Finance

Fed Chairman Jerome Powell struck a hawkish tone during his speech at the Jackson Hole economic symposium last week.
El-Erian gave the Fed credit for establishing a clear and consistent message, but said it would need to do two more things in order to give its forward guidance credibility from here on out.

Heidi Gutman | CNBC

Although it has now established more consistent messaging to the market, the U.S. Federal Reserve needs to do two more things to re-establish its credibility, according to Mohamed El-Erian, chief economic advisor to Allianz.
Fed Chairman Jerome Powell struck a hawkish tone during his speech at the Jackson Hole economic symposium last week, reinforcing the central bank’s commitment to aggressive monetary policy tightening in order to rein in inflation, and warning that the U.S. economy will face “some pain” in the process.

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Prior to establishing a firm message in recent months — with inflation running at a 40-year high — Powell and other Fed officials had struggled to guide markets effectively, after accepting fault for inaccurate projections throughout 2021 that inflation would be “transitory.”
“The more Fed officials repeat it, the more the market is pricing it in, but it’s mainly the fixed income markets so far that have priced it in,” El-Erian told CNBC’s Steve Sedgwick at the Ambrosetti Forum on Friday. 
“Other markets are hoping somehow that we are in a cyclical moment, not in what I think is more secular and strategic.”

El-Erian gave the Fed credit for establishing a clear and consistent message, but said it would need to do two more things in order to give its forward guidance credibility from here on out.
“One is to explain to the marketplace why it got its analysis so wrong and what has it done about its forecasting abilities,” he said. 

“And secondly, change its framework. Remember, we still have a framework that is for a world of deficient aggregate demand and we’re in a world of deficient aggregate supply.”
El-Erian added that the current framework has been geared toward an environment in which inflation has been “too low for too long” and where it is expected to remain low for a long period of time. He suggested that the central bank needs a new framework entirely.
“That was the world before the pandemic. This framework was introduced in 2021, but unfortunately it’s backward-looking, so we do need a new framework, and I don’t think people quite realize how important the governing framework is,” he said. 
“That’s why, when I look at the Fed, I say they’ve done great on one thing but there’s two more things they need to do if their forward policy guidance is to stick.”
Until inflation began soaring to 40-year highs, El-Erian said the market had “held the Fed hostage for a long time,” deducing what it wanted from policymakers’ mixed messaging on the pace and scale of monetary policy tightening.
“Once you bring in an inflation rate of 8.5% suddenly the ability of the market to hold the Fed hostage dissipates. I think that’s what the market is starting to realize — this is not the old days, inflation has fundamentally changed the equation,” he said.

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U.S. restrictions on Nvidia chip sales to China won’t affect Chinese electric car companies because they’re using auto systems that don’t include the sanctioned products.
Chipmaker Nvidia’s shares have plunged around 13% this week after the company disclosed new U.S. restrictions on its exports to China.
In China, the Nvidia Drive Orin and Xavier chips have become a core part of electric automakers’ assisted driving tech, but the new U.S. restrictions target Nvidia’s A100 and H100 products.

Nvidia has found success in China by selling automotive chips to the country’s electric car companies. But the U.S. semiconductor giant has been restricted from sending some products to China. So far, electric vehicle makers do not seem to be affected.
Budrul Chukrut | Sopa Images | Lightrocket | Getty Images

BEIJING — U.S. restrictions on Nvidia chip sales to China won’t affect Chinese electric car companies, as they’re using auto systems that don’t include the sanctioned products.
Chipmaker Nvidia’s shares have plunged around 13% this week after the company disclosed new U.S. restrictions on its exports to China, affecting about $400 million in potential sales in the current quarter.

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In China, the Nvidia Drive Orin chip has become a core part of electric automakers’ assisted driving tech. These semi-autonomous driving systems are an important selling point for the companies in what has become a fiercely competitive market in China. Some automakers are also using Nvidia’s Xavier chip. Automotive is a relatively small but fast-growing part of Nvidia’s business.
However, the new U.S. restrictions target Nvidia’s A100 and H100 products — and these chips’ sales are part of the company’s far larger data center business. The products are graphics processors that can be used for artificial intelligence.
“There shouldn’t be any restrictions on Xavier and Orin, and Xpeng, Nio and others would continue to ship with those chips,” said Bevin Jacob, partner at Shanghai-based investment and consulting firm Automobility.
Jacob, however, did warn that there could be “close scrutiny” in the future on U.S. firms shipping chips relating to artificial intelligence and autonomous driving to China.

Xpeng declined to comment. Nio, Li Auto, Huawei and Jidu — a new electric vehicle brand backed by Baidu and Geely — did not respond to requests for comment.

The new U.S. rules are designed to reduce the risk of supporting the Chinese military, according to the U.S. government, Nvidia said in its filing with the Securities and Exchange Commission on Wednesday. But it’s unclear what prompted this specific policy move or what could drive future ones.
In another positive sign for the chipmaker, the U.S. will allow Nvidia to continue developing its H100 artificial intelligence chip in China, the company said Thursday.
“The U.S. government has authorized exports, reexports, and in-country transfers needed to continue NVIDIA Corporation’s, or the Company’s, development of H100 integrated circuits,” Nvidia said in a filing Thursday.
The company said second-quarter revenue for its automotive business was $220 million, up 45% from a year earlier.

“Our automotive revenue is inflecting, and we expect it to be our next billion-dollar business,” Nvidia CEO Jensen Huang said in an earnings call in late August, according to a StreetAccount transcript.
WeRide, an autonomous driving technology start-up, said in a statement that “there is no immediate impact from the ban.”
“We believe both the supply and demand side in the industry will work closely together to handle the constantly changing business environment to safeguard the continuous development of technology,” the company said in a statement to CNBC.
Pony.ai, another autonomous driving start-up, said it is not affected, as did automaker Geely.
— CNBC’s Kif Leswing contributed to this report.

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View from the Gulf

Ratings agency Fitch calculates that GCC banks with Turkish subsidiaries posted net losses of roughly $950 million in the first half of 2022.
“Turkish exposures are a risk for GCC banks’ capital positions due to currency translation losses from the lira depreciation,” Fitch wrote.
In mid-August, Turkey shocked markets by lowering its key interest rate despite inflation at nearly 80%.

General view of Emirates NBD Bank on January 3, 2017 in Dubai, United Arab Emirates.
Tom Dulat | Getty Images

DUBAI, United Arab Emirates — Banks with exposure to Turkey have faced losses ever since the country’s currency began steeply depreciating in 2018; now, lenders in several oil-rich Gulf states in particular are set to take a hit in the next year because of their links to the country, according to a recent report by ratings agency Fitch.
Banks in the Gulf Cooperation Council — that’s Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates — with Turkish subsidiaries had to adopt “hyperinflation reporting” in the first half of 2022, Fitch wrote this week, as cumulative inflation in Turkey over the last three years surpassed a whopping 100%.   

Fitch calculates that GCC banks with Turkish subsidiaries posted net losses of roughly $950 million in this year’s first half. Among the hardest hit were Emirates NBD — Dubai’s flagship bank — and Kuwait Finance House, the second-largest bank in Kuwait. Turkish exposure for Kuwait Finance House and Emirates NBD is 28% and 16% of their assets, respectively. Qatar National Bank was also among those affected.
“Fitch has always viewed GCC banks’ Turkish exposures as credit-negative,” the ratings firm wrote. “Turkish exposures are a risk for GCC banks’ capital positions due to currency translation losses from the lira depreciation.”
The lira has lost 26% of its value against the dollar year-to-date, making imports and the purchase of basic goods much more challenging for Turkey’s 84 million residents. 

Why is Turkey’s currency falling?

This time five years ago, one dollar bought roughly 3.5 Turkish lira. Now, a dollar buys about 18 lira. The slide began as Turkey’s economy grew rapidly but its central bank declined to raise interest rates to cool rising inflation. That and things like a worsening current account deficit, shrinking foreign exchange reserves and rising energy costs — plus occasional spats with the U.S. that nearly resulted in sanctions on Turkey — pressured the currency further. 

Turkish lira and U.S. dollar
Resul Kaboglu | NurPhoto via Getty Images

Economists overwhelmingly blame Turkish President Recep Tayyip Erdogan, who has vocally rejected the idea of raising rates and has called them the “mother of all evil,” and who investors blame for throttling the central bank’s independence. 

If a central bank chief went against Erdogan’s policy of keeping rates low, they were eventually replaced; by the spring of 2021, Turkey’s central bank had seen four different governors in two years.
Erdogan’s government has instead devised alternative methods to try to prop up its currency and boost revenue, like selling its FX, imposing strict rules on lira loans, and improving relations with wealthy Gulf states to attract investment. The UAE and Qatar have both pledged billions of dollars of investment in Turkey’s economy.  

Billions in losses

In mid-August, Turkey shocked markets by lowering its key interest rate by 100 basis points — from 14% to 13% — despite inflation at nearly 80%, a 24-year high. With little solution to the lira’s woes in sight, the banks with Turkish exposure are set to see more trouble, analysts say.
“We calculate that GCC banks’ aggregate currency translation losses through ‘other comprehensive income’ were USD6.3 billion in 2018–2021, mainly due to lira depreciation,” Fitch wrote, adding that the total net income of the banks’ Turkish subsidiaries, meanwhile, was just over half that amount at $3.3 billion. 
“We expect currency losses to remain high until at least 2024 due to further lira depreciation,” the agency wrote. 

President of Turkey, Recep Tayyip Erdogan, arrived in Abu Dhabi as part of his visit to the United Arab Emirates on February 14, 2022 in Abu Dhabi, United Arab Emirates.
Presidential Press Office | dia images via Getty Images

Still, Fitch doesn’t see itself having to downgrade the viability ratings of the GCC banks that have Turkish subsidiaries, as it says “those banks have good loss-absorption capacity.”
It also doesn’t expect them to leave Turkey altogether, largely because there aren’t enough potential buyers, despite Turkish banks trading at half of their original book value.
“GCC banks would be willing and able to provide their Turkish subsidiaries with financial support, if needed, and this is reflected in the ratings of the subsidiaries,” Fitch wrote, adding that its outlook for their exposure remains credit negative in particular due to the growing risk of government intervention in Turkish banks. More

Nationwide, Lloyds and NatWest have all offered staff a one-time financial support package.
The move helps in the short-term, but longer-term solutions may be needed to keep hold of staff.

While these support measures may be welcome boosts for employees, they may not go far enough, Ruth Thomas, Chief Product Evangelist at compensation software and employee management company Payscale said.
Alexander Spatari / Getty Images

LONDON — Britain’s financial sector is being urged to do more to help workers struggling with the cost-of-living crisis, despite a slew of top banking names providing one-off payments to low earners.
Nationwide announced on Aug. 15 a payment to more than 11,000 employees to help with the increasing cost of living. The payment is aimed at those earning £35,000 ($42,300) or less a year, which is 61% of the workforce. 

“The months ahead will be worrying for many people and we’re always considering new ways to help our members. But rising prices affect our colleagues too and that’s why we’re providing this additional support,” Debbie Crosbie, CEO at Nationwide Building Society, said in a press release.
The world’s largest building society — an organization which lends capital for the building of property — is the latest in a string of U.K.-based financial institutions offering aid to employees. 
The move is a logical one, as the banking industry is reaping the rewards of the higher inflation rate that is strangling so many others.
As inflation — the rate at which prices increase over time — increases, so do interest rates, bringing in more income for banks. The Bank of England launched its biggest interest rate hike in 27 years on Aug. 4, the sixth rate hike since Dec. 16, 2021.
The U.K.’s biggest banks have made billions of pounds as a result of the Bank of England’s latest rate rise, with Barclays, HSBC, NatWest, Lloyds and Santander holding as much as £673.5 billion at central banks by the end of June, according to analysis by British newspaper The Times.

Workers’ rights group Unite the Union has been lobbying for organizations, including banks, to offer financial support to employees.
“We wanted to re-open the pay negotiations that had been closed,” Unite National Officer Dominic Hook told CNBC.
“Typically what happens is the pay year starts in March or April so we’ll have pay negotiations often towards the end of the previous year … So what we were saying is, we agreed it back last year but we’ve now got a cost-of-living crisis so we want to re-open negotiations,” he said.
Some banks agreed to negotiate salaries, while others opted for one-off payments.
Wealth inequality
Lloyds announced a one-off £1,000 payment to 99.5% of its colleagues in June, excluding senior management and executives, while TSB offered the same amount to the 4,500 members of staff earning £35,000 or less.
Virgin Money offered £1,000 to employees earning £50,000 or less in August, and HSBC granted its lowest paid workers a £1,500 cost-of-living payment in the same month.
While these support measures may be welcome boosts for employees, they may not go far enough, said Ruth Thomas, chief product evangelist at compensation software and employee management company Payscale.
“We are seeing practice amongst some employers to pay one-off bonuses to support workers through the cost of living crisis. Whilst these may give temporary relief to lower-earning employees, they do not address core issues of wealth inequality across organizations,” she said.
One-off financial perks also may not be the best way to keep hold of employees, Thomas said. 
They want access to earning progression over the course of their employment, she told CNBC.
“In the context of rising cost of living costs and wage inflation, employees make their own assessments of fair wages … With a buoyant labor market, moving jobs still is the fastest way to increase your pay.”
Changes in base pay
Other financial institutions have made longer-term alterations to employees’ salaries.
Barclays announced in June a pay increase for 35,000 of its U.K.-based staff. Those in customer-facing, branch and junior support roles received a £1,200 increase to their annual pensionable salary effective Aug. 1. 
The NatWest Group announced in July a permanent 4% salary increase for U.K. employees earning less than £32,000, while Santander offered the same percentage increase to U.K. employees earning under £35,000.
The Co-Operative Bank is offering support to a much wider range of employees. Anybody earning up to £80,000 will receive a £1,000 base salary increase from September. This follows a one-off payment of £300 to those earning up to £30,000 in July.
The bank is “committed to helping customers and colleagues during these challenging times,” according to CEO Nick Slape.
“This change in base pay will apply to approximately 95% of colleagues across the Bank, excluding those already on the highest salaries,” he said.
Salary discussions don’t stop there, however. Unite the Union is already thinking about next year’s salary negotiations.
“We’ll be not that long off from starting to think and talk about what pay rises should be given in the next year, and our claims will definitely be that people should be getting at least inflation,” Hook said.
“We don’t want people to have a real-terms cut in pay. They’re going to need an increase in pay, no question,” he said.
Increased interest rates mean banks should be able to offer higher salaries, Hook told CNBC.
“Their margins are better on things like mortgages — they’re still making big profits, they’re doing very well, so I don’t see why they shouldn’t be able to pay their staff properly.”
Challenger banks have been less forthcoming with one-off staff payments and salary increases.
A spokesperson for Revolut said the organization “will support [its] employees as the cost of living rises around the world.”
“We continually monitor the market and pay our employees in the upper quartile. In July we also introduced a new salary review process, where we committed to factoring in the local rate of inflation so that our employees are getting paid fairly to reflect the rising cost of living,” they added.
Atom, Monzo, OakNorth and Starling did not respond to requests for comment for this article.

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Pedestrians wearing protective masks walk past a Lululemon store in San Francisco, California, on Monday, March 29, 2021.
David Paul Morris | Bloomberg | Getty Images

Check out the companies making headlines in after-hours trading.
Lululemon — Shares of activewear brand Lululemon jumped 9.4% after the company reported quarterly earnings after the bell Thursday. The company reported adjusted earnings per share of $2.20 versus expectations of $1.87, according to Refinitiv. It also brought in $1.87 billion in revenue versus an anticipated $1.77 billion.

PagerDuty — PagerDuty shares climbed 6.3% after the company’s quarterly results beat Wall Street estimates. The company reported a $0.04 loss per share compared to estimates of a $0.08 loss. Revenue was $90.3 million versus an anticipated $88.1 million per Refinitiv.
Broadcom – Shares of Broadcom jumped 2.1% after the company posted a beat on the top and bottom lines. The company reported an adjusted earnings per share of $9.73 versus Wall Street estimates of $9.56. In addition, revenue was $8.46 billion versus the $8.37 billion estimate, according to Refinitiv.

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A Nvidia logo is seen on the company’s building at an industry park on February 7, 2019 in Tianjin, China.
VCG | Visual China Group | Getty Images

Check out the companies making headlines in midday trading.
Nvidia — Nvidia’s stock sank 7.7% amid news that the government is restricting the sale of some of its chips to China. Shares of Advanced Micro Devices, which was also ordered to stop selling artificial intelligence chips to China, fell 6%. Micron Technology lost more than 1%. Broadcom dropped more than 2%, and Qualcomm slid 4%.

Bed Bath & Beyond — Shares of home retailer and meme stock fell 8.6% midday after a handful of analysts said its turnaround plan, announced Wednesday, isn’t enough to fix its struggling business. Raymond James downgraded the stock Thursday, saying new financing and company plans to close stores and lay off employees “only kicks the can down the road.” 
Hormel Foods — Shares of Hormel dropped 6.5% after the company lowered its earnings outlook for the year. The maker of Spam and Skippy, among others, dropped its EPS guidance to a range of $1.78 – $1.85 from $1.87 – $1.97. CEO Jim Snee cited elevated cost inflation as a factor, but said the pressures are transient and likely to subside over the coming quarters.
Okta — Okta shares cratered 33.7% despite a top and bottom line beat in the recent quarter. A slew of Wall Street banks downgraded shares of the cybersecurity software company, citing troubles as it integrates Auth0, which it acquired last year.
HP — Shares of the PC maker fell 1.8% as Loop Capital downgraded the stock to a hold rating from buy. The Wall Street firm cited potentially softening commercial PC demand and the need for investors to assess the company’s pending transformation plan. Earlier this week, HP reported a revenue miss amid a slowdown in spending on electronics.
Campbell Soup — Campbell Soup lost 2% after sharing results that fell in line with Wall Street’s expectations in the recent quarter. The company said it expects continued demand for its products as inflation remains elevated.

Five Below — Shares of the value retailer rose 6.3% even after earnings and revenue for the recent quarter fell short of Wall Street’s expectations. Five Below also issued weak guidance for the third quarter and the full year.
MongoDB — MongoDB’s stock shed 25.3% after the cloud computing company said it expects a wider-than-expected loss in the third quarter. The company beat Wall Street’s top and bottom line expectations and shared strong revenue guidance.
Nutanix — Nutanix’s stock soared 29% following a revenue beat in the recent quarter. The company also shared a smaller-than-expected loss and shared strong guidance.
Ciena Corporation – Shares of telecommunications company Ciena Corporation slipped 10.4% Thursday after it reported quarterly earnings that missed Wall Street expectations. The company disappointed on both the top and bottom lines. The firm said that while it’s seeing strong customer demand, component shortages have affected sales.
Signet Jewelers — Shares of the jewelry retailer sank 12% despite better-than-expected earnings in the recent quarter. Comparable store sales were down more than anticipated.
Lands’ End — The apparel stock slid 15.3% despite the company posting a smaller-than-expected quarterly loss and revenue that beat expectations. It came as Lands’ End cut its guidance for the full year as it grapples with ongoing supply chain issues.
Pure Storage — Shares of Pure Storage traded 2.6% lower despite a second-quarter top and bottom line beat. The company also shared strong revenue guidance for the third quarter and full year.
— CNBC’s Michelle Fox, Yun Li, Carmen Reinicke and Tanaya Macheel contributed reporting.

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Check out the companies making headlines before the bell:
Hormel Foods (HRL) – Hormel fell 4.2% in the premarket after issuing a mixed batch of quarterly results and guidance. The food producer’s quarterly revenue beat forecasts, but earnings were slightly short. The same was also true for its full-year outlook as Hormel expects higher operational costs to persist.

Campbell Soup (CPB) – Campbell Soup lost 2.4% in the premarket after its quarterly profit and sales matched Wall Street estimates. Campbell issued an upbeat forecast, saying it expects continued elevated demand for its soup and other food products.
Ciena (CIEN) – Ciena tumbled 11.6% in premarket trading after the networking equipment maker missed estimates on the top and bottom lines for its latest quarter. Ciena is still seeing strong customer demand but its sales continue to be impacted by component shortages.
Lands’ End (LE) – The apparel retailer’s stock slid 8.3% in premarket action in spite of a narrower-than-expected quarterly loss and sales that beat consensus. Lands’ End cut its full-year outlook as global supply chain challenges elevate expenses.
Signet Jewelers (SIG) – Signet jumped 4% in premarket trading after its quarterly profit beat estimates, even amid a bigger-than-expected drop in same-store sales. The company also affirmed its prior full-year guidance.
Okta (OKTA) – Okta skidded 16.1% in the premarket despite better-than-expected quarterly results and an improved outlook. The identity management software company said it was running into unexpected integration issues following its acquisition of rival Auth0 last year.

Pure Storage (PSTG) – Pure Storage rallied 5.7% in premarket trading after the data storage company reported upbeat quarterly earnings amid mixed results from its industry rivals.
Nutanix (NTNX) – Nutanix shares surged 16.3% in premarket action as the cloud computing company beat analyst forecasts for its latest quarter. The company also saw an increase in billings and annual recurring revenue.
Five Below (FIVE) – Five Below gained 3.2% in the premarket despite top and bottom line misses for its latest quarter. The jump in the discount retailer’s shares comes after Chief Financial Officer Kenneth Bull said Five Below is poised to benefit this coming holiday season from consumer efforts to save money in the face of high inflation.
MongoDB (MDB) – MongoDB shares slumped 16.8% in premarket trading after the cloud computing company predicted a wider-than-expected loss for the second half of the year. MongoDB reported a smaller loss in its most recent quarter than analysts anticipated, and revenue beat forecasts as well.
Nvidia (NVDA) – Nvidia slid 4.3% in the premarket after the graphics chip maker warned it expects a sales hit of as much as $400 million from new U.S. licensing requirements. Those rules will impose restrictions on shipments of its most advanced chips to China. Advanced Micro Devices (AMD) said some of its chips would be impacted by those new requirements, and its stock fell 2.6% in off-hours trading.

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Hedge funds are used to being the star players in corporate America’s most aggressive sport: financial distress. They search for value in the liabilities of troubled firms, often hoping to participate in the restructuring of a company’s balance-sheet. And after a decade of unpleasantly benign financial conditions, excitement in the industry is building. A toxic cocktail of rising interest rates, slowing growth and high inflation is already creating pockets of distress. High-yield debt issuance has dried up (see chart), and it is increasingly difficult for companies to refinance their liabilities or raise fresh funds. In July the amount of distressed debt, which includes bonds yielding more than ten percentage points over Treasuries and loans trading at heavy discounts, surpassed $240bn, nearly three times as much as at the start of May.Distressed-debt investors have waited a long time for conditions like these. Their approach was born in the aftermath of the 1980s leveraged-finance boom, but came of age during the global financial crisis of 2007-09, when the face value of distressed and defaulted debt reached $3.6trn (Lehman Brothers, a former investment bank, contributed more than $600bn of that). Since 2011, funds have raised around $500bn in anticipation of more distress, but have had few opportunities to spend it. A decade of low interest rates made borrowing easy and distress rare. Even the covid-19 pandemic turned out to be a false dawn, since the door to liquidity was held open by massive central-bank stimulus.Although clouds are now gathering in credit markets, distressed-debt investors will not have things all their own way. Instead they will have to adjust to a new balance of power between lenders and borrowers. Lending to risky companies in the past decade has been not only vast, but loose. Maintenance covenants, financial commitments which lenders can use as a “stick” to force a restructuring, have all but disappeared. Combined with low interest payments, their absence means it will take longer for lenders to get companies to join them at the negotiating table. That is if distressed-debt investors can purchase debt in the first place. Today it is common for leveraged-loan documentation to include blacklists to prevent specialist funds from buying in.Once at the table, an emboldened opponent awaits. One trend in particular has sent the secretive, tight-knit world of distressed-debt investing into a spin: aggressive “priming” transactions, which involve subordinating secured lenders. In one variation, the borrowing company transfers collateral backing its existing loans to a subsidiary free from creditors’ rights. This allows the company to re-use the collateral to raise new debt, in effect shoving the original lenders down the pecking order if it comes to divvying up assets. After shifting around its valuable intellectual property in this fashion, J.Crew, the preppy American clothing brand, became a verb. Since then, the creditors of companies including Revlon, a beauty brand, Golden Nugget, a chain of hotels and casinos, and Travelport, a tourism firm, have all been said to be “J.Crewed”.Another new tactic involves a company working with a group of its creditors, encouraging them to engage in what is ominously referred to as “creditor-on-creditor violence”. In one type of “uptier” transaction, a company persuades a majority of its creditors to amend loan documentation to allow it to incur more senior debt. Lenders who consent are generously rewarded, often by participating in this new raise, watching the priority (and value) of their rival lenders’ debt decline. In other words, borrowing companies pay Peter by allowing him to take money from Paul.In March a court in New York concluded that one manoeuvre, undertaken in 2020 by Serta Simmons Bedding, a mattress manufacturer, may have breached the firm’s credit agreement. Legal challenges to similar transactions are rumbling on, and loans increasingly include tighter wording to prevent these deals. But while uptier transactions (and other similar moves) are disputed, they are a long way from vanquished.Distressed-debt investors should not be surprised by these new challenges. For the story of the past decade’s cheap leverage is also that of private equity, which spent $850bn on leveraged buy-outs in 2021 alone. A recent study by Vincent Buccola at the University of Pennsylvania explains the rise of hardball tactics in this light. According to his analysis, 18 of the 19 priming transactions undertaken to date have involved a private-equity sponsor. Private-equity executives, with personal fortunes at stake and an Olympic capacity for legal gymnastics, are proving considerably more adversarial than the sleepy corporate-management teams of old.Thus Wall Street’s most sophisticated operators increasingly shape the tactics of both lender and borrower, providing a vivid illustration of the triumph of finance over the real economy. After a decade of loose lending and buy-outs, increased corporate distress is now almost inevitable. The erosion of creditors’ protections will leave distressed-debt investors waiting longer to capitalise on this chaos. When they do reach the boardroom, expect some gladiatorial clashes. ■For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter. More