Perceived US Credit Risk Hits Highest Levels Since May

Michael Nierenberg, CEO at Rithm Capital, discusses the markets and how traders are mitigating the level of risk facing private credit.

BNP Paribas SA is holding discussions with investors about a potential significant risk transfer tied to about €2.5 billion ($2.9 billion) of corporate loans, according to people familiar with the matter, as the war in the Middle East tests risk appetite.

Marketing is at an early stage and the terms are subject to change, said the people, who declined to be identified because the discussions are private.

The deal, under BNP Paribas’s Resonance program, comes amid rising anxiety of a global stagflationary shock. A sustained increase in the price of oil threatens to ignite inflation and sap growth at the same time. That would leave central banks hamstrung to respond with either rate increases to temper price growth, or rate cuts to stimulate economies.

Euribor, a widely-used benchmark for floating-rate credit including SRTs, is trading near a one-year high as traders price out the likelihood of rate cuts in the Eurozone. The iTraxx Crossover index of junk-rated credit default swaps, a gauge of risk aversion, is near the highest in almost nine months, according to data compiled by Bloomberg.

Banks use SRTs as a way to insure loans against default, typically obtaining protection for between 5% and 15% of the loan value. That allows them to increase their solvency ratios and reduce reliance on less shareholder-friendly options such as issuing new equity. It also increases their leeway for new lending, acquisitions or shareholder payouts.

BNP Paribas has discussed an SRT tied to about €1.5 billion of leveraged buyout debt, according to people familiar with the matter said last month. The French bank is also considering another transaction tied to a portfolio of so-called Lombard loans, a type of financing typically extended to high-net-worth clients and backed by liquid assets such as equities or bonds, said the people.  US consumer spending barely rose in January after economic growth was weaker than previously reported at the end of last year, suggesting the economy lost some momentum before the war with Iran.

Inflation-adjusted consumer spending increased 0.1% from December, according to data out Friday, and a gauge of underlying inflation favored by the Federal Reserve rose a firm 0.4%. The government also halved its initial estimate of growth in the fourth quarter, when a record-long government shutdown, a slowdown in consumption and a decline in exports weighed on the economy.

The backdrop has shifted dramatically since then. Payrolls fell in February while unemployment rose, reviving concerns about the health of the labor market. And the war has boosted energy prices and dented household sentiment in recent weeks, according to a new survey from the University of Michigan.

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