Central Bankers’ continued enthusiasm for printing money is creating new leverage risks for bond holders. While the bankers are hoping to stimulate investment, some companies are using borrowed money to buy back their shares and go private.
This is a particular trend in the US, where Bennett says Verizon raising $50bn in September “opened people’s eyes to the scale of money that can be raised. It means that there could be a leveraged buyout of a company worth $100bn. Mega caps could suddenly be in play”.
He says that bond investors are adopting two strategies to mitigate the risk of suddenly finding themselves holding paper for significantly more leveraged firms.
One is to invest in companies that are unwilling to take on this debt. Many European companies, for example, are looking to pay down debt rather than borrow more.
However, he highlights the contrasting experiences of two European telecoms firms in this position. Telefonica in Spain managed to sell off enough of the business to raise the cash to maintain its investment grade status. Telecom Italia, by contrast, struggled to manage its sales, and has been downgraded to sub-investment grade by one ratings agency so far.
Bennett says: “If you’re buying companies that are unable to do leveraging then you have to pick the winners.”
Alternatively, he says some managers are investing in companies that have already undertaken their leverage activity and are unable to do any more. This could mean investing when the companies raise debt to pay for a buyout, or looking to the traditional high yield market.
One advantage is that for these companies, trading with a high yield is business as usual. “High yield companies are almost the safest place to hide, because they’re used to it,” he says.
