Expert: David Backhouse, Portfolio Manager, Columbia Threadneedle Facilitator: Paul Kearney
Headlines:
- The European high-yield bond market has grown significantly, from €50 billion during the financial crisis to over €400 billion, underscoring its critical role in capital markets
- High-yield bonds offer attractive, equity-like returns with lower volatility, supported by defensive characteristics and historical outperformance over other asset classes
- A bottom-up, research-driven approach focusing on improving credit stories is crucial for maximising returns and managing risks in high-yield investments
- Current market conditions, including spreads and yields, present compelling opportunities for long-term investors despite elevated default rates
- Topics such as fallen angels, sector exposures, M&A activity, and liability management exercises influence the high-yield bond landscape and present both opportunities and challenges
Discussion points:
Market Context and Growth
A comprehensive overview of the high-yield bond market's evolution and its necessity in European capital markets. Contrary to misconceptions, high-yield bonds are not inherently risky, with many established companies participating in this space.
Market Composition and Valuations
The high-yield market predominantly comprises double-B-rated bonds, with valuations showing tight spreads but attractive yields. Participants acknowledged that credit ratings, not yield, define the asset class.
Defensive Qualities and Performance
Data demonstrated the long-term outperformance of high-yield bonds relative to other asset classes, with lower volatility and consistent positive returns. It was emphasized that the defensive nature of these bonds allows significant spread widening before losses occur.
Default and Recovery Rates
Elevated default rates were discussed, with forecasts indicating improvement over the next 12-24 months. Recovery rates and the multiple components of investor compensation, including transaction costs and shifts in credit quality, were also examined.
Investment Strategy
Columbia Threadneedle’s strategy emphasizes a bottom-up, research-intensive approach, leveraging relationships with issuers and cross-asset analysts. This method focuses on cash flow analysis and identifying improving credit stories to drive returns over the medium to long term.
Market Dynamics and Technical Factors
Attendees discussed external influences such as covenants, private credit competition, sector risks, and the impact of technical factors on pricing and liquidity. The role of fallen angels and liability management exercises were also highlighted as areas requiring careful navigation.
Key takeaways:
- High-yield bonds provide an opportunity for equity-like returns with lower risk, particularly when approached with a research-driven methodology
- The €400 billion high-yield market represents a diverse array of investment opportunities across ratings, sectors, and geographies
- Advisers and investors should stay attuned to market dynamics, such as interest rate movements, sector-specific risks, and regulatory developments, to make informed investment choices
- Understanding default and recovery rates, as well as the implications of covenants and liability management exercises, is critical for protecting investor interests
- Leveraging insights from equity and investment-grade analysts enhances the ability to identify credit improvement catalysts and assess market opportunities effectively
