>>> US Gapping up

Gapping up
In reaction to earnings/guidance
:
  • TMDX +42.1%, DDOG +24.1%, UIS +22.5%, AYX +17.7%, VMEO +12.8%, TASK +12.5%, PAY +12.2%, PRAA +10.5%, TRIP +10.4%, ROVR +8.7%, DCGO +8.6%, RNG +8%, CELH +7.4%, CLVT +7.2%, PLNT +6.9%, HIMS +6.5% (also announced repurchase program), MTTR +6.1%, VERV +6.1%, IFF +5.6% (continuing agreement with Icahn Capital), NEO +5.1%, IMXI +5%, TWKS +4.7%, SRRK +4.7%, VECO +4.6%, SKWD +4.3%, DK +4.3%, AAON +4.1%, CBT +3.7%, HALO +3.5%, SGRY +3.3%, LEV +2.9%, SQSP +2.7%, ELAN +2.7%, IDYA +2.6%, KIDS +2.2%, UBS +2.1%, BLUE +2.1%, AMK +2%, CTRA +2%, PARR +2%, GFS +1.9%, FSK +1.8%, ATEC +1.8%, CRGY +1.8%, JELD +1.8%, STEP +1.6% (also appoints new CFO), DO +1.6%, GT +1.4%, O +1.4%
Other news:
  • ADPT +6.3% (announces a multi-year global translational collaboration with BeiGene (BGNE) to assess minimal residual disease using clonoSEQ assay technology across the company's pipeline of treatments for patients with lymphoid malignancies)
  • MGNX +3.3% (files mixed shelf)
  • SEAT +3.2% (announces its acquisition of Vegas.com in a cash and stock transaction valued at ~$240 mln; also issues guidance)
  • VLRS +2.4% (reports October capacity)
Analyst comments:
  • DOCN +8% (upgraded to Buy from Sell at Goldman)
  • APPN +2.9% (upgraded to Buy from Neutral at DA Davidson)
  • NWG +2.6% (upgraded to Outperform from Underperform at Exane BNP Paribas)

>>> US Gapping down

Gapping down
In reaction to earnings/guidance
:
  • ATSG -20.5%, AMRC -18.6%, ADTN -13.2%, SANM -10.4%, EVCM -8.5%, SWAV -8.2%, OLO -6.8%, TAC -6.8%, COHR -5.5%, PRGO -5.2%, SAGE -5%, CNHI -4.8%, INSW -4.2%, APD -3.9%, EMR -3.8%, OSCR -3.7%, GEO -3.6%, BCO -3.4%, HL -2.9%, DHT -2.7%, CG -2.6%, SMRT -2.3%, MYGN -2.1%, ICHR -2%, ICUI -2%, NOVT -1.9%, GOGO -1.9%, AZPN -1.7%, AOSL -1.7%, CE -1.7% (names new COO and CFO), EVRG -1.6%, HRT -1.5%, RCKT -1.4%, VAL -1.4%, MED -1.2%, SWIM -1.2%, VRTX -1.1%, PAX -1%, LCII -1%
Other news:
  • VTYX -75.2% (announces Phase 2 results)
  • AURA -20.1% (prices offering of 11.0 mln shares of common stock at $9.00 per share)
  • ALPN -10.2% (prices $150 mln offering)
  • ERO -8.2% (announces $105 mln brought deal financing via 8.51 mln shares at price of $12.35/share)
  • CPG -6.1% (to acquire Hammerhead Energy for $2.5 bln; files CDN$500 mln common stock offering)
  • MMS -5.6% (completes divestiture of employement services operations)
  • CNM -4% (stock offering)
  • COCO -3.4% (stock offering)
  • CWAN -3.1% (prices offering of 20.0 mln shares of common stock at $17.50 per share)
  • CPRI -2.7% (receives additional info request from FTC)
  • VTLE -2.6% (stock offering)
  • WELL -2.3% (prices offering of 17.5 mln shares of common stock)
  • KNF -1.6% (stock offering)
  • EPIX -1.5% (enters into At-The-Market equity offering sales agreement)
Analyst comments:
  • RMAX -3.8% (downgraded to Underweight from Equal-Weight at Morgan Stanley)
  • KW -3.3% (downgraded to Underperform from Neutral at BofA Securities)
  • SONO -3.3% (downgraded to Neutral from Buy at BofA Securities)
  • UDR -1% (downgraded to Equal Weight from Overweight at Wells Fargo)

FT : IMF upgrades China growth outlook

IMF upgrades China growth outlook
Beijing officials express optimism but analysts say weak export data shows recovery remains fragile

The IMF has raised its forecasts for China’s economic growth, citing stronger policy support from Beijing, as Chinese regulators used a gathering of top Wall Street heads in Hong Kong to push back against investor gloom over the country.

The fund said China’s gross domestic product would grow 5.4 per cent in 2023, upgrading its previous forecast of 5 per cent. It came as China released weaker than expected export data, adding to recent mixed readings on retail spending, manufacturing and consumer prices.

“The authorities have introduced numerous welcome measures to support the property market,” the IMF’s first deputy managing director Gita Gopinath said in a statement. “But more is needed to secure a quicker recovery and lower economic costs during the transition.” 

Beijing has been battling to improve confidence in the economy, which has struggled to rebound after stringent Covid-19 lockdowns last year, a property sector meltdown and weakness in export industries.

Foreign investors have dumped tens of billions of dollars worth of Chinese stocks and bonds this year, a trend exacerbated by much higher interest rates in the US.

The IMF said it had also upgraded its forecast for China’s growth next year from 4.2 per cent to 4.6 per cent but cautioned that weakness in the property sector and subdued external demand would persist.

Over the medium term, GDP growth was projected to decline gradually to about 3.5 per cent by 2028 because of weak productivity and an ageing population, said Gopinath.

“A strategy to contain the risks from the ongoing property sector adjustment and manage local government debt is needed to lift sentiment and boost near-term prospects,” the fund said. “Supportive macroeconomic policies should complement these efforts.”

But at a Hong Kong investor conference on Tuesday, one of the territory’s flagship events for the global financial community, China’s top officials said they were not “too” worried about the country’s economy. 

He Lifeng, China’s vice-premier and a powerful Communist party official overseeing China’s economic and finance affairs, said in a pre-recorded message that China would achieve its official growth target of 5 per cent this year.

“You may ask me, are you worried?” said another official, Zhang Qingsong, deputy governor at the People’s Bank of China, who attended in person, on China’s economy. 

“Not too much,” he told the event, which was attended by some of the most powerful executives in global finance, including Morgan Stanley’s James Gorman, Goldman Sachs’s David Solomon, Citadel’s Ken Griffin and Mark Rowan of Apollo Global Management.

Zhang said China’s economic fundamentals were stable and its government debt was “lower than [in] many other advanced economies”. 

Many of China’s largest developers have defaulted on their debts, prompting calls for a sector-wide bailout. But Zhang described this as “a natural selection and market-clearing process”.

“Having said that, we need to carefully manage the pace to avoid a sharp downturn and unintended consequences . . . I prefer to let the market play its role, but do policy adjustments if necessary,” Zhang said. “We are quite optimistic about the future of China’s property market.” 

The positive messaging from regulators came after one-third of listed Chinese companies reported third-quarter results that fell short of expectations — the most in half a decade, according to an analysis by Morgan Stanley.

China’s benchmark CSI 300 index has fallen more than 6 per cent this year.

But Wang Jianjun, vice-chair of the China Securities Regulatory Commission, the market watchdog, said the domestic debt and equity markets were “full of opportunities right now”.

“It’s never too late to catch the China train — you can still ride the dragon to heaven,” Wang said.

China’s exports dropped 6.4 per cent in October compared with the same period a year earlier, the sixth consecutive month of declines and worse than a Reuters survey of analysts that forecast a 3 per cent fall. 

In one positive sign, however, China’s imports expanded year-on-year for the first time since February, rising 3 per cent.

“The disappointing exports point to external headwinds to the still fragile recovery, while the much-better-than-expected imports suggest domestic demand could be bottoming out on policy support,” said Citi analysts in a note.

>>> Stoxx 600 Pre-Market Indications

  • Ryanair (RY4C TH) +2.4%
  • Hexagon (HXG TH) +1.8%
  • Evonik (EVK TH) +0.7%
    • Evonik 3Q Adjusted Ebitda Beats Estimates
  • Adyen (1N8 TH) -1.1%
    • Adyen Faces Test of Confidence as Investors Doubt Growth Story
  • Lanxess (LXS TH) -1.3%
    • German Industry Shrinks More Than Expected Amid Recession Risks
  • Fresenius Medical (FME TH) -1.5%
  • Sartorius (SRT3 TH) -1.5%
  • Nel (D7G TH) -1.8%
  • Hochtief (HOT TH) -1.8%
  • Daimler Truck (DTG TH) -1.8%
    • Daimler Truck Resilient in Volatile Market, Eyes Costs
  • Edenred (QSV TH) -2.3%
  • Siemens Energy (ENR TH) -2.9%
    • Siemens Seeks Discount for Siemens Energy’s India JV Stake: Reuters
  • Teleperformance SE (RCF TH) -4.9%
    • Teleperformance Guidance Reflected in Consensus: Street Wrap

>>> TradeGate Pre-Market Indications

DAX:
  • Mercedes (MBG TH) -0.5%
    • Daimler Truck 3Q Adjusted Ebit Misses Estimates
  • SAP (SAP TH) -0.6%
  • Vonovia (VNA TH) -0.9%
  • Daimler Truck (DTG TH) -1.4%
    • Daimler Truck Resilient in Volatile Market, Eyes Costs
  • Siemens Energy (ENR TH) -3%
    • Siemens Seeks Discount for Siemens Energy’s India JV Stake: Reuters
MDAX:
  • Fraport (FRA TH) +1.6%
    • Fraport 3Q Ebitda Beats Estimates
  • Evonik (EVK TH) +1.6%
    • Evonik 3Q Adjusted Ebitda Beats Estimates
  • Telefonica Deutschland (O2D TH) +0.7%
    • Telefonica Deutschland 3Q Adjusted Oibda Meets Estimates
  • Lufthansa (LHA TH) -0.5%
  • Fresenius Medical (FME TH) -0.9%
SDAX:
  • SFC Energy (F3C TH) +1.7%
    • SFC Energy receives follow-up order from Canadian oil producer worth more than CAD 4 million
  • Schaeffler (SHA TH) +1.5%
    • Schaeffler 3Q Adjusted Ebit Beats Estimates
  • Deutz (DEZ TH) +1%
  • Borussia Dortmund (BVB TH) +0.8%
    • CalSTRS Backs Borussia Dortmund on 4 of 6 Proposals Nov. 27
  • Kloeckner (KCO TH) +0.7%
  • Traton (8TRA TH) -0.7%
  • Siltronic (WAF TH) -0.9%
  • Aroundtown (AT1 TH) -1.1%
  • Patrizia (PAT TH) -1.2%
  • Adtran Holdings (QH9 TH) -11%
    • Adtran Holdings 3Q Revenue Misses Estimates

>>> What to look at today - 7th of November 2023

Asian stocks declined as fresh doubts emerged on whether the Federal Reserve has finished tightening policy, while the Australian dollar retreated after the central bank raised interest rates. An Asian equity benchmark was set to snap a four-day winning streak as major indexes traded lower. South Korea’s Kospi Index fell over 3% after jumping by the most since 2020 on Monday following a renewed ban on short-selling. Contracts for US stocks slipped. Traders are predicting the Fed will lean against the recent easing in financial conditions by saying it will keep its options open on policy. Minneapolis Fed President Neel Kashkari said it’s too soon to declare victory over inflation, despite positive signs that price pressures are easing, and a host of Fed officials — including Chair Jerome Powell — are due to speak over the next few days.  Treasuries steadied after yields rose across the curve on Monday. Ten-year yields jumped eight basis points as sentiment was dented by a heavy slate of corporate debt sales and traders readied for a series of auctions beginning Tuesday. The dollar edged higher. Swaps are pricing in more than 100 basis points of rate cuts by the Fed by the end of 2024 from an expected peak rate of 5.37%. On Monday, investors also waded through the Senior Loan Officer Opinion Survey — known as SLOOS — which showed tighter standards and weaker demand persist at US banks. Meanwhile, China reported a deeper-than-expected decline in exports for October that highlighted continued slowdown in global trade and its own fragile economic recovery. The offshore yuan was little changed after the figures were released. oil edged lower as an uncertain demand outlook and fresh doubts on the end of Fed’s tightening outweighed Saudi Arabia and Russia’s extension of supply cuts. US After Hours VMEO +16.1%, TRIP +12%, JELD +6.5% making nice moves following earnings; AMRC -11.7%, SANM -10.1% struggling after earnings; KMI -0.2% steady on NexEra Energy (NEE) M&A news.

Nikkei -1.34% Hang Seng -1.47% CSI -0.34% Shanghai -0.02% Shenzen +0.14%

Eur$ 1.0704 CNH 7.2883 CNY 7.2819 JPY 150.36 GBP 1.2322 CHF 0.9008 RUB 92.5908 TRY 28.4675 WTI$ 79.94 -1.08% Gold 1,971 -0.34% BTC 34,960 -0.21% ETH 1,894 +0.09%

S&P -0.27% Nasdaq -0.23% EuroStoxx -0.41% FTSE -0.24% Dax -0.35% SMI -0.19%

Macro :
- JPMorgan’s Kolanovic Says ‘Knee-Jerk’ Equities Rally Won’t Last
- FTSE's 10x P/E Looks Low But 4.3% 10-Year Brings Double Whammy
- Citadel’s Griffin Says Global Investors Have to Invest in China

Keep an eye on :
- AIBG ID : Ireland Plans to Sell About 5% Stake in AIB Group: Terms
- ABNB US : Italy Seizes €779m From Airbnb, Alleging Unpaid Taxes
- AOX GY : Alstria Office 9M Revenue EU142.1M Vs. EU137.1M Y/y
- AMS SM : Amadeus 3Q Adjusted Profit Beats Estimates
- AMS SM : Amadeus to Buy Back Up To 8.81m Shares for Up To EU625.3m
- BAKKA NO : Bakkafrost 3Q Operating Ebit Misses Estimates
- BIRK US : Birkenstock IPO Was Too High, Say Some Banks That Took It Public
- CAP FP : Capgemini 3Q Revenue Meets Estimates
- CPRI US : Capri Slides on FTC Requests for More Info on Tapestry Deal
- CGG FP : CGG 3Q Segment Revenue Beats Estimates
- CLASB SS : Clas Ohlson Oct. Online Sales +17%
- CNHI US : CNH Industrial announces voluntary delisting from Euronext Milan and single listing on the New York Stock
- CPG LN : Compass Sees 4Q Revenue $1.1B to $1.2B, Est. $1.12B
- DTG GY : Daimler Truck Confirms Guidance Despite Industrial Slowdown
- DEMANT DC : Demant Narrows FY Organic Revenue Forecast
- DB1 GY : Deutsche Börse Plans to Buy Back €300 Million of Shares
- ZIL2 GY : ElringKlinger 3Q Ebit Misses Estimates
- ENEL IM : UOL Brasil: Ministry of Justice gives Enel 24 hours to provide information about blackout in São Paulo
- ENGI FP : Engie Boosts FY Recurring Net Income Forecast
- EVK GY : Evonik 3Q Adjusted Ebitda Beats Estimates
- FRA GY : Fraport 3Q Ebitda Beats Estimates
- GT US : Goodyear 3Q Net Sales Misses Estimates
- ICOS IM : Intercos Revenue Beats, Ebitda a Slight Miss
- KPN NA : KPN Sees 2024 Adj. EBITDA AL About EU2.48B, Est. EU2.57B
- MC FP : Birkenstock IPO Was Too High, Say Some Banks That Took It Public
- KN FP : Natixis Sees Opportunities in Japan as Bond Yields Rise
- NEXI IM : CPP, Francisco Partners Among Firms Interested in Nexi: MF
- NOEJ GY : Norma Maintains FY Adjusted Ebit Margin Forecast (1)
- NOVOB DC : Novo Nordisk Initiates New Share Buyback of Up To DKK 4.1b
- OCI NA : OCI 3Q Adjusted Ebitda Misses Estimates
- PGHN SW : Partners Group Is Said in Talks to Buy Pipeline Inspector Rosen
- PSPN SW : PSP Swiss Maintains FY Adjusted Ebitda Forecast, Beats Estimates
- PST IM : Poste Italiane Boosts FY Ebit Forecast, Beats Estimates
- RAA GY : Rational 3Q Ebit Beats Estimates
- SAN FP : Rational 3Q Ebit Beats Estimates
- SHEIN IPO : Shein Is Said to Target Up to $90 Billion Valuation in US IPO
- SINCH SS : Sinch 3Q Ebitda Misses Estimates
- STORB SS : Storskogen 3Q Ebit Misses Estimates
- TIT IM : Telecom Italia Signed Transaction Pact With KKR on Netco
- O2D GY : Telefonica Deutschland 3Q Adjusted Oibda Meets Estimates
- TEP FP : Teleperformance SE 3Q Revenue Misses Estimates
- TOBII SS : Tobii 3Q Operating Loss SEK69M, Est. Loss SEK43.7M
- UBSG SW : UBS 3Q Net Loss $785M
- UBSG SW : UBS’s Kelleher Says Next Crisis Could Happen in Shadow Banking
- WEW GY : Westwing Group Sees FY Adjusted Ebitda EU13M to EU19M
- WE US : WeWork’s Anticipated Bankruptcy Is Disappointing, Neumann Says
- XPP LN : XP Power to Raise Up to £45.4m Gross in Share Issue

>>> Europe : Brokers Upgrades & Downgrades - 7th of November 2023

>>> Up
* Alm Equity Raised to Hold at Arctic Securities; PT 365 kronor
* HP Inc Raised to Buy at Edward Jones
* Meriaura Group Raised to Reduce at Inderes; PT 0.47 kronor
* Temenos Raised to Reduce at Baader Helvea; PT 64 Swiss francs

>>> Down
* Andritz Cut to Underperform at BNPP Exane
* Asos Cut to Hold at Investec; PT 370 pence
* Diageo PT Cut to 2,750 pence from 2,950 pence at Deutsche Bank
* Femsa ADRs Cut to Market Perform at Itau BBA; PT $127
* Foot Locker Cut to Inline at Evercore ISI; PT $23
* Hikma Cut to Hold at Jefferies; PT 1,940 pence
* Nilfisk Cut to Hold at SEB Equities; PT 129 kroner
* VGP Cut to Neutral at JPMorgan
* Viafin Service Cut to Accumulate at Inderes; PT 14 euros

>>> Initiation
* Basilea Rated New Buy at Pareto Securities; PT 64 Swiss francs
* Cytokinetics Rated New Buy at B Riley; PT $66
* S4 Capital Reinstated Equal-Weight at Morgan Stanley
* Schott Pharma Rated New Hold at Jefferies; PT 30.40 euros
* Schott Pharma Rated New Buy at Citi; PT 33.50 euros
* Schott Pharma Rated New Buy at Deutsche Bank; PT 34 euros
* Schott Pharma Rated New Neutral at BNPP Exane; PT 31 euros
* Team17 Rated New Overweight at Barclays; PT 355 pence

>>> Call
* Energy Sector Remains Attractive, Repsol Cut: Morgan Stanley
* Hikma Cut to Hold at Jefferies, Momentum May Be Reaching Peak

FT : The next corporate debt crisis


How much to worry about rising defaults

Sooner or later, we are all but guaranteed to get some trouble in corporate debt markets, for the simple reason that rates have risen by almost 5 percentage points in just a few years. Some increase in corporate distress is foreseeable, maybe even healthy. But will it stop at “some”? Is it a matter of the normal credit cycle returning, and companies with fragile financing heading for bankruptcy or restructuring? Or might we be headed for a credit crisis large enough to cause problems at financial institutions, causing market and economic contagion?

These are the questions posed by an excellent Big Read by our colleague Harriet Clarfelt. You should read the whole thing, but we’ll recap the main points.

It begins by disclaiming that things now are fine — that most current defaults are caused by industry- or company-specific issues. But there are worries about the future, as monetary policy continues to squeeze companies and the economy slows. We noted four in the piece: small companies, leveraged loans, extend-and-pretend tactics and private markets. In that order:

[On smaller firms] A recent survey by the National Federation of Independent Businesses showed that US small-caps were paying almost 10 per cent interest on short-term loans in September, up from lows of 4.1 per cent in mid-2020

[On loans] Cash interest coverage on newly issued loans had dropped to 3.16 times by the end of the third quarter, its lowest level since 2007 if compared with previous full years. Interest coverage has also declined for existing loans, data from PitchBook LCD shows, signalling that earnings are not growing quickly enough to keep pace with rising borrowing costs

[On extend-and-pretend and private markets] “If we look at the first three-quarters of this year, distressed exchanges [a type of workout for a faltering company] comprise roughly two-thirds of all corporate family defaults in the US,” says Julia Chursin, senior analyst at Moody’s. She adds that “the majority of them — 78 per cent — were done by private-equity owned companies”

Right now, relatively few companies are getting into trouble, but the trend is poor. Moody’s keeps a list of companies that are rated triple-B-negative or lower, that is, companies which are either C-rated (“of poor standing and subject to very high credit risk”) or right on the cusp of it. The Moody’s chart below shows that the size of that list, in both absolute numbers and as a percentage of the whole high-yield (“speculative grade”) universe, are only slightly above the long-term average, while the default rate is still below the levels of 2015-16, when low oil prices caused a series of defaults in the energy sector:


What that chart shows in the future will be determined by how two vectors — the path of interest rates and probability of recession — interact. When debt needs to be rolled over, the cost of new debt and corporate cash flows must co-operate to avoid problems.

To begin with the first vector, rates, the question is how long companies can wait, hoping for inflation to subside and rates to fall. Much, perhaps too much, is made of the “maturity wall”, the point in the future when a large bolus of debt will have to be refinanced. Cramming all high-yield debt together into a single sum, without adding a measurement of companies’ ability to pay, doesn’t tell you all that much. That said, aggregate maturities give some sense of how bad things might get at their worst, and when. And right now, the picture is not too bad in the US, at least for the next two years. The junk bond and leveraged loan markets total $3tn in outstanding debt between them. For less than $150bn of refinancing to cause a credit market contagion, economic conditions will have to be pretty bad. 


Still, a high-rate, recessionary world could be catastrophic for borrowers, who would be pinched by both rising interest expense and falling sales. But such a stagflationary outcome looks remote. More likely is either a low-rates recession, as the Federal Reserve cuts rates to boost activity, or a soft landing where the Fed lowers rates only a little.

A high-rates soft landing is not a common occurrence in history, but chances are it would be survivable. Economic growth gives companies options for staving off default. Capex, a significant expense that is somewhat discretionary, can be cut; so can employment levels. In a pinch, companies can also reduce debt by raising equity, so long as economic conditions are OK. Interest rates are important, but for companies with a functional business model in a growing economy, they are one expense line out of many.

On the other hand, a recession with low rates has happened many times before, and it is plainly bad for creditors, and could be worse this time. Even in a recession, rates might not be as low as the pre- and early-pandemic period in which today’s corporate balance sheets were built. (Virtually every episode of rising default rates in the high-yield bond market is explained by either recession or plunging oil prices, Marty Fridson of Lehmann Livian Fridson Advisors points out.)

So, what are the chances that we get a recession combined with only moderately lower rates, one that starts late enough or lasts long enough to coincide with a high volume of refinancing demand? That is the (slightly long-winded) question. 

It is important to note that bond markets are emphatically not signalling trouble ahead. Spreads over Treasuries of triple-B (lowest rung of investment grade) and double-B and single-B (upper parts of high yield) bonds were higher earlier this year, before long term interest rates jumped, and not far from pre-pandemic levels:


Banks, which have been notably cautious lately, seem to be relaxing a bit, too. The Fed’s latest loan officer survey recently came out, and reported that fewer banks are tightening lending standards for business loans: 


So (consistent with our case for economic optimism yesterday) while there is no doubt that plenty of individual firms will be forced into restructuring by high rates, the chances of a corporate debt crisis seems low as of now. 

But there is an important proviso. One complication in gauging credit risks is that some of the riskiest debt has migrated to private markets. That has been a factor in making public debt markets, especially for high-yield bonds, less risky. Fridson estimates that if default patterns similar to the mild recession in 2001 repeat in 2023, the high-yield bond default rate would peak at 8.5 per cent, versus 11.3 per cent in the dotcom bust, because of better company quality in the public markets. Moody’s forecasts that in a non-recession scenario, the default rate will stay below 5 per cent across public speculative-grade debt.

But even short of a recession, rising defaults may matter most in private markets, which mostly use floating-rate debt. The early signs are troubling. As Harriet’s piece notes, PE-backed distressed exchanges make up a major chunk of this year’s defaults. 

The problem for PE is that it is getting harder to shunt losses on to creditors. Researchers have found that high-yield bondholders in leveraged buyouts underperform bond benchmarks, and the underperformance gets worse the more experienced the PE backer is. Enter private credit, which has snapped up LBO debt by offering faster, nimbler loan execution than public markets in exchange for fatter spreads and tighter contracts. If a company defaults, or needs a distressed exchange, someone somewhere must take a haircut. That is a recipe for a legal knife fight between private lenders and private equity investors, a fight both sides could lose. (Armstrong & Wu)

FT : Local leaders seek to reverse 40 years of UK bus privatisation

Local leaders seek to reverse 40 years of UK bus privatisation
Franchise network run by Transport for London, a local government body, hailed as a way forward

Nearly 40 years after local bus services across most of Britain were privatised, momentum is building to reverse the move in many areas.

Margaret Thatcher’s 1986 reforms were intended to increase competition and improve a service relied upon by millions of passengers a day. However, after years of declining ridership, local leaders have begun to unpick the overhaul by the Tory prime minister, arguing it has failed on every measure. 

They point to the success of London’s extensive bus network, which was left untouched by deregulation and remains under the control of Transport for London, a local government body.

As bus journeys across the capital have grown, under a franchising model common across much of Europe by which private companies run services while TfL retains overall control, ridership elsewhere has fallen by 40 per cent since privatisation and car ownership has risen, according to government data.

Local leaders argue that adopting a similar franchising model to London’s across the country is essential both to closing the economic divide with the capital and to meeting climate change targets.

Liverpool is among those to have adopted the system. “The reason we’re franchising our buses is not based on ideology, but on simple economics,” said Steve Rotheram, Labour mayor of Liverpool city region. Public control would put “passengers before profit”, he said, by allowing local leaders to keep more of the income from fares and reinvest it in the network and in boosting productivity.

“We’ve got decades of evidence that a deregulated system leaves behind the very people who need it most,” he added.


Thatcher’s 1980s reforms allowed private operators across the UK, except for London and Northern Ireland, the choice of which bus services to run and how much to charge.

Buses remain by far the biggest form of public transport — accounting for about half of all journeys. But BBC analysis has found that, in some areas, networks have shrunk by up to half, as operators have cut less profitable routes and local authorities have been forced to withdraw subsidies in response to cuts in central government funding. 

Rotheram has taken his cue from another Labour mayor in north-west England — Greater Manchester’s Andy Burnham — who in September began using the franchising model to bring buses back under public control by tapping into powers given to local authorities in 2017.

“I think in some ways it represents the coming of age of English devolution, in that a decision has been taken that rows back some of the misguided policies of the 1980s,” Burnham said at the time.

In recent weeks other Labour mayors, in West Yorkshire, Cambridgeshire and Peterborough, have announced plans to follow suit. The Labour government in Wales is also looking at similar changes.

Local politicians from other parties are also considering an overhaul of local bus services, including Andy Street, Tory mayor of West Midlands, Oxfordshire county council, run by Liberal Democrats and Greens, and Glasgow council, led by the Scottish National party.

Andrew Carter, chief executive of the Centre for Cities think-tank, said “rubbish” public transport was increasingly considered a factor in the poor economic performance of UK cities relative to those in other European countries.

Deregulation represented an “old experiment”, added Carter, one that is “universally regarded” across parties, cities and districts as “having failed”. 

Research by data analyst Tom Forth in 2019 concluded that Birmingham’s size — and therefore access to its labour market — effectively halved during rush hour because of poor bus services. His research concluded that this could explain most of Birmingham’s productivity gap with its European comparators. 

Those findings have been particularly influential in central government, which has begun to take a more active interest in bus policy, according to one local transport official.

A Centre for Cities paper on Glasgow’s public transport network that argued for a switch to franchising drew similar conclusions last month, estimating that better bus services could increase the city’s effective population by 24 per cent.

Graham Vidler, CEO of the Confederation of Passenger Transport, the trade association for the UK’s bus and coach sector, said he expected franchising to “only gain more prominence in the coming months”. 

But he warned financial support was crucial. “In the end, it will take more than a change of regulatory framework to give millions of passengers the service they deserve,” because networks “require a real, sustained investment in the things that matter most to passengers.”

Alistair Hands, regional managing director at Arriva UK Bus, which runs services in London, Wales and Liverpool, said experience in the capital had shown franchised systems could work well, “when combined with measures to promote passenger growth”, such as bus priority lanes. Echoing Vidler, he said that included the need for sustained, long-term investment.

The strain on local government finances is seen as the biggest impediment to change. Regional mayors pushing for franchising have met resistance from council leaders worried about taking on further funding obligations given the dire state of budgets.

Upfront costs alone can run into tens of millions of pounds. Greater Manchester had to budget £85.7mn just for buying and refurbishing bus depots. Burnham has already proposed a hotel tax as one revenue stream once the existing bus funding package runs out in 2025.

Many local leaders believe more central government subsidies will be needed to build out networks. State funding for bus services is low compared to rail, despite a Department for Transport analysis of major bus schemes showing they “delivered benefits worth more than four times their cost”.

Although the UK government has committed new funding to English bus networks since 2019, passengers still only receive 32 pence in subsidy per journey, according to CPT analysis, compared to £3.32 for rail passengers. Scotland has larger gaps. 

Sandy Easedale, owner of McGill’s, the largest independent bus operator in Scotland, who is opposed to the changes, warned that “hundreds of millions” of pounds in investment would be needed to create the sort of improved networks being mooted by local leaders.

“They want this wonderful service everywhere, which is fine, but somebody has got to pay for it,” he said. He promised to “fight tooth and nail in the courts” against any attempts to shift to franchising.