What’s happening on the gaming bond markers?

Most industries (aside from, obviously, tourism) call summer the silly season for good reason. Nothing really happens that can move markets, and if it did, nobody would be around to notice and/or make a difference anyway. That’s why the seasonal maxim ‘Sell in May and go away…’ still comically carries so much weight in a supposedly AI-dominated twenty-first century.

This season may be different however. There’s an interesting series of movements happening in some of the traditionally dullest of financial instruments; bond markets. Typically seen as the boring bit of finance (Ian Fleming reputedly named his eponymous spy hero because “Bond was the dullest name I ever heard”), this $150tn market is facing one of its hardest challenges in decades.

To understand why this happening, and indeed its correlation to gaming, it’s worth revisiting the markets 3 years ago, at the height of the pandemic. At that time, it was a great opportunity for investors to pile money into bond markets (with a 5% annual interest payment) at a time when stocks were tanking and banks were paying little to no interest at all. Bonds were the safe haven for modest, but stable, gains at a time of deflation.

Then, at the end of last year, mainly due to rising inflation, there was a first bond selloff of over $10tn. This deficit has been somewhat replaced with new money, but arguably riskier, higher-yield notes (to compete favourably with rising interest rates), and as such, a higher risk of default. Because these bond markets have extended more credit than banks, that risk has now essentially been moved sideways; to a security that is arguably more decentralised and less openly measurable. Unlike traditional markets, such as short-term banking loans, where the risks are priced between lender and seller; bonds do not have such a flexible mechanism (other than yield, and sometimes price), so the degree of risk is not really evident, but crucially can be ditched in a hurry when investors panic, such as the bond crisis of 2008, or sold at a discount when high interest rates abound, as is the case at the moment.

So, what has it to do with gaming? There are mounting concerns that the bond market is now overdue a correction; some analysts estimate it could happen in a matter of weeks. And this time, the number of gaming companies (Playtech, Cirsa and GiG, among quite a few others) that have taken out long-term loans (ie: bonds) have increased significantly over the last 5 years, especially since the pandemic receded and the covid bounce subsided. So what seemed like a relatively sensible instrument (in a relatively stable industry) to invest is now looking more problematic given the meteoric rise in interest rates, and even more astounding inflation rate.

Crucially, should such an implosion happen, and gaming bonds decrease in liquidity or ultimately fail, it’s hard to see how governments will prioritise the bailout of these verticals through buying an unlimited amount of bonds, as they did with treasuries. So it’s probably time for the issuers of these bonds to hedge their risks and reconsider their options, such as rolling them over into newer loan instruments or liquidity permitting, even redeeming them before their term expires.

Incidentally, the original seasonal trade ended with ‘…do not return until St Leger’s Day’ which, as horseracing punters know too well, usually marks the end of the racing season around mid-September. This year it will be almost sure that traders will be back and active well before the arrival of St Leger himself.