Issuance by high yield companies hit a new record in the third week of March at more than $22bn (£14.5bn).
Much has been written about the sustainability of record low yields, but less attention has been given to the fact that this is not only beneficial to the companies.
In the Royal London Short Duration Global High Yield fund we target short maturity assets for their less volatile profile and the fund is generating a healthy excess return above our headline 5 per cent yield due to early redemptions.
A recent example of how we are benefiting from refinancing was our investment in the DFS 9.75% 2017 issue at a yield of 7 per cent to the July 2013 call date. Given the company’s strong cashflow during the past few years and the private equity ownership, we expected this company to take advantage of the current environment to refinance with a lower coupon in July, at the latest.
The company decided to pre-empt the call, leading to an early tender priced at 110.5p. This gave us a 2.5 point capital gain on top of the 9.75 per cent coupon we’d been earning and freed up our cash to reinvest in other similar opportunities.
Historically, two thirds of high yield bonds have redeemed before maturity – the current low rate environment is making it economic for companies to redeem even earlier than previously seen, which is a trend we continue to benefit from.
Azhar Hussain is head of global high yield at Royal London Asset Management
