Invesco star managers detect glut of unattractive debt

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Invesco star managers detect glut of unattractive debt

Invesco Perpetual’s star bond duo Paul Causer and Paul Read have claimed investors’ voracious appetite for yield is allowing a glut of unattractive debt to come to market, according to a Winterflood Securities paper.

The investment trust broker published a research note last week after analysing the £157m City Merchants High Yield Trust, which the duo runs with their colleague Rhys Davies.

Innes Urquhart, an analyst at Winterflood Securities, said the managers thought many investors were buying into new debt being issued by companies, as the low level of activity in the secondary market has made buying and selling holdings tougher.

“The managers believe that new issue pricing is therefore being driven by supportive technicals that reflect investors’ ongoing demand for income and has, on the whole, been unattractive,” Mr Urquhart said.

“This is also expected to mean that high-yield issuance will remain strong. They also note that the continuation of strong demand for new issues has been accompanied by a gradual relaxation of covenants, a deterioration in the credit quality of issuers, and an increase in the use of proceeds for less credit-friendly purposes such as dividend recapitalisations or merger and acquisition activity.”

The managers gave examples of several companies that have been able to reissue debt at much lower levels of interest rates.

Messrs Causer and Read said Spanish food company Campofrio had been able to redeem its 8.25 per cent bond in March and refinance it at 3.75 per cent.

Jaguar Land Rover has also been able to pull off a similar feat, the managers said, redeeming its 8.25 per cent bond and refinancing it at 3.875 per cent.

The duo noted the percentage of the European high-yield market yielding more than 5 per cent had “fallen considerably” in the past five years.

Elsewhere, Mr Urquhart said the fact the managers had 9 per cent of their portfolio in highly liquid bonds, which could be sold instantly, meant they would be able to “take advantage of any market setback”.

“Corporate bond yields are now at very low levels and corporate bond spreads are close to the levels seen before the global financial crisis,” Mr Urquhart said.

“The managers are therefore relatively cautious in their outlooks, and have been for some time.”