Evergrande Investigation, SAS Restructuring, France Spotlight 2023, Credit Risk Shifts, Supply Chains – Baker Ing Bulletin: 6th Oct 2023

Welcome back to your Baker Ing Bulletin! We're focusing on the critical updates that every credit professional needs to know. Here are the past week's key stories...

1?? Metro Bank's Mortgage Book Divestiture: A Jolt to the Credit Market ??

Metro Bank's latest move to offload a third of its ￡7.5bn mortgage book has ruffled feathers, sending its shares tumbling by nearly 30% and igniting discussions about its financial health. This comes as Metro Bank's plan to optimise its mortgage business awaits PRA approval, casting further doubts on its stability. With a plummeting market value of ￡64m, Metro Bank is actively seeking up to ￡600m—split between ￡250m in equity and ￡350m in debt—to bolster its balance sheet.

There may be tightened credit terms for businesses directly reliant on Metro Bank’s lending. Expect a domino effect impacting lenders, legal services, and insurance firms that deal with Metro Bank or have exposure to residential mortgages. These industries are the most at risk and should prepare for potential contraction in credit lines or stricter lending criteria.

Re-calibrate your credit risk models to weigh these newly emerged factors. Those with direct or indirect exposure to Metro Bank should run stress tests to gauge their resilience under scenarios of a Metro Bank default or further deterioration. Monitoring any regulatory announcements closely can also offer lead time for necessary adjustments.

2?? Graphcore's Capital Quest Amid Increasing Losses ??

Graphcore, a UK-based chip designer, is navigating treacherous waters with a 46% drop in revenue to $2.7mn and an 11% increase in pre-tax losses to $204.6mn in 2022. Though it sits on a cash reserve of $157mn, the company has flagged an urgent need for more funding within the next year.

Graphcore's financial struggles indicate heightened risks in the chip design and AI sectors. Given that it competes directly with giants like Nvidia, its struggle could imply an oligopoly forming in the sector, where only the big players with deep pockets can survive. Credit professionals should consider these dynamics as a microcosm of what's happening in the larger AI and tech sectors, where smaller, high-growth firms could find it difficult to scale.

While Graphcore's direct suppliers in specialised semiconductor materials are the most at risk, the company's need for immediate funding could signal larger credit risks for ancillary businesses such as logistics companies, software vendors, and other third-party service providers that Graphcore may owe money to. Default risks could extend to financial institutions that have lent to these secondary companies, affecting credit lines and terms across a wider business network.

Reassess exposure to high-growth tech firms, particularly in chip design and AI, that show signs of failing to scale. Credit lines should be reviewed not just for direct suppliers but also for businesses one or two steps removed in the supply chain. Be vigilant about credit market signals that may imply a broader recalibration of risk in the tech sector, and adjust credit portfolios and risk assessments accordingly.

3?? Evergrande Founder Under Investigation: Heightened Sectoral Risk ??

Evergrande's downward spiral has entered a new phase with Chair Hui Ka Yan under investigation for "illegal crimes," while the firm defaults on bond payments and its restructuring plan is in limbo due to an ongoing official probe. The situation not only shakes the foundation of China's property sector but also sends ripples through the global financial landscape. What originated as a tremor in China's property market now threatens to be an earthquake in global financial systems.

Credit professionals face complex risks that span beyond real estate. While immediate vulnerabilities lie with developers, raw materials suppliers, and banks exposed to the Chinese property landscape, the broader implications cannot be overlooked. Evergrande's staggering $300bn liabilities hold the potential to disrupt global debt markets, with a fire sale of assets that could deflate market values and trigger a chain reaction of credit rating downgrades.

This turbulence also necessitates a rigorous reassessment of currency and interbank credit markets. The extensive reach of Evergrande means its impact could manifest indirectly through various tiers of your supply chain. Furthermore, keep tabs on the credit derivatives market for early warning signs of a broader credit crisis, especially regarding credit default swaps related to Chinese corporate debt.

Conduct an immediate, comprehensive audit of all credit exposures linked to Evergrande and its far-reaching supply chain (e.g., raw material suppliers, subcontractors, real estate brokers, financial institutions, utility providers, equipment leasers, legal and consulting services, retail outlets). Update risk models to reflect these dynamics and their possible ripple effects across debt markets globally.

4?? SAS's Shareholder Wipeout: A Credit Risk Reconfiguration ??

Scandinavian airline SAS is undergoing a significant financial restructuring that leaves existing shareholders in the lurch and ushers in new equity partners, including Air France-KLM, private equity firm Castlelake, and the Danish government. With a package comprising $475mn in new equity and $700mn in convertible debt, the overhaul is designed to bring SAS out of Chapter 11 bankruptcy protection.

The significant financial restructuring at Scandinavian airline SAS is illustrative of how quickly credit risk can change, affecting a wide range of industries and financial instruments. The involvement of new equity partners and changes in ownership structure ripple beyond the obvious parties—like immediate suppliers or creditors—to echo in less apparent sectors.

If SAS can dramatically alter its credit profile overnight, it raises questions about the volatility of credit assessments elsewhere. Supply chain participants, for example, extend beyond aviation into logistics, financial services, and even technology vendors who cater to these sectors. Such ripple effects necessitate that credit professionals, regardless of their sector, keep a vigilant eye on developments like these. Moreover, the entry or exit of government stakeholders, as seen with SAS, introduces a layer of political risk that might not have been accounted for in your models, making it a crucial factor for re-evaluation.

In light of the SAS situation, immediate action points include: a re-assessment of any exposure that might seem even remotely connected, a stringent review of credit terms, and heightened due diligence to preempt similar occurrences in your own sector. Keep a finger on the pulse of market developments that could signal comparable shifts, especially in sectors thought to be stable.

5?? Navigating France's Credit Challenges ????

In Parisian cafes, where topics range from art to economics, a new undercurrent of financial concern is palpable. The complexities of extending trade credit in France have evolved into a high-risk endeavour, thanks to lengthening payment terms and broader economic shifts. "France Spotlight 2023," a new report, aims to guide Credit Managers through this altered landscape.

Sectoral nuances abound; while tech startups offer fewer defaults and a brighter outlook, the hospitality sector faces rising insolvencies due to pandemic pressures and political unrest. Understanding these subtleties within France's broader macroeconomic picture is key to effective credit management.

Navigating France’s multifaceted economic landscape demands strategic foresight, especially with looming challenges like the Russia-Ukraine conflict and rising inflation. For comprehensive analysis and actionable guidance tailored to Credit Managers, "France Spotlight 2023" serves as a crucial resource.

?? Download “France Spotlight 2023” Here: Baker Ing International

Stay ahead of global trends that impact your credit decisions with our no-nonsense Global Outlook. Check out the latest insights here: Global Outlook.

We'll be back next week with more updates that matter in the credit and finance world.

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