Columbia Threadneedle: Fallen corporate bonds deserve a closer look

(AOF) – According to Columbia Threadneedle Investments, corporate bonds that have seen their ratings downgrade due to the current market environment, could offer real investment opportunities. The investment universe corresponding to these bonds, also called “Fallen Angels”, is developing rapidly in the wake of the Coronavirus crisis and could cause congestion in the high-yield bond market. At the same time, the potential returns compensate investors well for the risks.

According to Roman Gaiser, head of high yield bonds in the Europe, Middle East and Africa region (EMEA) of Columbia Threadneedle, the volume of bonds of fallen angels in Europe amounts to 30 billion euros and 3, £ 5 billion since the start of 2020.

That’s more than 2018 and 2019 combined and already represents around ten percent of the high-yield European bonds in circulation. “The downgrades in credit ratings are accelerating,” he wrote in the attached comment.

JP Morgan said in a recent press release that 100 billion euros of bonds, or 4.3% of the European universe of the investment grade category, could be downgraded in the high yield category, recalls Columbia Threadneedle Investments.

“The high-yield market currently representing 350 billion euros of notional and 300 billion euros e market value, such a scenario could increase its size by almost 30%, creating a risk of congestion of new issues on a universe quite small in size, “said Roman Gaiser.

However, according to Columbia Threadneedle experts, some of these fallen angels have relatively solid fundamentals, which is why they see them as offering investment opportunities.

“At the current spread levels, the remuneration offered by the markets to investors is notably several times equal to the levels observed when default rates reached historic highs. It seems to us that the potential returns are well offsetting the investment risk”, writes Gaiser.

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“Following the recent collapse in prices in the wake of pell-mell sales in March, we are looking to include some fallen angels and better rated bonds.”

Overall, Gaiser, who manages the Threadneedle (Lux) European High Yield Bond Fund, has been defensively positioned since the start of the year. At the industry level, it continued to underweight cyclical sectors such as the automotive, transportation and commodities sectors, while overweighting healthcare (e.g. IQVIA), technology (SFR and Netflix) , media and financial services.


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