The Key to Credit: Selection and Timing

Credit spreads are too tight… This is a frequent observation during meetings with investors. It’s hard to disagree. Currently, no risky asset seems ‘undervalued.’ Whether you look at the S&P, the DAX, gold, or Bitcoin - all are reaching historical highs.

Admittedly, spread levels are no longer what they were in 2022 or 2023, but opportunities remain. Let’s not forget that during that period, most investors favoured monetary solutions, attracted by high rates and an uncertain environment, at the expense of other asset classes. This led to an almost unprecedented credit rally.

At the beginning of the year, we identified several themes for credit strategies, notably the reopening of the primary market and a proactive approach by issuers toward refinancing their debt. Some issuances include a call option allowing the issuer to redeem the debt before maturity. When this option is exercised or the market anticipates it, bond prices tend to appreciate, coupled with carry. In 2024, the primary market was very active, with numerous calls or public tender offers on financial debt (AT1 or Tier 2), some High Yield (HY) debt, and Collateralised Loan Obligations (CLOs).

We are now adjusting our credit strategies toward a more bottom-up approach, increasing the quality of issuances and maintaining a monetary pocket close to 10%. Currently, no credit asset class stands out significantly, unlike last year when financial debt after the Silicon Valley Bank and Credit Suisse crises or BBB CLO tranches offered attractive spreads of 500 basis points plus Euribor at 4%.

However, the current environment offers many opportunities from a micro perspective. What do Adidas, Volkswagen, Pernod Ricard, and Bouygues have in common? At first glance, not much, except that their credit spreads have widened since the beginning of the year, while Investment Grade spreads have slightly tightened. Dispersion is even more pronounced in the HY market, where the spread gap between Bs and CCCs has reached rarely seen levels, with major issuers like Altice France, Intrum, or Ardagh undergoing restructuring.

This dispersion opens up promising prospects for 2025. Some issuers whose spreads widened in 2024 present potentially good entry points, offering active managers opportunities to capitalise on these chances while remaining selective!

by Vincent Ollivier

Credit Portfolio Manager

Glossary:
•   AT1: Fixed maturity or perpetual bonds that can absorb certain losses or be converted into shares when the issuer's capital level falls below a defined threshold.
•   Tier 2: Subordinated bonds issued by commercial banks. In the event of bankruptcy or liquidation, Tier 2 lenders are repaid only after senior debts are settled.
•   Credit Rating: Used by banks to assess an entity's repayment capacity. Ratings range from AAA (highest grade) to C (high risk of default).

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