Credit Events: What's going on in Global Credit
0:00
Hello, and welcome to a Special Credit Events Webcast from Destra Capital that looks at the opportunities in global credit markets and what it can bring to investors portfolios. This webcast is intended for financial professionals only and not for the general public. My name is Ken Merritt and I will serve as a host for this webcast. We will hear from a Portfolio Manager at BlueBay Asset Management, one of the most recognized global credit manager's headquartered in the UK, and with the US Office based in Stanford, Connecticut. Let's get started by meeting our guests from BlueBay. With us today is Marc Kemp, an institutional portfolio manager with BlueBay's global leveraged finance group based in the UK. Marc joined BlueBay in 2016 after spending 15 years as a managing director at JP Morgan, responsible for distribution of European high yield debt. Marc, welcome to the webcast.
0:50
Thank you very much, Ken, Glad to be with you.
0:54
Mark, with the global shutdown due to Covid-19, more and more headlines are touting the rise of defaults globally. Can you walk us through how you and your team view the current defaults in the market, and what sectors or areas of the economy are most affected?
1:08
Yes absolutely. Defaults are of course on the rise and in the U.S. high yield market currently sit around 5% currently. To put that level into context, that same default rate stood at below 3% at the end of 2019, so we have already seen a notable rise in the past few months.
As you would expect defaults have been prevalent in the energy sector in particular – over the past 12 months that’s accounted for almost 40% of the defaults seen in the bond market. Over the past few months, we also witnessed notable activity in consumer sensitive sectors and of course the retail sector has been particularly vulnerable with some high profile and well know companies filing for Chapter 11. I would highlight that even supposedly quite resilient sectors have been vulnerable with the default rate in telecoms and cable sectors not far behind what we have seen in energy year-to-date.
I would highlight that even supposedly quite resilient sectors being vulnerable default rate sector, such telecoms and cable, not far behind what. We've seen an energy here today.
Despite the activity seen so far this year, we would highlight however, that our base case is that we see defaults peaking significantly lower than in previous similar recessionary periods. Quite simply the pace and quantum of fiscal and monetary liquidity that has been made available to corporates this time around has provided much needed support and has undoubtedly underpinned what would have otherwise been one of the most challenging periods we have ever lived through.
2:43
You touched on U.S. high yield defaults, are you seeing the same in Europe?
2:50
Actually, for the moment at least European defaults are strangely quite low and really haven’t moved (so far) from their long-term average of around 1.5%. I touched on it just a moment ago, but what we have seen in Europe is a significant amount of domestic fiscal support for corporates – so liquidity being provided by the state or country in which the company is based (with perhaps less support from debt capital markets). That support has been very influential and so far has quelled the default rate beyond where we might expect.
3:35
There has also been talk about recovery rates being lower, can you walk us through the importance of this and how the team sees this playing out.
3:44
I think often recovery rates is an area that perhaps doesn’t get quite as much attention as it deserves as this naturally is an indicator of how much of your capital you get back when a company defaults. What we are witnessing at this point is a pretty meaningful decline in recovery rates in the US. In actual fact, for both HY bonds and loans, recovery rates are at record lows.
Historically high yield bonds have typically recovered around 40% of par value – over the last twelve months, recovery rates stand at only 15% (and it’s a similar story for leveraged loans with 1st lien recoveries at around 45% compared to a long term average of 65%).
4:40
This all seems a bit alarming, a couple of questions, do you see light at the end of the tunnel or is this just the tip of the iceberg and where do you see the current as well as long term opportunities?
4:52
We do think defaults pick up further from here from their already elevated level and so in that sense we are probably only half through the tunnel. We absolutely take some comfort from the liquidity that has been provided across the board but would certainly underline that this isn’t enough to quash defaults completely. Navigating leveraged finance assets successfully at the moment (for us at least) is all about strong bottom up fundamental analysis. There is a huge opportunity set out there and for those that have the skill and resource to analyze and make educated and informed investments the current environment presents a potentially very fertile environment.
5:40
Thank you Mark, I would like to point out to the audience that Investors can access the skill and resources that Marc just mentioned through the Destra International and Event Driven Credit Fund, sub-advised by BlueBay Asset Management.
Marc, thank you for your time, comments and insights today and we look forward to having you on future “Credit Event” webcasts and webinars5:58
Thank you for having me.
6:02
And a special thanks to all the advisors who have listened to this webcast. If you would like to learn more about the benefits and opportunities of global credit investing, please contact your Destra representative, or call us at 877-855-3434.
You can always visit our website as well…..www.destracapital.com…. and click on “Credit Events” to learn more.
This concludes the special “Credit Events” Webcast.