Good opportunities to invest in the second half of 2020: the “fallen angels”, bonds of important companies that go from investment grade (able to repay loans on schedule) to high yield (default risk bonds, at least in theory), with particularly profitable profit margins.
The number of fallen angel bonds is growing as well as the interest of investors: for Goldman Sachs at the end of 2020 it will be a 416 billion dollar market in the US and 133 billion euros in Europe.
Investing in high yelds bonds of emblazoned companies is an interesting idea of bond investment, especially in an era in which central banks are less ligid and rigid on the requirements necessary for the purchase of bonds.. In fact, the Federal Reserve has already included fallen angels in its investment perimeter and, as soon as possible, even the ECB could follow their example.
In this way, the appeal towards those fallen angel bonds among which investors hunt for profitable returns grows, betting on a future return to the investment grade parameters of the “big corporate” and on the economic recovery once the Covid19 crisis is over.
The shift of issuers from investment grade to high yield generates the price distortion that creates buying opportunities, since what may be considered less attractive for an investment grade investor, is often the most interesting aspect for those investing in the high yield sector and hunts for higher returns with a consequent higher risk.
“We expect insolvency rates to rise to around 8% in the US and around 6% in the European market in 2020,” warns J.P.’s Global Fixed Income, Currency and Commodities Group team. Morgan Asset Management.
The transition from investment grade to high yield creates buying opportunities. There is in fact the risk that a second wave of Covid could lead to numerous defaults, but usually the rating cut is made on the basis of what has already happened: hopefully, the worst could also be behind us.
And the market could grow further. The Covid pandemic caused fallen angels to hit a record $ 240 billion, with an impressive rate of growth: in the second quarter of 2020, Moody’s made over 600 downgrades, five times the rate maintained in the past two years. And it’s not over. According to estimates by Thomas McMahon, product specialist of Western Asset (Legg Mason group), investment grade corporate bonds with ratings that reach the limit threshold are close to one billion dollars, and of these 466 billion are in the watchlist with negative implications of at least one of the major rating agencies (29 billion are the issues targeted by all three major rating agencies).
Where to invest in 2020 with the Covid crisis: cheap bonds to buy “fallen angels”
For the investor able to accept the greater degree of risk brought by the fallen angels, the opportunities for good investments in high yield bonds (but practically investment grade) are not lacking at the sector level, given the presence in the category of energy giants (Continental Cenovus Energy, Patterson- Uni Energy, Occidental Petroleum, Continental Resources, Apache,), the auto (Ford, Renault), the financial sector (Commerzbank, Unicredit, Multibank), the fashion (Michael Kors, Marks & Spencer, Macy’s), in the networks (Atlantia) , of food (Kraft Heinz). In particular, the US bonds of the financial, tech, media and telecom sectors, while the stocks of the cyclical sectors such as the automotive or capital goods are underweight.
S&P reports 126 possible future fallen angels among whom price distortions may be found, including:
- Networks and transport companies such as Abertis Infraestructuras (which has emissions of 155 billion dollars), a subsidiary of Atlantia
- Tourism giants such as Expedia (with debts of 7.7 billion)
- Cruise companies such as Carnival (with a debt of 9.2 billion)
- Hotel chains such as Accor (which has debts of 5.1 billion), Choice Hotel International (with a debt of 800 million), Host Hotels & Resorts (with debts of 4.4 billion), Hyatt Hotels (with debts of 2 , 1 billion), Las Vegas Sands (with debt for 9.5 billion), Marriott International (with debt for 10.3 billion)
- Catering companies: Kingfischer (with debt for 55 million), Kohl’s Corp (with debt for 2.6 billion), Metro (with debt for 1.8 billion), Nordstrom (with debt for 3.5 billion)
- Large retail groups such as Auchan (with debts of 7.5 billion)
- Industrial giants such as Arcelor Mittal (with debt of 13.77 billion)
- Energy Company: Devon Energy (with a debt of 7.5 billion), Diamondback Energy (with debt for 6.4 billion), Ecopretrol (with debt for 7.8 billion), Empresa Nacional del Petroleo (with debt for 2.98 billion), Energy Transfer (with debt for 49.9 billion), Hess Corp (7.6 billion), Marathon Oil Corp (with debt for 10.33 billion), Noble Energy (with debt for 5.8 billion) ), National Fuel Gas (with payables for 2.1) billion, Ovintiv (with payables for 6.4 billion)
- Financial institutions: Ally Financial (with debts of 19.4 billion), Bank of Irland (with debts of 6.2 billion), Discover Financial Services (with a debt of 12.6 billion); Fce Bank (with debts for 9.2 billion), Synchrony Financial (with debts for 8 billion) and Virgin Money UK (with debts for 3.9 billion)
- Fashion companies such as Capri Holding (with a debt of 450 million) which own brands such as Gianni Versace and Jimmy Choo and Next (with debt of 1.3 billion)
- Consumer goods companies such as Conagra Brands (with a debt of 13.8 billion), Molson Coors Beverage (with debts for 7.6 billion), Sysco Corp (with debts for 12.77 billion)
- Real estate groups: Brookfield Property (with a debt of 13.7 billion) and Emaar Properties (with debts of 3.25 billion)
- Media groups like ITV (with debts of 1.8 billion)
- hi tech companies such as VMware (with debt for 6 billion) and Tech Data (with debt for 1.7 billion)
- Automotive companies such as Peugeot (with debts for 9.6 billion) and Valeo (with debts for 3.8 billion)
- Airlines such as Easyjet
The sovereign debt of Romania (equal to 37.5 billion) and Colombia (25.3 billion) was also observed. Italy not yet.