white papers

Credit where credit is due

21 May 2020

Anando Maitra, PhD, CFA

Head of Systematic Research and Portfolio Manager

Ashton Parker

Head of Credit Research

Jamie Salt, CFA

Systematic Fixed Income Analyst and Portfolio Manager

Corporate credit markets today present highly compelling prospects for investors.

The market has sold off across sectors in an indiscriminate grab-for-cash that has uncoupled valuations from fundamentals. While defaults are expected to be substantially higher in the wake of the sudden economic shutdown, we believe unprecedented government support should help mitigate defaults, especially in better quality high yield where the Federal Reserve is now acting as a backstop.

Credit spreads have generally overestimated default risk in the past, and we find that even at these stress default levels, credit spreads more than compensate for defaults within standard bond indices.

Long-term investors able to look beyond the current situation could select mispriced names that retain robust fundamentals, meeting higher yield targets in the process.

What are the opportunities?

Opportunities at the time of writing include crossover credit, Swiss credit and convertible bonds.

Pricing in the BBB to BB crossover segment reflects strong value in global credit, in our opinion. We see the greater supply of fallen angels presenting prospects because fallen angels tend to outperform peers once downgraded – this process could play out faster in today’s market because central bank purchases are occurring in this bucket.

The return to widespread positive yield for Swiss credit marks a phenomenon not seen in years. At end-February, roughly 94% of the SBI index (AAA-BBB) was negative yielding. As of end-March, however, 63% of the SBI index offered positive yield.

Parts of the global convertible bond market are now behaving like bonds, except they are offering higher yields than straight credit with the same seniority and from the same issuer, all whilst including an equity option.

There are clear openings in credit markets for specialised, active managers to deliver alpha, while long-term investors could finally resolve the low yield conundrum of recent years.

important information.

For professional investor use only

This document has been issued by Lombard Odier Funds (Europe) S.A. a Luxembourg based public limited company (SA), having its registered office at 291, route d’Arlon, 1150 Luxembourg, authorised and regulated by the CSSF as a Management Company within the meaning of EU Directive 2009/65/EC, as amended; and within the meaning of the EU Directive 2011/61/EU on Alternative Investment Fund Managers (AIFMD). The purpose of the Management Company is the creation, promotion, administration, management and the marketing of Luxembourg and foreign UCITS, alternative investment funds ("AIFs") and other regulated funds, collective investment vehicles or other investment vehicles, as well as the offering of portfolio management and investment advisory services.

Lombard Odier Investment Managers (“LOIM”) is a trade name.

This document is provided for information purposes only and does not constitute an offer or a recommendation to purchase or sell any security or service. It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful. This material does not contain personalized recommendations or advice and is not intended to substitute any professional advice on investment in financial products. Before entering into any transaction, an investor should consider carefully the suitability of a transaction to his/her particular circumstances and, where necessary, obtain independent professional advice in respect of risks, as well as any legal, regulatory, credit, tax, and accounting consequences. This document is the property of LOIM and is addressed to its recipient exclusively for their personal use. It may not be reproduced (in whole or in part), transmitted, modified, or used for any other purpose without the prior written permission of LOIM. This material contains the opinions of LOIM, as at the date of issue.

Neither this document nor any copy thereof may be sent, taken into, or distributed in the United States of America, any of its territories or possessions or areas subject to its jurisdiction, or to or for the benefit of a United States Person. For this purpose, the term "United States Person" shall mean any citizen, national or resident of the United States of America, partnership organized or existing in any state, territory or possession of the United States of America, a corporation organized under the laws of the United States or of any state, territory or possession thereof, or any estate or trust that is subject to United States Federal income tax regardless of the source of its income.

Source of the figures: Unless otherwise stated, figures are prepared by LOIM.

Although certain information has been obtained from public sources believed to be reliable, without independent verification, we cannot guarantee its accuracy or the completeness of all information available from public sources.

Views and opinions expressed are for informational purposes only and do not constitute a recommendation by LOIM to buy, sell or hold any security. Views and opinions are current as of the date of this presentation and may be subject to change. They should not be construed as investment advice.

No part of this material may be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorised agent of the recipient, without Lombard Odier Funds (Europe) S.A prior consent. ©2020 Lombard Odier IM. All rights reserved.