Outlook for credit now ‘particularly appealing’

It is a good time for investors to consider investments in corporate credit as its outlook is currently “particularly appealing” as yields from both investment grade and high yield bonds are trending above their long-term median, according to Acadian Asset Management’s new paper.

Additionally, this asset class has been helped by strong corporate balance sheets and interest coverage ratios which are at multi-decade highs, Scott Richardson, director of systematic credit at Acadian Asset Management and the author of the paper “Current opportunities in public credit markets” said.

According to him, credit spreads at present were especially favourable for three key reasons: strong corporate balance sheets, record high interest coverage ratios, and a net-debt-to-EBITDA ratio for the median high yield-rated company at a 10-year low.

“These conditions are a by-product of the low interest rate environment from late 2020 to early 2022, which incentivised companies to issue debt and lock in favourable financing costs,” he said.

“The credit risk premium is observable and distinct from both the equity premium and the term premium which intuitively this makes sense because they arise from different economic drivers.

“In particular, credit and equity premia derive from different aspects of, and sensitivities to, company fundamentals and their returns have only a modest correlation to one another.”

Gillian Savage, Chief Executive Officer of Acadian Australia, also said the corporate bond market had developed meaningfully over the past decade, creating opportunities for investors to gain exposure to this distinct asset class via a broader range of strategies including active systematic credit.

According to the Acadian paper, the application of systematic investing concepts to corporate bonds only began in the early 2010s due to a lack of publicly available data for corporate bond transactions, complexities in modelling finite-life securities with different terms and seniority, and a historically manual trading environment.

“Systematic active credit strategies are relatively new and offer potential advantages over ostensibly passive vehicles, and they complement traditional discretionary approaches,” she said, signaling Acadian’s plans to launch of a systematic credit strategy in early 2024,” Savage noted.