Avoid lower quality
March 13, 2017

Investors should steer clear of much of the lower quality paper currently being issued in the high-yield universe and focus on the higher quality segment of the market, according to Kames Capital.

It notes that global high-yield bond funds have hit the ground running in 2017, with strong returns being delivered year-to-date, prompting an increase in issuance from lower-rated companies.

However, Kames is urging investors to avoid the temptations of much of the issuance that has been coming to market recently, highlighting concerns about the quality of some of the issuers and the way they are funding payments to borrowers.

"Global high-yield returns have been very strong since the beginning of the year, but recently we have seen more and more companies taking advantage of the strong market to issue bonds," says Jack Holmes, Investment Manager in the high-yield team at Kames Capital.

"As is typical in these strong periods, many of these issuers are lower quality – we have had CCC-rated bonds with non-contractual coupons (so the company can choose to pay borrowers with more debt, rather than cash - never a good sign) and bonds funding lending to the riskiest sub-prime personal borrowers in the UK."

The trend is being seen globally, with Holmes noting that in the US market CCC-rated bonds have made up more than 20 percent of total new issuance so far in 2017, double the rate of last year.

Bonds issued so far this year include CCC-rated packaging company Verallia, which launched a EUR 350 million raising that allowed for coupons to be paid for either in cash or more of the bond.

Rather than participate in such raisings, Holmes says Kames' approach is always to concentrate on the higher-quality part of the market.





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Investors should steer clear of much of the lower quality paper currently being issued in the high-yield universe and focus on the higher quality segment of the market, according to Kames Capital.

It notes that global high-yield bond funds have hit the ground running in 2017, with strong returns being delivered year-to-date, prompting an increase in issuance from lower-rated companies.

However, Kames is urging investors to avoid the temptations of much of the issuance that has been coming to market recently, highlighting concerns about the quality of some of the issuers and the way they are funding payments to borrowers.

"Global high-yield returns have been very strong since the beginning of the year, but recently we have seen more and more companies taking advantage of the strong market to issue bonds," says Jack Holmes, Investment Manager in the high-yield team at Kames Capital.

"As is typical in these strong periods, many of these issuers are lower quality – we have had CCC-rated bonds with non-contractual coupons (so the company can choose to pay borrowers with more debt, rather than cash - never a good sign) and bonds funding lending to the riskiest sub-prime personal borrowers in the UK."

The trend is being seen globally, with Holmes noting that in the US market CCC-rated bonds have made up more than 20 percent of total new issuance so far in 2017, double the rate of last year.

Bonds issued so far this year include CCC-rated packaging company Verallia, which launched a EUR 350 million raising that allowed for coupons to be paid for either in cash or more of the bond.

Rather than participate in such raisings, Holmes says Kames' approach is always to concentrate on the higher-quality part of the market.



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