At a time of falling interest rates and historically low credit yields, CAMRADATA’s new whitepaper, Opportunities in Credit looks at the latest opportunities for investors, including exploring ESG factors and the ‘fallen angels’ segment. The whitepaper includes insight from guests who attended CAMRADATA’s recent virtual roundtable hosted including representatives from Allianz Global Investors, Muzinich & Co, Nuveen, bfinance, Cambridge Associates, LCP and StepStone.
The report highlights that currently there is around $11 trillion of negative yielding debt. This includes investment grade credit, much of it European. Massive stimulus persists, with central banks heavily buying bonds, but there are also widespread concerns about inflation. Together, these are two factors that affect the credit markets.
Despite these concerns, CAMRADATA’s guests shared insight into where the opportunities exist for credit investors including the possibility that companies with good ESG credentials may emerge as credit winners and looked at which fallen angels could become rising stars.
Sean Thompson, Managing Director, CAMRADATA said, “The investment grade bond segment has been particularly hit under the forces of stimulus and inflation fears, while high yield continues to show more resilience due partly to the asset class’ lower correlation with sovereign bonds. The credit market is experiencing a volatile rate environment and perhaps the sensible thing for credit investors right now is to focus on instruments which are less sensitive to rates. In the credit arena, many opportunities exist as it’s also an area where we see innovation and new strategies emerging.”
The roundtable began by canvassing consultants and discussing where clients were looking beyond traditional credit and had made allocations to their strategies during the pandemic.
The managers at the roundtable then homed in on their speciality, which led to discussion around aviation as this had been broadly affected by the pandemic. Given the rapid increase in ESG criteria, the panel was asked how aviation financing fitted in with the path to decarbonisation.
The panel then discussed trade finance, before the final debate turned to ESG and Responsible Investing including looking at the pace of change around Net-Zero-Carbon policies, the challenges in green bonds and avoiding greenwashing.
Key takeaway points were:
- One guest highlighted that clients were looking at listed tradeable and non-tradeable corporate direct lending; real estate debt; trade finance and leasing; and a host of alternative annuity types such as music royalties. Of these, they had directed a significant amount of money into trade finance and real estate debt.
- Another said that Investment Grade ABS, especially in consumer debt, had attracted 80-90% of credit replacement capital in 2020 from their clients, which now include not just pension schemes but family offices, charities, and Sovereign Wealth Funds. The rest has gone into lower tranches of ABS, Commercial Mortgage Debt and Regulatory Capital.
- Making a commitment is different to making an investment. An investor could see a bumper Internal Rate of Return (IRR) for the last quarter but hitherto has been sitting on cash or Investment Grade bonds. The question for asset owners is: what is the holistic cost of making allocations to these strategies?
- Looking at opportunities in airplane leasing, one guest said that publicly traded airline bonds and most tranches of ABS and Enhanced Equipment Trust Certificates (EETC) have all recovered. A few months ago, fallen angels were trading at 70 cents on the dollar, now these ABSs are back to 100 cents.
- On ESG, the direction of travel is clear, as one guest said in asset-leasing searches for clients, there has been a focus on decarbonisation. That is going to represent a headwind for many aviation strategies.
- Another disagreed and said that different clients have different ESG priorities. The situation is complicated by the fact that they did not see a big overlap between ESG compliance and creditworthiness.
- Pragmatic investors could be discerning in only lending to carriers that are the most efficient or lending solely to finance carriers retiring older and less fuel-efficient fleets with newer, greener, aircraft. Being a lender in this way also means investors are more difficult to ignore when it comes to engagement in more carbon intensive industries like aviation.
- As with aviation finance, trade finance funds have grown as banks have taken a step back, with one panellist saying they estimate a $1.5trillion shortfall in trade financing globally.
- The discussion ended looking at ESG and Responsible Investing, with one guest highlighting a segment within the ESG universe called Impact Investing. Here they focus on outcome-based use of proceeds, where they can measure the impact of what use of proceeds are having.
- Another pointed out that public markets’ returns are not always about the fundamentals relating to any specific issuer but about whether more folk are buying than selling; and whether you participate in primary issuance and long-term hold or expect to generate returns by trading. They said green does not necessarily mean good investment.
To download the ‘Opportunities in Credit’ whitepaper click here
For more information on CAMRADATA visit www.camradata.com