TheChek News Flow

New PM Michel Barnier works to put together a government against backdrop of worsening public finances

France has asked for more time to submit its debt and deficit reduction plans to the European Commission as new Prime Minister Michel Barnier works to put together a government against a backdrop of worsening public finances. 

The country’s finance ministry said it had asked Brussels to give it more time putting together the plans, which are due to be submitted on September 20. France would probably send them alongside the draft 2025 budget, due by mid-October, one EU official said.

“Like other member states in this year of transition to the new European budgetary rules, France has asked the commission for such an extension. This aims to ensure consistency between the plan and [France’s] draft finance law for 2025,” the finance ministry said on Sunday. 

Last week, outgoing finance minister Bruno Le Maire warned that the country’s public deficit would be higher than expected this year, rising to at least 5.6 per cent of gross domestic product. 

“The main risk is linked to an extremely rapid rise in spending by local authorities which alone could affect 2024 accounts by €16bn compared to the 2024-27 stability programme,” his letter to MPs said, in reference to spending plans sent earlier this year to Brussels.

Passing the country’s 2025 budget, which must be presented to parliament for debate at the start of October, will be the first big hurdle facing Barnier’s new government, and one that promises to be highly contentious in a hung parliament sharply divided along ideological lines. 

A veteran conservative politician and former Brexit negotiator for the EU, Barnier’s experience as a political dealmaker will be put to the test as he tries to forge a stable government in a highly fractured political landscape.

EU fiscal rules that limit spending to 3 per cent of GDP were suspended during the pandemic but have been reintroduced with new clauses and conditions.

France is one of seven EU member states facing an excessive deficit procedure, launched by the commission in June, a reprimand for breaching bloc rules that limit annual borrowing to 3 per cent of GDP. 

The commission will give instructions in the autumn on how to reduce spending once EU countries have submitted their multiannual plans for review. However, France still does not have a new government in place two months after snap elections returned a divided parliament. 

In his first interview since being named as PM by Macron this week, Barnier on Friday said he did not want to add the country’s debt. However, he is already facing pressure on spending plans from the different political forces he will need to balance in order to avoid having his government toppled. 

“The country can no longer afford to make reckless expenditures in a certain number of areas. I am thinking of immigration, but also of fraud,” said Marine Le Pen, leader of the far-right Rassemblement National, which came second in the July vote, in an interview with La Tribune Dimanche. 

The prime minister has been consulting with political leaders over potential ministers, but he will need support from his Les Républicains party, other conservatives and centrist groups, as well as the tacit agreement of the RN not to vote against him, if his coalition is to survive. 

“The next budget will undoubtedly be the most delicate of the Fifth Republic,” Pierre Moscovici, head of the national auditor, told Le Parisien at the weekend. “We absolutely must control our debt . . . If this continues, it would result in a massive departure from our commitments and our European partners.”

A commission spokesperson said: “A submission of the plan after September 20 is a possibility foreseen in the rules. Member States can agree with the commission to extend that deadline by a reasonable period. We cannot confirm at this stage whether we have received [France’s] request.”

Very few startups have raised enough money to build and support powerful generative AI models. Germany’s Aleph Alpha appeared to be one of them. Late last year, it touted an investment in excess of $500 million from the country’s industrial giants and one of its richest tycoons, cementing it as Europe’s greatest hope in developing advanced AI independent of Silicon Valley.

Now, it’s exiting that race.

Last week, Aleph Alpha announced a new strategy centered around its latest product, PhariaAI, an “operating system for generative AI.” It’s effectively software to help corporate and government clients use AI chatbots and tools, regardless of whether the underlying technology was made by Aleph Alpha or one of its rivals. The startup still plans to develop large-language models, or LLMs — the systems that underpin products like ChatGPT — but they’re no longer the centerpiece of its commercial strategy. Nor is it trying to outperform models from firms such as OpenAI or Meta.

The shift makes Aleph Alpha the latest high-flying AI startup to change course in a field increasingly controlled by a few well-capitalized giants. In the US, several prominent newcomers ditched ambitious plans after their founders took jobs at Microsoft, Google and Amazon. Startups behind leading AI models — including OpenAI, Anthropic and France’s Mistral — have also formed tight partnerships with these tech giants, who they rely on for cash and computing resources.

“The world changed,” Jonas Andrulis, Aleph Alpha’s chief executive, said in an interview. “Just having an European LLM is not sufficient as a business model. It doesn’t justify the investment.” He pointed to the consolidation of the field, and the expensive computing contest this set off, as factors behind his company’s “evolution.”

The shift means Aleph Alpha can grow its business without having to spend the monumental sums needed to maintain leading AI models. Yet Silicon Valley’s clout may not be the only reason behind Aleph Alpha’s pivot. Others close to the startup say it has been hobbled in the fast-moving AI market because of slow decision-making and difficulty living up to the unique pressures associated with being a national champion.

“As a founder, of course I think we should be moving faster,” Andrulis said, before adding that his company’s strategy was more developed than those of other generative AI rivals. “Nobody knows how to build business models that make any sense. We are certainly a step ahead there.”

Founded in 2019 by veterans of Apple Inc. and Deloitte LLP, Aleph Alpha pitched itself as a cutting-edge AI upstart committed to upholding “European values” like transparency, autonomy and regulatory compliance. In April 2022, the startup released Luminous, an AI model designed to parse and generate images and text in five languages. After ChatGPT launched seven months later — transforming AI from a niche research field into a top priority for investors and governments — everybody wanted in, including Germany.

“That attention needed a target,” Ludwig Ensthaler, a founding partner with 468 Capital, said in July. “And Aleph Alpha was it.”

Suddenly, Andrulis was meeting frequently with German Chancellor Olaf Scholz and appearing with Robert Habeck, Germany’s economy minister, to stress the importance of “AI made in Europe.” Last November, Habeck and Andrulis stood side-by-side to announce that Aleph Alpha’s latest fundraise had exceeded $500 million, and included German industry titans SAP SE and Bosch.

The outsized attention shocked even the small startup’s biggest boosters. After the 2023 round, when the company had around 60 employees, German business newspaper Handelsblatt put Andrulis on its cover with the headline, “All of Europe should hope that this entrepreneur is successful.” Ensthaler, who was Aleph Alpha’s first investor, recalled doing a double-take upon seeing it. “Is this a joke?”

The investor was impressed with the startup’s progress in a daunting field, but didn’t feel as if it had earned such breathless coverage. Behind the scenes, several Aleph Alpha insiders described the period around the fundraise as turbulent, with leadership debating the launch of a chatbot, expanding outside of Germany and bringing on Intel Corp. as a backer. At one point, investors weighed the idea of finding a new CEO before settling on hiring a chief operating officer, according to people familiar with the matter who asked not to be identified discussing private matters. (Andre Retterath, chair of the startup’s board, said directors did not consider replacing Andrulis.) Critical stories about the company in German media would later detail missed sales targets, product delays, customer complaints and senior staff turnover.

Scrutiny also centered on the startup’s unconventional financing, which the company only confirmed well after the fact. The bulk of its fundraise, €300 million, came as a 10-year research grant from the Dieter Schwarz Foundation, an institution formed by the German billionaire behind the retail conglomerate Schwarz Group. Only €110 million of the investment arrived as equity, while the remainder came from revenue guarantees from the startup’s investors. The company has never disclosed its valuation.

Normally, valuations serve as indicators of potential equity to investors, and this omission caused some outsiders to question whether Aleph Alpha was inflating its size with an eye-catching investment sum. Retterath noted that the deal’s unusual structure made a valuation difficult to calculate, but described it as “the most attractive” he had seen within the generative AI sector.

The arrangement, which tethered the company’s research efforts to the Schwarz Group, suited Andrulis’s unspoken strategy of prioritizing domestic growth above all else. The company walked away from a financing offer from Intel Corp. to instead focus primarily on domestic investors, according to people familiar with the plans who could not discuss financing deliberations publicly. Two other people who worked at the company who did not want to be identified speaking about internal strategies also said that Andrulis concentrated his sales efforts on German businesses and government agencies despite an internal push to expand internationally.

Germany’s tech market is relatively small. IDC, a market research firm, estimated that spending on computing and software in German-speaking countries would reach $330 billion by 2026, accounting for less than a third of Europe’s total projected spending.

Andrulis declined to comment on Intel’s offer, but he said he preferred a deal without any requirements to buy computing resources from investors. He described the financing round as oversubscribed and said that Aleph Alpha opted for backers that did not impose “strategic limitations” on the startup. (A spokesperson for Intel also declined to comment.)

Andrulis also said that while the company’s “road map” includes eventually expanding beyond its home country, “we cannot disappoint our German partners.”

As Aleph Alpha doubled down on Germany, another national rival was rising. A month after Aleph Alpha’s big announcement, Paris-based Mistral sealed a €385 million round to build its own large-language models. In the months that followed, Mistral brought in more money — hitting a $6 billion valuation in June — and released multiple new versions and models. Aleph Alpha’s model, meanwhile, languished without any notable updates.

Ten months after the height of its media attention, Aleph Alpha now has roughly 200 employees and is booking around €20 million in annual recurring revenue, according to two people familiar with the finances who asked not to be identified discussing private information. The company told investors it would net €20 million in total revenue in 2024 and reach €70 million next year, according to documents viewed by Bloomberg News. In 2023, it projected €5.9 million in sales but delivered shy of €1 million.

Andrulis wouldn’t comment on sales figures beyond saying the startup is on track to beat its targets this year. A spokesperson for Aleph Alpha said it will reach a “solid double-digit million figure” in revenue this year. Andrulis noted that Aleph Alpha currently has “30 to 40” customers, with 90 to 95% of its business in Germany. The startup’s joint venture with the German unit of PricewaterhouseCoopers LLP, formed this summer, will be announcing several prominent deals later this fall, Andrulis said.

Thomas Odenwald, a German executive who spent four months as vice president at Aleph Alpha before leaving in April, said many of the nation’s businesses show little aptitude for taking risks and making swift decisions. “This concept of ‘fail fast’ — you need to internalize that as a startup,” said Odenwald, who lives in California. “It goes against the traditional German mindset.”

Still, Ensthaler, the early investor, noted that businesses looking to use AI in Germany must conform to particular data privacy and regulatory requirements. Aleph Alpha, he said, is “best positioned to cater to those needs.” Other observers have also suggested that Europe’s AI startups are better suited to compete outside the costly LLM race. Adrian Locher, a general partner with Merantix, a venture capital firm in Berlin, said offering “highly specialized” AI applications for particular industries could be a model that would flourish in Europe. “That doesn’t necessarily mean Aleph Alpha has to be the ‘OpenAI of Europe’ to be a success,” he said.

For now, Aleph Alpha is settling into its new strategy. In July, it announced that government employees in its home state of Baden-Württemberg would soon start using the system now called PhaidraAI. During an interview, Andrulis briefly showed it off — an interface that lets public employees tap AI tools to do tasks like manage files, sift through documents or write emails.

The government is using Aleph Alpha’s model to run part of that system. For another part, it’s using an LLM built by Mistral.

The job market is flashing a classic pattern that signals a recession is coming, Citi says

The U.S. economy added 142,000 jobs last month, falling short of forecasts, while the unemployment rate dipped to 4.2%.

Private-sector hiring totaled 118,000, but the three-month moving average dropped below 100,000. According to Citi Research analysts led by chief U.S. economist Andrew Hollenhorst, that’s the weakest three months for the private sector since 2012, excluding the pandemic.

Meanwhile, the unemployment rate has climbed by a nearly a full percentage point from its low, he added in a note on Friday, pointing out that layoffs that were once seen as temporary have now been normalized.

“The takeaway from the range of labor market data is clear – the job market is cooling in a classic pattern that precedes recession,” he wrote.

In a follow-up note on Friday, Hollenhorst and company zeroed in further on the three-month average of private-sector job gains slipping below 100,000, saying that pace is usually only seen around recessions.

Adding more concern is that revisions to prior jobs reports indicated payroll growth was overstated by as much as 70,000 per month.

“Data released this week left us more certain that the US economy is headed at least into a substantial slowdown (and more likely a recession), but it is still uncertain as to how exactly the Fed will respond to the deteriorating outlook,” he said, adding that Citi’s base case is for 125 basis points of rate cuts this year.

Other signs of an economic downturn include slowing auto sales and lackluster home purchases, which remain subdued despite the recent drop in mortgage rates, according to the note.

Hollenhorst has been a relative contrarian this year by maintaining a dimmer view on the economy, even as the Wall Street consensus shifted to a soft landing.

In July, he predicted the Fed would slash rates by 200 basis points through mid-2025 as the economy heads for a sharper decline. In May, he doubled down on his warning that the U.S. is headed for a hard landing and that Fed rate cuts wouldn’t be enough to prevent it. That followed a similar forecast in February, even amid blowout jobs reports.

To be sure, the consensus hasn’t shifted back to a recession as economists point to low jobless claims, robust corporate earnings, strong GDP readings and estimates, upbeat retail sales, and rising wages.

But elsewhere on Wall Street, analysts have flagged other recession indicators that are sounding the alarm now. On Friday, Interactive Brokers senior economist Jose Torres pointed out that the yield curve has de-inverted, which has preceded every recession since 1976.

An inversion—where short-term yields top long-term yields—has been a reliable recession indicator as it signals that investors see more risk in the near future.

Yields were inverted for about two years until recently, but their de-inversion doesn’t mean the economy is in the clear.

“Indeed, a positive spread across the 2- and 10-year Treasury maturities following a long period of a negative difference has historically preceded economic downturns,” Torres warned.

U.S. debt is so massive, interest costs alone are now $3 billion a day

With U.S. debt now at $35.3 trillion, the cost of paying the interest on all that borrowing has soared recently and now averages out to $3 billion a day, according to Apollo chief economist Torsten Sløk.

And that includes Saturdays and Sundays, he pointed out in a note on Tuesday.

The daily interest expense has doubled since 2020 and is up from $2 trillion about two years ago. That’s when the Federal Reserve began its campaign of aggressive rate hikes to rein in inflation.

In the process, that made servicing U.S. debt more costly as Treasury bonds paid out higher yields. But with the Fed now poised to start cutting rates later this month, the reverse can happen.

“If the Fed cuts interest rates by 1%-point and the entire yield curve declines by 1%-point, then daily interest expenses will decline from $3 billion per day to $2.5 billion per day,” Sløk estimated.

Meanwhile, the federal government closes out its fiscal year at the end of this month, and the year-to-date cost of paying interest on U.S. debt was already at $1 trillion months ago.

But even if Fed rate cuts lighten the burden on interest payments, the next president is expected to worsen budget deficits, adding to the pile of total debt and offsetting some of the benefit of lower rates.

In fact, a recent analysis from the Penn Wharton Budget Model found that the deficit will expand under either Donald Trump or Kamala Harris.

But there’s a big difference between the two.

Under Trump’s tax and spending proposals, primary deficits would increase by $5.8 trillion over the next 10 years on a conventional basis and by $4.1 trillion on a dynamic basis that includes the economic effects of the fiscal policy.

Under a Harris administration, primary deficits would increase by $1.2 trillion over the next 10 years on a conventional basis and by $2 trillion on a dynamic basis.

Still, JPMorgan analysts called the outlook unsustainable, regardless of who wins the presidential election, while acknowledging the prospect of bigger deficits with Trump.

“Irrespective of the election outcome, the trend since the pandemic has been profligate fiscal policy that is absorbing substantial amounts of capital and is incentivizing additional private investment,” the bank said. “At the same time, the en masse retirement of baby boomers is shifting a substantial share of the population from a high-savings period in life to a low-savings period, depressing the supply of capital.”

In an interview with DealBook, the U.S.T.A. chief Lew Sherr discussed the U.S. Open’s record attendance, the prospect of a new tennis league, and fighting with pickleball for court space.

This weekend, Jessica Pegula and Aryna Sabalenka, and then Jannik Sinner and Taylor Fritz, will face off in championship matches as the U.S. Open concludes what has been a booming 144th run. The tournament is expected to draw more than a million in fans for the first time, sell $10 million worth of Honey Deuce cocktails and offer up its biggest prize pool ever.

But the event’s success highlights the sport’s perennial struggle to get tournaments right the rest of the year. Professional tennis has been troubled by complicated scheduling and late start times that tire players and confuse fans. With private equity firms and sovereign wealth funds hungry to invest in tennis as they plow into sports globally, the big question is whether tennis can fix itself on its own.

DealBook’s Lauren Hirsch spoke with Lew Sherr, the chief executive of the United States Tennis Association, about how the sport plans to approach those challenges. The interview has been edited and condensed.

What explains the surge in attendance at the U.S. Open, beyond the growth of tennis as a sport?

We’re seeing the results of investing in fan week, a period before the main draw when the top players are here practicing. This year we had 216,000 people come through the gates that week free of charge. Last year, we were under 160,000 fans.

Years ago, we worried that investing in that programming might cannibalize first-week sales. It’s been the opposite. When our long-term partnerships come up for renewal, the fact that when the deal was signed, we might have been hosting 700,000 fans and now we’re up more than a million — there’s clearly more value in that partnership.

Alicia Keys, Tony Goldwyn and Simone Biles were among the many celebrities spotted in Arthur Ashe Stadium. We are coming off a huge Olympics, where it felt like celebrities were everywhere. Has there been any extra effort to recruit celebrities to attend the U.S. Open recently?

We’ve made an effort for years and years to lean into that aspect of our sport and our event. Many of our sponsors now are active in facilitating that. We have quite a sophisticated machine that supports it. But so much of that celebrity attendance really is inbound inquiries from some of the biggest celebrities in the world that are just keen to be here.

U.S.T.A. has invested big in building new tennis courts across the country. To what extent has this driven the great tennis and pickleball rivalry?

Where pickleball and tennis come into conflict is when someone makes a decision to convert a tennis court into pickleball courts, even though they didn’t have enough tennis courts to begin with, solely because it’s so much cheaper to just paint over a tennis court. We’re trying to address that.

We provide enormous support in terms of funds, grants for court refurbishments and court construction. And we’re also now starting to take advantage of those pickleball courts for beginning tennis play.

Tennis has a huge fan base, but investors have argued its business is broken. The major parties in tennis have discussed creating a premier league that includes the sport’s best-known tournaments, beyond the majors, like a tennis version of Formula 1. Is that the solution?

About 70 percent of tennis fans really are only paying attention to the Grand Slams. What we would love to see is more attention to tennis on a week-to-week basis. We’re working very closely with the tours, the Association of Tennis Professionals and the Women’s Tennis Association.

How much of the potential financial upside from a premier league would be from TV rights?

We are the third-most popular sport on the planet, but probably come in eighth or ninth against other sports in our commercial efforts, which are primarily driven by TV rights. The solve for that is to create more focus on premier events where the best players are playing the best players.

What is the risk that lower-tier tournaments are dwarfed by that arrangement?

Proceeds generated at the top would need to be redistributed to subsidize prize money and events at lower levels. I’m not sure private equity coming into the sport, or others coming into the sport, would necessarily be focused on reinvesting.

Is there any concern that a premier league would diminish the prestige of the four Grand Slams?

We feel very secure in where our event sits, the history of our event, the investments we’ve made into infrastructure.

Have discussions progressed to the point of hiring a banker or other advisers?

No. These are very productive and cordial conversations that we’re having with the ATP and the WTA and the four Grand Slams to try to work through really complicated issues.

There has been a lot of discussion about maximizing the value of men’s and women’s tournaments by selling them in one combined package. Is one barrier to that kind of deal figuring out how to value each business?

At the U.S.T.A., that issue was settled more than 50 years ago. We started offering equal prize money in 1973, We don’t differentiate when we sell our broadcast rights. It is the U.S. Open: When you buy a ticket, you know you’re going to see a men’s match and a women’s match.

When it comes to combining, the reality is what would be best for the sport is getting to that place. There are some challenges, but I think those are conversations that are happening now between the ATP and the WTA.

CVC Capital Partners is now a minority investor in the WTA Has having an institutional investor had any broader impact on the sport?

I’m not within the WTA and I’m certainly not in their board meetings. What I would say is CVC coming into the sport, and what accompanied that, which was a separation of the commercial arm of the WTA from the sporting arm of the WTA, has probably brought more energy, more focus, more resources to pursuing commercial opportunities. My understanding is they’ve had some meaningful revenue growth as a tour in the past year.

And, of course, the elephant in the room is Saudi Arabia. To what extent has the Saudi threat helped spur these conversations around the premier league?

We’re not involved in any direct conversations with the Saudis. I know it’s been reported the Saudis are in discussions with the ATP about becoming part of that tour and bringing an event to Saudi Arabia. I think it’s reflective of the global interest in the sport.

Murmurs of a sale come just as Tapestry prepares to go to court and defend its $8.5 billion acquisition of Capri.

The reshuffling seems to have already begun at Tapestry Inc., which multiple sources have said is close to selling off its Stuart Weitzman brand — just as the company prepares to defend its $8.5 billion buyout of Capri Holdings Ltd. in Manhattan federal court on Monday.

The brand’s chief executive officer Giorgio Sarné is also said to have left the company.

A spokesperson for Tapestry declined to comment.

Tapestry owns Coach, Kate Spade and Stuart Weitzman and is looking to expand with Capri’s portfolio of Michael Kors, Versace and Jimmy Choo.

The Federal Trade Commission sued to stop the deal in April, charging, in part, that the buyout would give the firm undo control over the accessible luxury handbag market.

The sale of Stuart Weitzman wouldn’t change that equation, but it would demonstrate a certain willingness for Tapestry to shake up its portfolio ahead of the trial. A deal for Stuart Weitzman would also help Tapestry raise some extra funds and offload a business that has struggled recently.

Even before the FTC challenged the acquisition of Capri, there was speculation that Tapestry would seek to sell some of its smaller businesses to help fund the deal and focus on the larger brands.

For the fiscal year ended June 29, Stuart Weitzman’s revenues fell 14 percent to $241.5 million with operating losses of $21.2 million, according to Tapestry’s latest financial report. The brand has 34 doors in North America and 60 stores in the rest of the world.

On a call with analysts last month, Joanne Crevoiserat, Tapestry’s chief executive officer, said of Stuart Weitzman: “Our results for the year were challenged, significantly impacted by external pressures in the brand’s two key markets of North America and Greater China. Despite disappointing financial results, we continue to focus on brand building initiatives to drive awareness, growth and profitability long term.”

During the fiscal fourth quarter, Stuart Weitzman expanded its assortment of shoes and extended into new and emerging categories, including men’s and handbags.

“Importantly, new innovation is driving traction at wholesale with the business growing double digits at [points of sales] in North America in the fourth quarter,” Crevoiserat said. “Further, order bookings through spring ’25 season are up over 30 percent to last year. This will support an improvement in revenue and profitability trends in the year ahead.”

Tapestry, then Coach Inc., acquired Stuart Weitzman in 2015 from Sycamore Partners in a $574 million deal.

— With contributions from Miles Socha

Space engine pioneer seeks up to £20mn to keep hypersonic plans alive

Reaction Engines needs new investment after losses deepen

Reaction Engines, the British aerospace pioneer hoping to make hypersonic flight a reality, has told investors it needs to raise close to £20mn in new capital or risk falling into administration.

The Oxfordshire-based company has been in talks with its existing backers, including the UAE-backed Strategic Development Fund, about a much needed fundraising, according to people familiar with the situation. The cash would provide new working capital. That would give Reaction Engines the 18 months it needs to fulfil key contracts and generate new revenue streams.

Reaction Engines declined to comment on the talks, but people familiar with the situation said the company would probably need between £15mn and £20mn. 

Although SDF is in detailed talks to invest more, Reaction Engines’ other backers have yet to show their hands. The company’s main strategic investors, FTSE 100 groups BAE Systems and Rolls-Royce, which together own just under 24 per cent, declined to comment. Other shareholders, which include asset management firm Baillie Gifford, could yet join another fundraising, said the people close to the talks. 

Reaction Engines has previously raised more than £150mn, including £40mn from SDF in 2023, and more than quadrupled its commercial revenues last year. The company, however, had already warned this year that it would need to raise additional financing after it missed internal forecasts and its losses deepened.

While the company is focused on securing new funding, it will probably have to go into administration if that is unsuccessful, according to the people close to the talks. PwC, the accountancy firm, has been put on standby for that eventuality. 

Reaction Engines’ predicament has raised questions over the future of a company that was founded in 1989 on the promise that its technology could revolutionise access to space. Hypersonic vehicles travel at five times the speed of sound or more — far faster than conventional supersonic aircraft.

Its engineers have been developing a hybrid jet and rocket engine, Sabre. The innovative engine was originally planned to power Skylon, a space aircraft also designed by Reaction. Key to Sabre is the company’s pre-cooling technology which dissipates heat and prevents engines from overheating. 

Reaction, which has been led by former Rolls-Royce executive Mark Thomas since 2015, has more recently also looked to develop commercial applications for its pre-cooling technology for other industries such as energy. 

Together with Rolls-Royce, Reaction Engines is also part of a UK-led military project, designated HVX, to pursue reusable hypersonic air vehicle technologies. The consortium, which also includes the Royal Air Force and the defence research agency Defence Science and Technology Laboratory, had hoped to fly a demonstrator vehicle as early as the middle of this decade.

Nick Cunningham, analyst at Agency Partners, called the technology “absolutely alluring . . . like science fiction”.

Cunningham said that “at worst, the company might end up making heat exchanger products for commercial applications”. But he said there were questions over the size of the end market for Reaction Engines’ original ambitions for the technology — offering a single stage to orbit aircraft or hypersonic vehicles.

These applications were “problematic” from the point of view of working out the end demand, Cunningham said.

“Just because you can do it, does it mean it will be done and is there enough of a market, especially in the UK given the constraints on the defence budget?” he asked.

The Labour government has launched a strategic defence review in an effort to cut costs and some industry experts believe there is no certainty that the hypersonic programme will survive. Supporters of the company, however, believe its groundbreaking technology has strategic value for the UK at a time when other countries are investing heavily in hypersonics.

The government said it had a “long-running relationship” with Reaction Engines and would “closely monitor” all its supply chains to ensure the “continued delivery of key capabilities, including research and development”.  

Flurry of investment-grade bond deals as investors prepare for a potentially volatile autumn

Companies issued record volumes of US debt this week as they moved to head off possible volatility from closely watched economic data, a Federal Reserve meeting and a fast-approaching presidential election.

Twenty-nine US investment-grade bond deals hit the market on Tuesday alone following the Labor Day holiday, data from LSEG shows — the highest daily number on record.

Another burst of activity on Wednesday took issuance over those two days to just under $73bn, the largest figure in LSEG records going back 20 years. More blue-chip deals followed, taking total borrowing across 60 high-grade issuers to almost $82bn — marking the busiest week since May 2020.

“It’s definitely been much busier than we could have ever imagined,” said Teddy Hodgson, global co-head of fixed income capital markets at Morgan Stanley.

Recent borrowing has spanned various sectors, with a $2.5bn deal from Ford Motor Credit, a flurry of bond sales by banks, a $750,000 deal from Target and a $4bn deal from Uber, which marked its first such transaction as an investment-grade company after being upgraded last month.

Investment-grade borrowers typically rush to tap lenders in early September. But senior debt bankers said the record-breaking issuance this week also reflected a desire to get ahead of any potential volatility sparked by economic data or the US election in early November.

“Issuers [are] pulling forward issuance in an effort to de-risk ahead of potential event risks out there, including upcoming economic data reports, the Fed’s decision on rates, the election and ongoing geopolitical risk while navigating blackout periods,” said Dan Mead, head of Bank of America Securities’ investment-grade syndicate.

Borrowing costs had fallen over the summer, bankers added, making this week a particularly attractive moment to refinance some of the debt set to mature in the next couple of years.

The average yield on an investment-grade bond stood at 4.8 per cent on Thursday, according to Ice BofA data, down from 5.6 per cent in early July. Even after a sharp drop in Treasury yields over that same timeframe, the spread — or premium — paid by borrowers to issue debt over the US Treasury had climbed only marginally.

Bankers also said that a bout of turbulence last month, triggered by a surprisingly weak US payrolls report for July, had reminded companies about the risks of delaying fundraising only to find that conditions moved against them.

“One thing for sure that happened in August was that people started talking about recession again for the first time in a long time,” said Maureen O’Connor, Wells Fargo’s global head of investment-grade syndicate. “The risk of a proper recession is still quite low, but it’s higher than it was at the start of the summer. I think there is a reminder there.”

“[There is] the perfect storm, of sorts, creating this issuance environment,” she added.

For Hodgson, “the volatility at the beginning of August served as a wake-up call to issuers, once again reiterating that in periods of volatility, this market moves a lot faster in a negative direction than in a positive direction”.

Another payrolls report on Friday showed that US employers had added 142,000 jobs in August, up from a downwardly revised 89,000 in July but fewer than economists had expected. On the same day, top Fed officials left the door open to large interest rate cuts if data showed signs of worsening.

Markets were on Friday broadly pricing in bets of at least a quarter-point rate cut when the Fed concludes its next meeting on September 18, which would take borrowing costs down from their current range of 5.25 to 5.5 per cent — a 23-year high.

Still, another closely watched consumer price index reading is due next week, while a number of companies also enter their earnings blackout period in October — further limiting borrowing windows.

Additionally, bankers said that concerns about possible volatility as November’s election draws closer was another factor pushing treasurers to meet funding needs now.

“I do think there’s definitely a component of it which is people saying ‘I’m going to finance in the last four months of the year; why don’t I just go way ahead of the election?’,” said Richard Zogheb, head of global debt capital markets at Citi.

“I think the market largely expects things to be open regardless of the outcome of the election, or regardless of who wins,” said Morgan Stanley’s Hodgson.

But “if we get into another one of these contested elections or protracted legal battles, and a long drawn out process over the last two months of the year and into 2025, you don’t really want to be sitting there with a big funding need and become a forced borrower”.