The case for global short-dated high yield | Insight Investment

Better quality than in the past

The credit quality of the euro and US dollar-denominated high yield markets has changed materially over the last decade. In euro markets, 66% of the market is BB-rated and 5% is CCC-rated. In the US, 50% is BB-rated and 13% CCC.  This is a significant improvement from 2006 and 2007, when CCC-rated bonds represented more than 20% of the market. Companies with higher ratings are generally larger in scale, both in terms of profits and cashflows. Larger  companies are less vulnerable to shocks and can better navigate macroeconomic downturns.

Figure 1: High yield issuers have migrated upward in rating¹

Companies now carefully manage maturity profiles

Many high yield companies actively ensure that they are not vulnerable to a short-term liquidity crunch by carefully managing their maturity profiles. This provides certainty for management as they have time to adapt their business models as necessary during periods of geopolitical or economic uncertainty.

This means we see companies refinancing bonds often years before they are due to mature and issuing new debt at much longer maturities. By pushing out maturities the risk of a default is dramatically reduced, as it gives time to operate, adjust and generate cash. Figures 2 and 3 demonstrate the high level of refinancing activity and how high yield issuance is broadly spread over a range of maturities.

Figure 2: European high yield bond maturities and refinancing activity²

Figure 3: European high yield outstanding issuance by rating³

Short-dated investments increase cashflow visibility

We believe that investing in short-dated maturities is a good way to further improve resilience. In a time of macro and geopolitical uncertainty it is critical to have a deep understanding of the underlying cash generation within the businesses in which you invest. We believe that understanding and therefore predicting cashflows is easier on a short-term, two-year, basis than over longer time horizons. As an example, if we invest in a company that historically manufactures 10m beer cans every year, with expected variation around events such as major sporting tournaments, then we can more accurately predict the revenue, profitability and cashflows. However over seven or 10 years there is far greater uncertainty, as trends could change more dramatically, for reasons such as consumer preference or regulation. There is thus far greater certainty over shorter time periods.