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Monday 26 September 2022

High yield – reasons to be positive High yield – reasons to be positive

There are undoubtedly reasons to worry about taking credit risk today. Central banks are tightening fast. The Fed just raised rates by 75 basis points (bps) bps as markets expected, while the Riksbank raised its policy rate by 100 bps with more on the way from the European Central Bank, Bank of England and others. Deutsche Bank points out that the ratio of global hikes to cuts over a rolling 12-month period has been as high as 25:1 recently having not being above 5:1 over...

September 2022

Higher inflation, higher interest rates and higher education – the graduate conundrum

As markets, central banks, governments and consumers alike try to adjust to levels of inflation not seen for decades, there is one stream of RPI-linked income that is potentially very attractive to the UK government right now – student loans. In the UK since 2012, students are likely to have been paying around £9,000 a year to attend university and the vast majority of students rely on student loans (post-2012 loans are known as “plan 2”). This means that outstanding student debt in the UK…

Corporate linkers could provide investors with an attractive inflation hedge

First published in Investment Week Inflation is a major concern today and investors face an uncertain trajectory, especially bond investors. In light of this, corporate inflation-linked bonds (‘linkers’) look well-positioned to mitigate the risks posed by inflation to a bond’s rate of return. Corporate linkers work like their more established counterpart – government inflation-linked bonds. These instruments are designed to remove the uncertainty caused by inflation, so they provide investors with a known real rate of return. Essentially investors in linkers will receive actual inflation…

August 2022

Short dated credit – reassuringly exciting

The short end of the investment grade credit universe is generally a rather dull place. Lending to good quality companies for a relatively short amount of time rarely provides much excitement. From time to time, however, the benefits of the asset class shine through. Now is one of those moments. Most investors view bonds as the low risk portion of their overall portfolio but, as many have found this year, not all bonds are created equal. Higher government bond yields, over which corporate credit is…

Europe’s energy winter

The restriction of natural gas flows from Russia into European countries continues to be a threat to European and global economies. The situation is most acute in Germany where the economy is more dependent on cheap and reliable energy to power its manufacturing industry. Higher energy prices will have knock on consequences to food prices and business confidence Having become reliant on piped gas from Russia, Germany does not currently have any liquefied natural gas (LNG) import terminals that could compensate for the reduced imports…

The double-edged sword of good covenants in corporate credit

In periods of market stress, strong bond and loan covenants protect debt investors from company actions that would be adverse to creditors’ interests when it matters most. Yet, relative to their weaker covenant counterparts, bonds with strong covenants often see more pressure than would be expected or warranted in difficult market environments. Flash back to 2019 Suppose I were to gift you $1 million of new issue bonds for one of two hypothetical travel companies – BOAT and SAIL: 1. BOAT 7.75% coupon, unsecured bonds,…

July 2022

Himalaya-high spreads: which emerging market sovereigns can acclimatise?

When mountaineers climb above 8,000 meters, they are considered to be in the death zone. At such high altitude, there is not enough oxygen. Their bodies experience huge stress until they descend to a safer elevation.  High yield emerging market sovereign bond yields have ascended in 2022 while global monetary conditions tightened, recession risks reverberated, the US dollar strengthened and widespread investor risk aversion took hold. With non-investment grade sovereign spreads recording historic highs at over 1,000 basis points, the eurobond market has recently been…

Are ESG-themed Bonds Compatible with Junior Debt?

The growth of ESG-themed bonds continues with no slowdown in sight. While project style financing for named projects or defined activities, particularly around environmental improvements via green bonds continues to see high demand, newer concepts such as Sustainability-Linked Bonds (SLB) show very high growth rates. SLBs offer an issuer far greater flexibility over how debt capital raised is used. As long as the company achieves certain stated group-wide sustainability improvements over the lifetime of the bonds, the money raised is available for general corporate purposes…

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