Philippa Kaur

Vishal punjabi sounds groggy over the phone. “You know when you can’t remember where you are when you wake up,” he says. “I’m in Cannes, before that Barcelona and before that Dubai, London, Udaipur, Delhi, Chennai and Bangalore. Now off to Charlotte, North Carolina and then the Napa Valley.” This globetrotting lifestyle would be familiar to high-powered ceos, venture capitalists or investment bankers. Mr Punjabi is none of these. Instead, he produces intricate wedding videos for Indian nuptials: 65 in the past year, two-thirds of them for Indian couples who wed outside India. His expanding workforce includes set designers, sound and light engineers, composers, video editors, even script writers. Listen to this story. Enjoy more audio and podcasts on More

When investment bankers agreed in January to underwrite the leveraged buy-out of Citrix, a software company, by a group of private-equity firms, returns on safe assets like government bonds were piffling. Yield-hungry investors were desperate to get their hands on any meaningful return, which the $16.5bn Citrix deal promised. Lenders including Bank of America, Credit Suisse and Goldman Sachs were happy to dole out $15bn to finance the transaction. Inflation was transitory, central bankers insisted. Russia hadn’t invaded Ukraine, energy markets were placid and the world’s economies were growing. Nine months later the banks tried to offload the debt in a market gripped not by greed but by dread—of stubborn inflation, war and recession. Struggling to find takers, they palmed off $8.6bn of the debt at a discount, incurring a $600m loss. They are still nursing the remaining $6.4bn on their balance-sheets.The Citrix fiasco is a particularly egregious example of a broader shift in corporate debt markets. Having rediscovered their inner Volcker, Western central banks are pushing interest rates to levels not seen in 15 years and shrinking their balance sheets. Those that bought corporate bonds during the pandemic in order to stave off a wave of bankruptcies have been selling them or have already done so. All this is draining the market of liquidity as investors abandon riskier assets like corporate debt in favour of safe Treasury bonds, now that these suddenly promise decent return, observes Torsten Slok of Apollo, a private-asset manager. The result is plummeting prices of corporate bonds, especially for less creditworthy businesses: yields on junk paper have soared to 9.1% in America and 7.5% in Europe, up from 4.4% and 2.8%, respectively, in January (see chart 1). All this raises awkward questions about what happens next with the mountain of debt that companies have amassed in recent years (see chart 2). Since 2000 non-financial corporate debt has gone up from 64% of GDP to 81% in America and from 73% to 110% in the euro area. (In Britain the share is a modest 68%, roughly what it was in 2000, a rare spot of relief for an otherwise beleaguered economy.) All told, American, British and euro area public companies now owe creditors almost $19trn, with a further $17trn owed by unlisted firms. Just how wobbly is this pile?The credit crunch will not affect all borrowers equally. Indeed, viewed in aggregate the West’s corporate debt load looks manageable. We calculate that American public companies’ earnings before interest and tax are a healthy 6.7 times the interest due on their debts, up from 3.6 times in 2000. In the euro area, this interest-coverage ratio has risen from 4.4 to seven this century. Moreover, some riskier borrowers loaded up on debt at low rates during the pandemic. Just 16% of the euro area’s junk bonds by value mature before the end of 2024. In America the figure is 8%.Yet the surge in borrowing costs will cause strain, in three areas. The first comprises businesses that have come to rely on less orthodox sources of credit, which are often those with the diciest prospects. The outstanding value of leveraged loans in America, typically provided by a syndicate of banks and non-bank lenders, now matches that of junk bonds, and it has been growing briskly in Europe, too. So has the value of private credit, offered by private-asset managers such as Apollo and Blackstone. Such loans tend to tolerate higher leverage in return for high and, more troubling at the moment, floating interest rates. Borrowers are thus far more exposed to rate rises. Because this sort of debt often comes with fewer strings attached, lenders have limited ability to accelerate repayment once signs of distress emerge.The second area of vulnerability involves so-called zombie firms: uncompetitive enterprises, kept alive by cheap debt and, during the pandemic, government bail-outs. Fortunately, according to our calculations the corporate undead are relatively rare and typically small. We define a zombie company as one that is at least ten years old and whose interest coverage ratio has been one or less for at least three consecutive years, stripping out fast-growing but loss-making tech firms, pre-revenue businesses in sectors like biotechnology, where products take years to get to market, and revenue-less holding companies. On that definition, we identify 443 active zombies that are listed in America, Britain and the euro area (see chart 3). That is up from 155 in 2000, but represents just 5.6% of all listed firms, responsible for 1.9% of total debt and 1.4% of total sales. Their demise could be the economy’s gain, as mismanaged firms with low productivity that binged on bail-outs finally close, although that would be cold comfort to their employees and owners.The third and biggest area of concern involves firms that are merely unfit rather than undead. One way of capturing their prevalence is to look at firms with an interest coverage ratio of less than two times. That gets you to a fifth of the total debt of listed American and European companies—some $4trn-worth (see chart 4). Alternatively consider firms whose debts are rated just above junk status. Some 58% of the investment-grade non-financial corporate bond market is now rated bbb, according to Fitch, a ratings agency. The average yield on such bonds has more than doubled in America in the past 12 months, to 5.6%. Unlike high-yield bonds, many of them come due soon and will need to be refinanced at much higher rates.Ever since the global financial crisis plenty of mature companies with slow sales growth have taken advantage of cheap credit to pile on debt to the precipice of junk status in order to fund shareholder payouts. As profits come under pressure and interest costs rise, they face a squeeze that could lead them to cut employment and investment. And if earnings plummet, which some analysts are beginning to predict as recession fears mount, this financing strategy could push these businesses over the edge into junk territory. Asset managers whose portfolio mandates require them to favour safe assets may then be forced into fire sales, triggering a crash in prices and an even greater surge in borrowing costs. Most of the firms operating just above junk status are still a long way off a downgrade, reckons Lotfi Karoui of Goldman Sachs. Many of the flakiest investment-grade borrowers got downgraded early in the pandemic, so the remaining ones are on average more robust. A nightmare scenario is not, in other words, inevitable. But it is no longer inconceivable, either. ■ More

With a straw hat, shades and a red chequered shirt, Randy Bekendam looks every inch the grizzled farmer—albeit in a Californian countercultural sort of way. The tomatoes, courgettes and King David apples he sells at this time of year have never seen a pesticide. Young families visit to pet his goats and learn about the merits of soil health. The 70-year-old is not shy about sharing his convictions, either. They run deep. The land he has leased for the past 34 years, called Amy’s Farm, has been sold out from underneath him. Now, echoing Joni Mitchell, he is battling to stop the rural idyll from being paved over and turned into a warehouse.Listen to this story. Enjoy more audio and podcasts on More

So this channel is just for the speakers to communicate on? Good. Right, how many of our treasured colleagues are on the call? Looks like we have enough to begin. And the sooner we start, the sooner we can get back to doing some proper work.Listen to this story. Enjoy more audio and podcasts on More

The powerful rear-mounted engines of Porsche’s long line of 911 sports cars made them small and fast. In a corner, though, they acted like a pendulum, leaving some less skilful drivers parked in roadside hedges. After an initial public offering (ipo) on September 29th, the luxury carmaker will also require nimble handling to ensure its strengths do not become a source of weakness.In a nod to its most famous model, the ipo will comprise 911m shares. Only 114m, with no voting rights, will be sold to the public and big investors, including the Qatar Investment Authority. The rest will be held by vw, which has owned Porsche since 2012, More

After a hot and dry summer, the rain and chill in September brought some relief to parched Germans—but also a reminder of the looming winter. On September 16th Klaus Müller, boss of the Bundesnetzagentur (bna), Germany’s energy regulator, admitted that if it gets very cold “we will have a problem”. He could not rule out the rationing of natural gas, which Germany’s biggest supplier, Russia, has withheld as part of its war in Ukraine. Listen to this story. Enjoy more audio and podcasts on More

Swedish steel is considered the world’s toughest. It may soon become its greenest. In Boden, a town near the Arctic Circle, a startup called h2 Green Steel (h2gs) is erecting a €4bn ($4bn) new mill, Europe’s first in nearly half a century. It will be powered not by the usual coal or natural gas but by green hydrogen, produced on site by the region’s abundant wind and hydropower. When fully built in a few years, it will employ up to 1,800 people and churn out 5m tonnes of steel annually.The project matters far beyond sparsely populated northern Sweden. The consequences could be momentous for the continent’s producers of steel and other basic materials, such as cement and chemicals, which between the three of them directly contribute around 1% of the eu’s gdp. It would ripple through the supply chains of firms, from carmakers to builders, which account for another 14% of eu output, according to Material Economics, a think-tank. It would boost Europe’s energy independence, the importance of which has been laid bare by Russia’s energy blackmail in response to Western sanctions against its war in Ukraine. And it would be a boon for the climate, since basic-materials industries spew out about a fifth of Europe’s greenhouse-gas emissions. It could in short, thinks Ann Mettler of Breakthrough Energy, a venture-capital fund backed by Bill Gates, mark the rebirth of Europe’s heavy industry for the post-fossil-fuel era. Heavy industry has long seemed irredeemably carbon-intensive. Reducing iron ore to make steel, heating limestone to produce cement and using steam to crack hydrocarbons into their component molecules requires a lot of energy. On top of that, the chemical processes involved give off lots of additional carbon dioxide. Cutting all those emissions, experts believed, was either technically unfeasible or prohibitively expensive. Both the economics and the technology are at last starting to look more favourable. Europe is introducing tougher emissions targets, carbon prices are rising and consumers are showing a greater willingness to pay more for greener products. Several European countries have crafted strategies for hydrogen, the most promising replacement for fossil fuels in many industrial processes. Germany is launching the Hydrogen Intermediary Network Company (hint.co for short), a global trading hub for hydrogen and hydrogen-derived products. Most important, low-carbon technologies are finally coming of age. The need for many companies to replenish their ageing assets offers a “fast-forward mechanism”, says Per-Anders Enkvist of Material Economics. Taken together, these developments are allowing European industrial firms that have vowed to become carbon-neutral by 2050, which is to say many of them, to start putting money where their mouth is. Material Economics has identified 70 projects in Europe that are commercialising technology to reduce carbon emissions in basic-materials industries. Scarcely a week goes by without the unveiling of a new venture. Decarbonising industry has turned from mission impossible to “mission possible”, says Adair Turner of the Energy Transitions Commission, a think-tank.The steel industry is the furthest along. h2gs’s mill in Boden is cleverly combining proven technologies at a big scale. The firm is building one of the world’s largest electrolysis plants to produce hydrogen. The gas is then pumped into a reactor, where it powers a process called “direct reduction”: under great heat, it snatches oxygen from iron ore, producing nothing but water and sponge iron. This material, so called because its surface is riddled with holes, is then refined into steel using an electric-arc furnace, which dispenses with coking coal.A half-hour drive south of Boden, hybrit—a joint venture between ssab, a steelmaker, Vattenfall, a power utility, and lkab, an iron-ore producer—is piloting a similar process. In July the board of Salzgitter, a German steel company, gave the green light to a €723m project called salcos that will swap its conventional blast furnaces for direct-reduction plants by 2033 (it will use some natural gas until it can secure enough hydrogen). Other big European steel producers, including ArcelorMittal and Thyssenkrupp, have similar plans.Cement-makers are heading in the same direction, albeit more slowly. Since heating limestone generates about 60% of the sector’s carbon emissions and a replacement technology, such as direct reduction in steelmaking, is lacking, the industry is chiefly focusing on abating emissions after the fact, using carbon capture and storage (ccs). Many firms are experimenting with a heating process that replaces air with pure oxygen, which produces CO2 suitable for sequestration. Some are trying to use electricity rather than fossil fuels to heat the limestone. The most ambitious are developing new, lower-carbon types of cement. HeidelbergCement, the world’s fourth-largest manufacturer of the stuff, has launched half a dozen low-carbon projects in Europe. They include a ccs facility in the Norwegian city of Brevik and the world’s first carbon-neutral cement plant on the Swedish island of Gotland. Ecocem, an Irish startup, is making cement that uses less clinker, the intermediate material derived from the heated limestone, and thus emits less carbon. Some companies are trying to retrieve cement from old concrete in demolished buildings.The chemicals industry faces perhaps the biggest challenge. Although powering steam crackers with electricity instead of natural gas is straightforward in principle, it is no cakewalk in practice, given the limited supply of low-carbon electricity. Moreover, the chemicals business breathes hydrocarbons, from which many of its 30,000 or so products are derived. Even so, it is not giving up. basf, a chemicals colossus, is working with two rivals, sabic and Linde, to develop an electrically heated steam cracker for its town-sized factory in Ludwigshafen. It wants to make its site in Antwerp, which emitted 3.8m tonnes of CO2 last year, net-zero by 2030. To achieve this goal, basf recently bought part of a wind farm off the Dutch coast to provide it with carbon-free electricity. The company is, like its cement counterparts, also taking a serious look at recycling, in particular a process called pyrolysis, where plastic waste is burned in the absence of oxygen and split into its hydrocarbon components. Other firms are dreaming up different types of greener feedstocks. afyrem, a French startup, is deriving hydrocarbons from biomass. Several dozen pilot projects—even large ones with proven technology—do not amount to a green transition. The hard part is scaling them up. The necessary infrastructure is either a work in progress (clean-electricity generation) or scarcely exists (hydrogen production and distribution). Costs remain high: green steelworks are still two to three times more expensive to build than the conventional kind. Attracting workers can be difficult, especially to renewables-rich places which are often, like Boden, remote. And rivals in other countries aren’t standing still; a couple of giant Indian conglomerates in particular are betting big on green hydrogen. Europe needs to hurry up if it is to maintain its lead, warns Frank Peter of Agora Energiewende, a think-tank.All these are real obstacles. But they need not be insurmountable ones. To understand why, once again consider h2gs. It has convinced firms including bmw, a carmaker, and two white-goods manufacturers, Electrolux and Miele, to sign contracts for 1.5m tonnes of green steel. That order book serves as collateral for banks to finance two-thirds of the project (with the rest coming from equity investments by backers including venture-capital firms and industrial giants such as Scania and Mercedes-Benz). To attract hundreds of skilled workers and their families to remote Boden, meanwhile, it will help them find housing in a complex that will, if its architects have their way, resemble a snazzy resort. To secure the other important input, hydrogen, h2gs has teamed up with Iberdrola, a Spanish energy firm, to build a large factory in Western Europe to produce the gas, with a view to supplying some of it to other industrial users. h2gs’s thinking is that if can establish its steel and hydrogen platforms early, it can lock in important advantages ahead of competitors elsewhere. These include things like setting standards and grabbing a slice of potentially lucrative businesses such as software to control hydrogen- and steelmaking equipment. For Europe to become a green-industry superpower, its governments and industrial giants will need to display similar ingenuity and ambition. ■ More

For the past decade there were two more or less universally acknowledged truths about digital advertising. First, the rapidly growing industry was largely impervious to the business cycle. Second, it was dominated by the duopoly of Google (in search ads) and Meta (in social media), which one jealous rival has compared to John Rockefeller’s hold on oil in the 19th century.Both of these verities are now being challenged simultaneously. As China’s economy slows and the West’s slides towards a recession, companies everywhere are squeezing their marketing budgets. Until recently, that would have meant cutting non-digital ads but maintaining, or even raising, online spending. With most ad dollars now going online, that strategy is running out of road. Last quarter Meta reported its first-ever year-on-year decline in revenues. Snap, a smaller rival, is laying off a fifth of its workforce.For Meta and Google’s corporate parent, Alphabet, the cyclical problem may not be the worst of it. They might once have hoped to offset the digital-ad pie’s slower growth by grabbing a larger slice of it. No longer. Although the two are together expected to rake in around $300bn in revenues this year, sales of their four biggest rivals in the West will amount to almost a quarter as much. If that does not sound like a lot, it is nevertheless giving the incumbents reason to worry. Five years ago most of those rivals were scarcely in the ad business at all (see chart). What is more, as digital advertising enters a period of transformation, the challengers look well-placed to increase their gains.The noisiest newcomer to the digital-ad scene is TikTok. In the five years since its launch the short-video app has sucked ad dollars away from Facebook and Instagram, Meta’s two biggest properties. So much so that the two social networks are reinventing themselves in the image of their Chinese-owned rival. TikTok’s worldwide revenue will exceed $11bn this year and will be double that by 2024, forecasts eMarketer, a firm of analysts.The TikTok threat is well known—not least to Meta’s boss, Mark Zuckerberg, who mentioned the “unique” competitor five times on a recent earnings call. But Meta and Google may have more to worry about closer to home, where a trio of American tech firms are loading ever more ads around their main businesses.Chief among them is Amazon, forecast to take nearly 7% of worldwide digital-ad revenue this year, up from less than 1% just six years ago. The company started reporting details of its ad business only in February, when it revealed sales in 2021 of $31bn. As Benedict Evans, a tech analyst, points out, that is roughly as much as the ad sales of the entire global newspaper industry. Amazon executives now talk of advertising as one of the company’s three “engines”, alongside retail and cloud computing.Next in line is Microsoft, expected to quietly take more than 2% of global sales this year—slightly more than TikTok. Its search engine, Bing, has only a small share of the search market, but that market is a gigantic one. Microsoft’s social network, LinkedIn, is unglamorous but its business-to-business ads allow it to monetise the time users spend on it at a rate roughly four times that of Facebook, estimates Andrew Lipsman of eMarketer. It generates more revenue than some medium-sized networks including Snap’s Snapchat and Twitter.The most surprising new adman is Apple. The iPhone-maker used to rail against intrusive digital advertising. Now it sells many ads of its own. As sales of smartphones plateau, the company is looking for new ways to monetise the 1.8bn devices, from smartphones to smart earphones, it already has in circulation. So far it is only dabbling in ads and does not report sales figures. But Bloomberg reported recently that Apple’s ad business was already generating sales of $4bn a year, making it about as big an ad platform as Twitter. Apple executives believe there is much more to be had.They may well be right. Changes are coming to the digital-advertising industry which will suit the big-tech challengers. Apple itself is in part responsible for what may be the most consequential development. Its rules on “app-tracking transparency” (att), introduced last year, have made it much harder for advertisers to follow users around the web to serve them ads based on their interests. The eu’s Digital Services Act, unveiled earlier this year, takes steps in the same direction. America is mulling similar legislation of its own.The crackdown on tracking has been especially hard on platforms that serve display ads, which target consumers on the basis of their interests, as opposed to things they have actively searched for. Meta, whose social networks specialise in such ads, said in February that att would knock $10bn off its ad business this year. It is trying to develop other ways of divining consumers’ interests. So are smaller platforms reliant on display ads, but their task is more difficult without Meta’s deep pockets. Or at least that is how investors see it: Snap’s market value has plummeted by 83%, or $97bn, in the past 12 months.Amazon, Apple and Microsoft, by contrast, are insulated against anti-tracking initiatives. They rely mostly on “first party” data of their own. Amazon’s ads are based on what users search for on its site: type “socks” into its search bar and you will see sponsored promotions for exactly that. Microsoft’s Bing is similarly immune. LinkedIn is probably less so, though Microsoft could theoretically use data from Bing to fine-tune the ads shown to LinkedIn users (at the moment it does not, though it has looked into it). Ads on Apple’s app store follow the same principle as Amazon: search for TikTok, say, and you may see an ad for a rival app like Pinterest. Apple is rumoured to be preparing to introduce ads on its Maps app, to promote local businesses. Through its move into payments it could learn about customers’ shopping habits. None of this would require tracking, since the behaviour all happens on Apple’s platform.Advertising’s other big coming change is the migration of television-viewing from broadcast and cable to internet-connected tvs, capable of delivering targeted ads. Amazon has already shown ads alongside sport on its Prime Video streaming service. Apple has done the same on Apple tv+, and may yet launch an ad-supported subscription tier, as rivals Netflix and Disney+ soon will. Microsoft has no tv offering, but its acquisition earlier this year of Xandr, an ad-tech company, has given it a foothold in serving ads for other streamers. In July Netflix chose Microsoft to run its forthcoming ad business—to disappointment at Google, which had bid for the contract, and to some surprise at Microsoft itself.Digital advertising is spreading into other markets where the new challengers are well positioned. Audio is undergoing a similar digitisation to video, as listening switches to streamed music and podcasting. This presents an opportunity for Amazon and Apple, both of which have audio-streaming services and make smart speakers. Both also have voice-activated assistants, Alexa and Siri, who could just as easily bark out promotions as take orders. Amazon sees Alexa as a future saleswoman as well as a servant.Meanwhile, Microsoft’s pending acquisition of Activision Blizzard, a video-gaming giant, will make it a powerful force in that fast-growing and increasingly ad-supported industry. Its Xbox console already shows some ads on the user’s on-screen “dashboard” and will reportedly soon offer more help for developers to sell in-game ads. Activision’s units include King, the maker of “Candy Crush”; last year King generated revenue of $2.6bn from ads and in-game purchases by its quarter of a billion players.As digital ads work their way into more corners of the economy, “a new order is going to materialise”, believes Mr Lipsman. He thinks Amazon will overtake Meta in total advertising revenue, possibly within five years. Google is better placed to take advantage of the coming changes, with its healthy search ads and its vast YouTube video and audio services. Still, it will find things more competitive in future. The incumbent digital-ad duo might have hoped that, as ever more advertising went online, their empires would only extend. It looks instead as if new rivals will reach into their business. ■ More