06.07.18

Snapshots is really enjoying the 2018 Football World Cup. We think the addition of VAR (Video Assistant Referee) has added an extra level of tension and excitement to the game. However, it has not dealt with the gratuitous play-acting on the pitch. Historically this play-acting was only displayed by a few countries but it seems to have spread globally this year!

Weak markets

At our weekly Multi Asset Credit meeting, our teams of portfolio managers and analysts also noted price weakness spreading across the credit market. This was initially seen in bank capital and investment grade and high yield corporates but has now spread to leveraged loans, CLOs and securitised products.

As we have been saying for some time, we believe the primary driver is tightening monetary policy after nearly a decade of loose monetary policy from the world central banks. Potential trade wars add to this mix but we see them as drivers of idiosyncratic risk as opposed to systemic risk for now (e.g. credit spreads in the auto sector have been coming under pressure as the auto industry is directly impacted by tariffs).

Pricing power

The good news is that our portfolio managers have also noted a marked shift in pricing power from borrowers to lenders. As cautious lenders we are pleased by this development.

For example, the leveraged finance team is seeing limitations around EBITDA add-backs, debt incurrence limits, ticking fees and bigger new issue discounts offered to get deals done. Our quantitatively minded securitised product team has been utilising a technical strategy called the “cheeky bid” and getting immediate engagement from arrangers!

We do not expect this environment to change soon and are navigating our portfolios with this shifting pricing power amidst volatile markets in mind.

Good luck.

Asif Godall
Co-Chief Investment Officer