Fixed Income 

Experts warn on periphery debt

Bond managers have warned investors not to be sanguine about debt issuance from companies in the European periphery after a bumper bond issuance in the past few weeks.

The European corporate bond market has raised $416bn (£263.5bn) in 2013, which is a 14 per cent increase compared with the same period of 2012 – helped, in part, by a $29bn influx in just the past few weeks.

The companies issuing debt included firms in peripheral nations such as Italian bank Banca Intesa, Spain’s Gas Natural Fenosa and Portuguese utility EDP.

Managers said appetite for the bonds was strong but warned investors against a blanket approach to companies based in peripheral countries because the crisis on the continent could flare up again.

Jon Mawby, manager of the £129.5m GLG Strategic Corporate Bond fund, said one of the “main themes” from the recent issuance was the amount of debt from companies in peripheral countries.

“I think investors are incredibly complacent and a lot of people are talking as though the European sovereign debt crisis is over,” he said.

“The appetite for higher beta debt from the periphery is increasing. This is the converse to what we have been doing in the fund.”

Mr Mawby said he had actively been reducing exposure to peripheral names in the past three months, as he expected volatility in Europe to resume following the German elections.

“I think [German chancellor] Angela Merkel has been very savvy for the past nine months because she knows there is an election coming and has been good at keeping her politicians quiet,” he said.

“Europe has gone from front-page news to hardly being in the papers and I don’t think this is an accident but a very well thought out tactical plan.”

Mr Mawby said he was “nervous” about what would happen after the German election, adding that issues such as the Greek bailout would cause renewed volatility.

Sajiv Vaid, fixed income fund manager at Royal London Asset Management, agreed that there had been a large number of issuance from companies in peripheral countries, but warned investors to be selective.

“Peripheral issuance has picked up and has been quite well received because of what has been happening with underlying sovereign bonds in countries such as Spain and Italy, [which have seen] their risk premiums to core Europe come down.

“That suggests the risk premium attached to peripheral corporates will come down too.”

But Mr Vaid said that in the latest wave of issuance he had been discriminating in his purchases of debt issued by peripheral corporates. The manager said he had bought debt issued by Gas Natural Fenosa, as it yielded 2.8 percentage points more than German bunds.

Fraser Lundie, co-head of credit and senior portfolio manager at Hermes Fund Managers, said he had bought some high yield names as well as some periphery issues too.

He bought into the debt issued by French car manufacturer Peugeot in the recent flurry of issuance, which would yield roughly 6.7 per cent, and Dutch-based semiconductor manufacturer NXP Semiconductors.