George Goudelias, Managing Director, Head of Leveraged Finance, Senior Portfolio Manager, and Michael Kirkpatrick, Managing Director, Senior Portfolio Manager of Seix Investment Advisors, recently discussed how global market volatility has affected leveraged credit on a live call with advisors. George and Mike shared their views on where they are seeing risks—and potential opportunities—in the leveraged loan and high yield bond markets.
• Recent spreads on leveraged loans and high yield bonds have been around 1000 basis points, which historically has been an opportune time to invest in both asset classes.
• After weathering and emerging stronger from the global financial crisis, the Leveraged Finance team at Seix was preparing for volatility over the last 12-16 months by significantly overweighting higher quality names while maintaining its underweight of lower quality companies.
• With spreads at astonishing levels, Seix hasn’t changed the quality of its leveraged loan portfolio, but is staying very liquid, deploying cash very prudently and taking advantage of significant opportunities that may represent strong potential returns in the long run.
• With regard to high yield, Seix remains more defensively positioned in stay-at-home industries like cable, which has held up very well in this environment.
• The largest potential opportunity the Leveraged Finance team is seeing currently is in fallen angels. Forced selling in the investment grade market has created opportunities to buy (at very attractive rates) some high quality companies that are dealing with temporary issues.
• While defaults are expected to rise, we are still well below historical averages*. As always, Seix is focused on companies that have levers to pull in difficult environments—companies with big market caps, and more predictable, steady cash flow profiles.
* Source: JPMorgan High-Yield and Leveraged Loan Morning Intelligence, 3/31/20
IMPORTANT RISK CONSIDERATIONS
Credit & Interest: Debt securities are subject to various risks, the most prominent of which are credit and interest rate risk. The issuer of a debt security may fail to make interest and/or principal payments. Values of debt securities may rise or fall in response to changes in interest rates, and this risk may be enhanced with longer-term maturities. Foreign & Emerging Markets: Investing internationally, especially in emerging markets, involves additional risks such as currency, political, accounting, economic, and market risk. High Yield-High Risk Fixed Income Securities: There is a greater level of credit risk and price volatility involved with high yield securities than investment grade securities. ABS/MBS: Changes in interest rates can cause both extension and prepayment risks for asset- and mortgage-backed securities. These securities are also subject to risks associated with the repayment of underlying collateral. Bank Loans: Loans may be unsecured or not fully collateralized, may be subject to restrictions on resale and/or trade infrequently on the secondary market. Loans can carry significant credit and call risk, can be difficult to value, and have longer settlement times than other investments, which can make loans relatively illiquid at times. Market Volatility: Local, regional or global events such as war, acts of terrorism, the spread of infectious illness or other public health issue, recessions, or other events could have a significant impact on the fund and its investments, including hampering the ability of the fund's portfolio manager(s) to invest the fund's assets as intended. Prospectus: For additional information on risks, please see the fund’s prospectus.
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