Credit market – down but not out
This has not been an easy year for investors in non-government bonds. After last year’s marvellous fun, with fanfares and so many successful launches, the reality of the ups and downs of creating and investing in what is essentially a brand new product in Europe has hit hard.
The second week in December gave investors a bit of cheer – this was the first week since the start of September that high yield bonds, globally, recorded a positive rate of return. Laura Zimmerman, a managing principal with US group Payden & Rygel, agrees that investors have suffered. She does point out, however, that absolute returns for the year have been better than many other asset classes. She goes on, “Unfortunately many investors measure the performance of their credit portfolios to all-government benchmarks. If you are doing this, then yes this year’s performance looks bad as spreads have widened significantly over the past 12-months.”
WestLB’s Torstein Jorstadt agrees that there has been considerable carnage in the market, but argues that much of the sell-off has been over done. “Credit analysis is about sentiment and credit quality together. Whilst we would all agree that we are in the down swing of the credit cycle, there is not going to be a credit crunch in the US and certainly not here in Europe,” he asserts, adding: “It is basic fact of life – sentiment and fundamental reality do sometimes decouple.”
The domination of TMT names in the market has also been unfortunate factor for 2000. “Any prudent investor would have had a diversified exposure to credit, and not a big bias to any one sector such as the TMTs”, says Zimmerman, “Although the telecoms did dominate the issuance market last year, there are other sectors represented, such as the banks and financials.”
But enthusiasm for credit in Europe is not going to diminish because of one difficult year, the experts believe. Zimmerman explains, “We are both excited and enthusiastic about the emergence of the credit market, and we have already put in lots of resources in order to be fully involved here. That’s not to say we have been enthusiastic investors in credit ourselves this year. On the contrary, we have been nervous about spreads, and have concentrated our exposure to asset backeds , typically five-year bullet structures, and also agency paper. ”
Both Torstadt and Zimmerman agree that the introduction of the single currency has opened up the market to the possibilities of a credit market comparable on complexity and, eventually depth as that in the US. Zimmerman goes on, “The euro is a very important global currency and any issuer must consider it. There will always be a need for capital and the markets provide the most efficient and cost effective access to it. In addition demand is increasing - as government issuance declines, investors have to buy something!”
Torstadt thinks that issuance across the credit spectrum is there, if somewhat hidden from view just now. He adds, “There’s so much restructuring and ongoing disintermediation going on, there are many interested parties out there. And on the other side we are clearly seeing a developing culture in credit investing.”