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Newsmakers

Direct Bond Market Developing for Investors, But Not at Any Price

Capital-rich investors are prime targets for companies whose usual lenders are hamstrung by regulation, but there are a couple of hurdles to overcome first.

(August 15, 2012) — Intuitional investors are becoming more tempted to loan directly to companies as bank lending continues to dry up, but mis-matched expectations between borrowers and lenders are holding up progress.

Restrictions on bank lending brought about by incoming regulation around the world has meant areas of business that used to rely on the same financial partners are having to look elsewhere, a report by Standard & Poor’s (S&P) Credit Matters team highlighted this month.

Taron Wade, associate director at the ratings agency and research firm, said a dearth in bonds being issued in the high yield and mid-markets paved the way for capital-rich and return hungry investors – something several market participants have been advocating since the credit crunch hit.

“Even though the loan market will return, there is a lot of interest from pension funds and insurance companies to come into the market and replace the structured demand – the collateralised loan obligations (CLOs) that are coming out of their reinvestment period for example,” Wade said.

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In the first half of this year, debt capital market volumes slumped from an already poor state in 2011, according to Thomson Reuters. Data from the firm showed a 7% drop in fixed-income issuance in the first six months overall. High yield bond issuance in the second three months of 2012 was down 50% on the first quarter, the data monitor said.

Wade said it would take time to develop a functioning market between investors and companies, so the high yield market would have to struggle on in the immediate short-term.

“Despite difficulties, there is innovation,” said Wade, highlighting moves by exchanges to create retail bond platforms and the Association of Corporate Treasurers mooting a private placement market in Europe, like the one established in the United States.

However, mis-matched expectations over pricing are also stopping flow between borrower and lender.

Wade said: “The rate of return is lower than what investors want and companies are not prepared to pay much higher [rates]. This is exacerbated by little leverage in the system, meaning investors are not getting leveraged returns.”

 Wade was reporting from a conference on credit markets, the panels of which were populated by banks, credit analysts and institutional investors. For the full account, click here.

Home > News > Risk > SEI: Even Lower Interest Rates ‘Quite Possible’
Risk

SEI: Even Lower Interest Rates ‘Quite Possible’

SEI's Ashish Kapur won't predict when interest rates will rise, but advises institutional investors to ride out the low rates through allocations in long-duration bonds, emerging market debt, and high-yield bonds.

Interest rates around the world are near record lows, and with the Eurozone economy officially in contraction, they don’t appear set to climb anytime soon. 

What’s a CIO to do? Invest in alternative fixed-income (i.e. timber land, infrastructure, and high-yield bonds), emerging market debt, absolute return bond funds, and long-duration bonds, according to Ashish Kapur, fiduciary manager SEI’s head of European institutional solutions. Kapur recently published a whitepaper on the future of interest rates and strategies for maneuvering through a higher or lower rate environment. With the news of Europe’s shift from stagnation to contraction, the former situation doesn’t seem worth fretting too much about. 

“It is quite conceivable that the situation could worsen before it gets better,” wrote Kapur. “Further falls in interest rates would of course mean higher liabilities for pension schemes.” 

To cope with the volatility of fund liabilities, Kapur suggested setting de-risking triggers to manage interest rate hedges. “These triggers can be funding level related whereby switches are made according to changes in funding level or market related in which switches are made according to pre-agreed market changes,” he explained in the paper. Triggers can be automatic or manual, whereby the pension scheme is consulted every time a trigger is reached before a change is made. “The specific triggers will differ by pension scheme according to their funding value and risk appetite,” he wrote.  

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Kapur called the timing of a rise “impossible to predict,” and listed the conventional factors that could lead to a rate jump: a resolution to the Eurozone crisis, high inflation, and growth in the US, United Kingdom, and emerging markets. 

In July, Pacific Investment Management Company CEO and co-CIO Mohamed El-Erain argued that low global interest rates were hurting institutional investors without boosting economies. “According to textbook economics, lower interest rates have beneficial flow and stock effects. They make it cheaper to fund investment and consumption; and they make it easier for companies, governments and individuals to carry a given stock of already-accumulated debt,” El-Erian contended. “In practice, however, the situation is much more complicated and not so benign.”

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