In a new paper titled “A Survey of the Tiered Landscape of Corporate Credit,” Robert Cohen, Director of the Global Developed Credit team at DoubleLine Capital LP, examines the state of risk pricing in the sectors of the U.S. corporate credit universe.
“The year 2020, and the decade leading up to it, have led to some interesting reversals in U.S. corporate credit, including irregularities across the investment grade (IG), high yield and bank loan markets,” Mr. Cohen writes. “What is the state of play? Investment grade, due to years-long falling Treasury yields as well as spread compression and now buying by the Federal Reserve, has yields at or near all-time lows across all rating cohorts as of the publication date of this paper. In below investment grade credit, the distinction has blurred between the bank loan market, once regarded as higher quality, and the high yield bond market, historically regarded as riskier.”
The convergence of risk pricing between below investment grade corporate bonds (also known as high yield bonds) and bank debt, Mr. Cohen observes, is something relatively new. He writes: “Unlike high yield bonds, most of which are unsecured, bank debt is secured by assets that investors can seize and liquidate in the event of default. Thus, for most of the history of these asset classes, bank debt was considered less risky than high yield bonds.”
Mr. Cohen discusses the causes of this convergence and examines where investment opportunities might lie in high yield bonds, bank loans and collateralized loan obligations. Given the rally in corporate credit in the wake of market interventions by the Federal Reserve, Mr. Cohen regards a further broad-based rally in these sectors as remote. However, he sees opportunities in individual credits within these sectors, including in issues of businesses among the most hit by the economic shock of the COVID-19 pandemic.
To access the paper, click here.