Benefits of leveraged loans in a HY portfolio

Transcription

1 Benefits of leveraged loans in a HY portfolio May 15 Sander Kleine Amsterdam Verwijder deze afbeelding en voeg een nieuwe in.

2 Achmea IM External Managers > 120 BILLION ASSETS UNDER MANAGEMENT > 70 BILLION MANAGED VIA EXTERNAL MANAGERS 18 PROFESSIONALS WITH 15 YEARS AVERAGE EXPERIENCE OPERATIONAL DUE DILLIGENCE ECONOMIES OF SCALE HISTORY OF OUTPERFORMANCE IN ALL ASSET CLASSES 2

3 Achmea IM Global High Yield Fund Strong client base: 13 long term institutional investors Asset under Management: EUR 2 billion Benchmark: BoA/ML Non-Financial Developed Markets High Yield Constrained Index Portfolio consist of five regionally focused external managers (4 US, 1 EUR focused) Approximately 10% allocation to US leveraged loans 3

4 Blending loans contributes to attractive risk-adjusted returns Above average excess returns over the past five years + Below average volatility of performance = First quartile risk adjusted return (IR) compared to evestment peer group 4

5 US Leveraged Loan market has grown substantially Source: Credit Suisse, DDJ Capital Management 5

6 Leveraged credit market characteristics (US) Leveraged Loans High Yield Bonds Amount outstanding USD 1.08tn USD 1.27tn Number of Issues Yield/Spread 6,33% / 416bps 5,77% / 358bps Average rating Split BB B+ 20 year total return (ann.) 4,78% 6,70% Average default rate 3,1% 3,2% Average recovery First lien 66,7% Second lien 24,7% Source: Credit Suisse, BofA Merril Lynch, JP Morgan, DDJ Capital Management Senior unsecured 36,3% Senior subordinated 28,3% 6

7 Leveraged credit market characteristics (US) Leveraged Loans High Yield Bonds Coupon Primarily floating rate (3-month Libor) Primarily fixed rate Seniority Mostly senior secured Mostly senior unsecured Tenor Typically 5-7 years Typically 5-10 years Call protection Less favorable to creditors More favorable to creditors Duration 3 months ICE BofA ML Index average: 3.9 years Trading Over-the-counter Over-the-counter Issue size USD 712 million on average USD 675 million on average Covenants Both maintenance and negative Usually only negative Settlements Best case T+7. Manual proces T+2. Standardized process Information Quarterly (public) / monthly (private) Quarterly Source: DDJ Capital Management 7

8 Loans vs bonds: Similarities > differences Comparable credit quality and default rate Comparable tenor but call risk higher for loans Returns are highly correlated Comparable structure Loan Bond 8

9 Priority of repayment Benefit 1 Invest across the entire capital structure Highest Lowest Source: M&G Investments Super senior debt e.g. revolving credit facility Super secured debt e.g. bank loans, first lien loans and bonds Secured debt e.g. second lien and mezzanine loans Senior unsecured debt e.g. corporate bonds, credit lines, bilateral loans Subordinated debt e.g. subordinated bonds and loans Hybrid securities/ quasi equity e.g. convertible bonds, contingent capital in banks Ordinary shares e.g. equity Lowest Highest Riskiness 9

10 Benefit 2 Opportunities for tactical allocation 25% 20% 15% 10% 5% BAML High Yield Non-Financials Constrained Index (HCNF) Yield to Worst BAML YTW Credit Suisse Leveraged Loan Index (CSLL) Yield (3-year life) CSLL Yld 3yr life Difference 0% -5% Source: BofA Merril Lynch, Credit Suisse, DDJ Capital Management 10

11 Benefit 3 Loans are less risky on average Source: evestment Alliance, DDJ Capital Management Calculated using monthly returns, rolled monthly Source: JP Morgan, DDJ Capital Management 11

12 Benefit 4 Better access to information 12

13 Yield to Maturity Benefit 5 Interest rate risk almost non-existent leveraged loans HY U.S. 3M LIBOR (bps) Duration (years) Source: BofA Merril Lynch, Credit Suisse Source Credit Suisse, Bloomberg, TCW 13

14 Conclusion Leveraged loans is a mature asset class now There are more similarities than differences Ability to invest in loans increases the investable universe for a HY bond investor For our fund this has contributed well to the risk/return profile 14

15 Thank you for your attention! May 15 Sander Kleine Amsterdam