Navigating the Credit Cycle

Transcription

1 Navigating the Credit Cycle Dan Henken, CFA - Portfolio Manager - Technology Media & Telecom Analyst John Leiviska, CFA - Minnesota Life Portfolio Manager Tom Houghton, CFA - Total Return Portfolio Manager June 15,

2 The only person who sticks closer to you in adversity than a friend is a creditor. - Anonymous

3 Overview DEFINE OUR PERSPECTIVE CURRENT STATE APPROACH 3

4 What is a Credit Cycle? A credit cycle is a cycle involving the access to credit by borrowers. Credit cycles first go through periods in which funds are easy to borrow; these periods are characterized by lower interest rates, lowered lending requirements and an increase in the amount of available credit. These periods are followed by a contraction in the availability of funds. During the contraction period, interest rates climb and lending rules become more strict, meaning that less people can borrow. The contraction period continues until risks are reduced for the lending institutions, at which point the cycle starts again. Source: Investopedia. 4

5 The Four Phase Credit Cycle GROWTH Recovery Repair Expansion Downturn RISK APPETITE Source: Advantus Capital Management. 5

6 Advantus Perspective Percent of GDP Latin American Debt Crisis ('81) Japanese Banking Crisis ('91) Global Savings Asian Contagion ('97) Russia Default ('98) Technology Bubble ('00) Global Housing Bubble ('08) Financial Crisis ('09) Source: International Monetary Fund and Advantus Capital Management. 6

7 Economic Growth Credit Growth Monetary Policy Inflation Volatility Risk Appetite Liquidity Yield Curve Fundamentals Asset Valuations Credit vs. Equity DOWNTURN REPAIR RECOVERY EXPANSION CURRENT Steepening Steep Flattening Flat/Invert Flattening Both Down Credit Biased Both Up Equity Preferred Both Up Source: Advantus Capital Management. 7

8 Economic Growth U.S. Real GDP Percent of GDP Source: Bloomberg. 8

9 Credit Growth Investment Grade and High Yield $1,600 US Corporate Bond Issuance* $1,400 USD, Billions $1,200 $1,000 $800 $600 $400 $200 $0 Source: Thomson Reuters. * Includes all non-convertible corporate debt, MTNs and Yankee bonds. Excludes all issues with maturities of one year or less and CDs. 9

10 Monetary Policy Federal Funds Target Rate Percent Source: Bloomberg. 10

11 Risk Appetite US Aggregate Corporate Average OAS Basis Points Source: Bloomberg. 11

12 Inflation Consumer Price Index Percent Source: FactSet. Excludes Food and Energy. 12

13 Volatility VIX Index Source: Bloomberg. 13

14 Yield Curve Yield Year May-16 Aug-16 Nov-16 Feb-17 May Year Yield 10 Year Yield 30 Year - 10 Year Source: Bloomberg. 14

15 Fundamentals 6.0x Leverage Trends by Rating Class 30% EBITDA Margin Trends by Rating Class 4.0x 25% 20% 2.0x 15% 10% 0.0x A BBB BB B 5% A BBB BB B Aug-14 Jan-15 Jun-15 No-15 Jun-16 Nov-16 Aug-14 Jan-15 Jun-15 No-15 Jun-16 Nov-16 10% Default Rates $120 Trailing 12M Earnings per Share 8% 6% 4% 2% 0% $100 $80 $60 $40 $20 $- Source: Bloomberg. 15

16 Insurance Approach

17 Cumulative Issuer-Weighted Global Default Rates * 40 5-Year Holding Period by Rating Percent Aaa Aa A Baa Ba B Caa-C Source: Moody s. 17

18 Risk-Adjusted Return Return / Standard Deviation Barclays Baa Corporate Index Barclays Ba U.S. High Yield Index Barclays B U.S. High Yield Index Barclays Caa U.S. High Yield Index Barclays High Yield Time period: 1/31/05 through 12/31/16. Source: Barclays. 18

19 Efficient Frontier Framework 8.00% Barclays Ba U.S. High Yield Index Annual Return 7.50% 7.00% 6.50% 6.00% 5.50% 5.00% Barclays Baa Corporate Index Barclays U.S. High Yield Barclays B U.S. High Yield Index Barclays Caa U.S. High Yield Index 4.50% 4.00% Barclays A Corporate Index Barclays Aa Corporate Index 3.50% 3.00% 3.00% 5.00% 7.00% 9.00% 11.00% 13.00% 15.00% 17.00% Standard Deviation Time period: 1/31/05 through 12/31/16. Source: Barclays. 19

20 Total Return Approach

21 Total Return Approach Strategic Credit Income Strategy Multiple sector strategy Corporates investment grade and high yield, domestic and international (including emerging markets) Structured securities ABS, MBS (including credit risk transfer) Bank loans Preferred Municipals Relatively more defensive interest rate positioning Exploits Advantus bottom-up, actively managed total return approach 21

22 10-Year Treasury Rates Hovering Near All-time Lows Yield Source: Bloomberg. 22

23 International Opportunities Finding Different Stages of the Credit Cycle Multinational Companies Geographic revenue diversification More representative of the global supply chain Emerging Market Debt Potential for improving economic fundamentals Alternative to domestic high-yield European Corporate Debt Earlier stage of the credit cycle Supportive policy backdrop from the European Central Bank 23

24 Capital Structure Matters Average Corporate Debt Recovery Rates Measured by Trading Prices Issuer-weighted Recoveries Volume-weighted Recoveries Lien Position st Lien Bank Loan 75.0% 64.1% 66.9% 78.0% 53.6% 62.9% 2 nd Lien Bank Loan 22.5% 25.1% 31.3% 22.5% 20.4% 27.3% Sr. Unsecured Bank Loan N/A N/A 46.4% N/A N/A 40.2% 1 st Lien Bond 43.4% 54.8% 52.8% 36.4% 58.7% 52.7% 2 nd Lien Bond 34.1% 25.3% 44.6% 35.8% 20.6% 44.1% Sr. Unsecured Bond 31.3% 37.6% 37.2% 26.3% 33.1% 33.1% Sr. Subordinated Bond 36.7% 36.6% 31.1% 56.1% 20.3% 26.2% Subordinated Bond 24.5% 58.5% 31.9% 24.5% 56.8% 27.1% Jr. Subordinated Bond 0.6% 14.0% 23.2% 0.6% 14.0% 14.2% Source: Moody s. 24

25 Credit Risk Transfer Securities Securitized Assets Yield Credit Risk Transfer Non-rated U.S. Corporate High Yield - Yield to Worst Source: Bloomberg. As of 5/23/17. 25

26 Questions?

27 Disclosures The opinions expressed herein represent the current, good faith views of the author(s) at the time of publication and are provided for limited purposes, are not definitive investment advice, and should not be relied on as such. The information presented in this article has been developed internally and/or obtained from sources believed to be reliable; however, Advantus does not guarantee the accuracy, adequacy or completeness of such information. Predictions, opinions, and other information contained in this article are subject to change continually and without notice of any kind and may no longer be true after the date indicated. Any forward-looking statements speak only as of the date they are made, and Advantus assumes no duty to and does not undertake to update forward-looking statements. Forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. Actual results could differ materially from those anticipated. Advantus Capital Management, Inc. is a subsidiary of Securian Financial Group, Inc. For Institutional Investment Use Only Advantus Capital Management, Inc. All rights reserved. DOFU