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17 September 2020 | GSAM Connect
Corporate Credit Five in Five
In this five minute read, we highlight five key factors behind our corporate credit views.
Policy Tailwinds. We see opportunities in European and US investment grade corporate credit; both markets benefit from central bank purchases. The US Federal Reserve (Fed) commenced purchases in May 2020 and has amassed a corporate bond holding of $12.7bn.
Dissect and Examine. We dissected Global and European credit markets to examine sensitivity to COVID-19 based on the following four categories: severe negative exposure, modest negative exposure, neutral exposure and positive exposure. For example, Airline and Hotel companies faced severe negative exposure amid stay-at-home orders, while Broadband companies benefit from remote working and e-commerce activity, and are therefore placed in the positively exposed category. Since April, spreads for all categories have tightened (see Chart 1), however, a significant spread premium still exists for bonds issued by companies that are deemed to be severely negatively exposed to COVID-19.
Spreads, Sectors and Security Selection. We favour sectors that we perceive to be less exposed to virus developments such as Technology, Communications, and Consumer Products. That said, some companies and sectors that we perceive to be sensitive to COVID-19 developments present investment potential given attractive spread premiums (as discussed above). In addition, some of these companies stand to benefit from ongoing economy re-opening’s. In our view, second virus waves will be a speedbump rather than a roadblock for the growth outlook, with policymakers preferring containment measures that have lower economic costs relative to the first virus wave.
Primary Sources of Return. Our fundamental research seeks to draw out idiosyncratic opportunities in COVID-19 exposed companies—in sectors such as manufacturing, real estate, autos and airlines—whose healthy balance sheets can help to preserve credit ratings and where spread levels compensate for perceived virus-related risks. These opportunities can be accessed in both secondary markets and amid new bond issuance in primary markets.
Thinking Thematically. We expect continued challenges for certain sectors facing secular shifts. This includes traditional brick-and-mortar retailers who face headwinds from the accelerated adoption of e-commerce and energy companies given lower oil prices and a rising need to adapt to the energy transition.
EXHIBIT 1: Global credit spreads based on GSAM estimated COVID-19 Impact
Source: GSAM, Bloomberg Barclays as of September 2020. Option adjusted spreads (OAS). COVID impact exposure categories are based on GSAM views.
Companies continued to conserve capital over the second quarter, though efforts to shore up liquidity have led to higher debt levels. Looking ahead, we are monitoring measures undertaken to pay down debt, shareholder policies and earnings adjustment practices
Both European and US corporate credit markets are supported by accommodative macro policies. Even after recent spread tightening, we see attractive opportunities for security selection in European investment grade given high dispersion among ratings and across sectors.
US corporate credit has been among the sectors most affected by recent market volatility, with exposure to both the economic impact of coronavirus and the collapse in oil prices. While credit faces fundamental challenges, for investors seeking opportunities in an uncertain environment, we see several reasons why now might be the time to consider credit.