New Paper Finds Credit “Particularly Appealing” In the Current Environment
17 October 2023: The outlook for corporate credit is particularly appealing right now with yields from both investment grade and high yield bonds currently trending above their long-term median, due to strong corporate balance sheets and interest coverage ratios at multi-decade highs, according to a paper from global systematic manager, Acadian Asset Management.
According to Scott Richardson, Director of Systematic Credit at Acadian Asset Management LLC and the author of the paper “Current opportunities in public credit markets”, credit spreads at present are especially favourable for three key reasons: strong corporate balance sheets, record high interest coverage ratios, and a net-debt-to-EBITDA ratio for the median high yield-rated company at a 10-year low.
“These conditions are a by-product of the low interest rate environment from late 2020 to early 2022, which incentivised companies to issue debt and lock in favourable financing costs,” he said.
In addition to strong returns, Mr Richardson said credit may also provide important diversification benefits.
“The credit risk premium is observable and distinct from both the equity premium and the term premium which intuitively this makes sense because they arise from different economic drivers,” he said.
“In particular, credit and equity premia derive from different aspects of, and sensitivities to, company fundamentals and their returns have only a modest correlation to one another.”
Gillian Savage, Chief Executive Officer of Acadian Australia, said the corporate bond market had developed meaningfully over the past decade, creating opportunities for investors to gain exposure to this distinct asset class via a broader range of strategies including active systematic credit.
“Systematic active credit strategies are relatively new and offer potential advantages over ostensibly passive vehicles, and they complement traditional discretionary approaches,” she said, signaling Acadian’s plans to launch of a systematic credit strategy in early 2024.
According to the Acadian paper, the application of systematic investing concepts to corporate bonds only began in the early 2010s due to a lack of publicly available data for corporate bond transactions, complexities in modelling finite-life securities with different terms and seniority, and a historically manual trading environment.
However, there is a lot more data available today and the technology and infrastructure needed to conduct extensive data analysis had become readily available. As a result, systematic active management is now feasible and growing.