Text on screen: What's happened in the corporate credit market?
Jamie Weinstein, Portfolio Manager, Head of Corporate Special Situations: First, we have the crippling global pandemic that we’re all struggling with, and second, a concurrent collapse in oil prices. The result of this has been a swift and broad-based repricing of risk across all the capital markets, across all sectors, asset classes and geographies.
Some of the most severe impacts have been in corporate credit markets. In the best of times, corporate credit, particularly in the below investment grade space, is relatively illiquid, but now things have turned extremely illiquid resulting in market dislocations across different types of assets.
Two things to touch on in terms of some metrics to give you a sense. First, investment grade corporate credit spreads have widened to a level as wide as we saw at points during the 2008 global financial crisis, implying a five-year cumulative default rate that would be in the double digits.
Second, in the leveraged loan and high-yield bond market, there’s now over a trillion dollars of debt trading at distressed levels, and we also anticipate a default rate exceeding 10% in that space.
Text on screen: What has been the impact?
We've seen a number of key elements show up in the credit markets that we find concerning.
One, liquidity remains very constrained. That primary new issue market in particular for below-investment-grade credit and leveraged loans and high yield bonds are basically closed right now, with relatively limited trading in secondary names and difficulty with price discovery.
Second, the formation of new CLOs. This is an important one, because CLO, by our math, represented more than half of the incremental demand for leveraged loans in the last couple of years.
New CLO formation right now has effectively shut down, which limits the ability of loan transactions to come to market.
Third, redemption from daily liquidity vehicles: there has been a wave of redemptions across mutual funds and exchange traded funds, forcing managers to sell what we're perceived to be liquid performing credit at illiquid nonperforming prices.
Fourth, actions by rating agencies, where they've begun to downgrade certain issuers, particularly those most closely associated with the issues between the pandemic and oil and gas, but where we expect to see a broader wave of downgrades to come, over the coming months.
And with more of that, we expect to see more selling pressure on the part of ratings constrained holders.
Lastly, the speed of reaction of public markets: it's been much faster this time than we saw in 2008. And with the movement in public markets, it's made private market transactions very difficult to price, and we've seen private markets for new capital shut down as well for a period of time.
With this repricing of deals and risk, it will be a while before private transactions come back and can be available to fill the hole for corporate credit borrowers in need.
Text on screen: What’s next?
PIMCO remains cautious on companies where liquidity constraints and earnings deterioration are in play and we think more attractive opportunities may develop over the balance of the year.
For now, we're remaining patient and focused on higher-quality segments of the market.
We expect to see constrained liquidity along constraints on leverage, leading to further dislocations in public and private lending markets as CLOs, BDCs, and direct lending funds potentially seek to sell underperforming credit.
As rating agency actions continue to catch up, we would also expect to see these sales accelerate.
We further expect a potentially larger opportunity to develop in private markets as underwriters pivot to private markets and leveraged private lenders become forced sellers.
We believe the dynamic may drive public and private distressed financings and private capital solutions opportunities, in the medium term.
Lastly, for those investors who have the expertise and long-term vehicles, and the capability to lead restructurings we anticipate some of the highest return opportunities may be in repairing balance sheets of damaged companies.
Shots of Jamie Weinstein working.
PIMCO has been preparing for this dislocation across our credit complex, and we believe that we have a number of vehicles that can capitalize on these opportunities, and are customized to match investors’ liquidity needs and different risk tolerances.
For more insights and information visit pimco.com
Disclosure
Recorded 6 April 2020
Thank you for joining us for the Straight From PIMCO: Dislocations in Corporate Credit Markets. This call is being held for informational purposes only and is not intended to provide and should not be relied on by any person for accounting, investment, legal, tax or other advice. This information does not constitute an offer to sell or a solicitation of an offer to buy interests in a fund or any other PIMCO trading strategy or investment product.
Past performance is not indicative of future results and there can be no assurance that any PIMCO trading strategy or investment product will make investments similar to the investments discussed in this call.
All investments contain risk and may lose value. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and low interest rate environments increase this risk. Reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Corporate debt securities are subject to the risk of the issuer’s inability to meet principal and interest payments on the obligation and may also be subject to price volatility due to factors such as interest rate sensitivity, market perception of the creditworthiness of the issuer and general market liquidity. Mortgage- and asset-backed securities may be sensitive to changes in interest rates, subject to early repayment risk, and while generally supported by a government, government-agency or private guarantor, there is no assurance that the guarantor will meet its obligations. U.S. agency mortgage-backed securities issued by Ginnie Mae (GNMA) are backed by the full faith and credit of the United States government. Securities issued by Freddie Mac (FHLMC) and Fannie Mae (FNMA) provide an agency guarantee of timely repayment of principal and interest but are not backed by the full faith and credit of the U.S. government. The credit quality of a particular security or group of securities does not ensure the stability or safety of the overall portfolio.
There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision.
References to specific securities and their issuers are not intended and should not be interpreted as recommendations to purchase, sell or hold such securities. PIMCO products and strategies may or may not include the securities referenced and, if such securities are included, no representation is being made that such securities will continue to be included.
Certain statements made on this call may be forward-looking and are subject to a number of risks, uncertainties and assumptions, and actual events or the actual performance of the fund may differ materially.
Views expressed on this call are those of PIMCO and may change at any time.Any views expressed herein are as of the date indicated, are based on information available to PIMCO as of such date, and may not have been updated to reflect real time market developments. Statements of opinion are subject to change, without notice, based on market and other conditions. No representation is made or assurance given that such views are correct. PIMCO has no duty or obligation to update the information contained herein. Opinions expressed are intended solely as general market commentary and do not constitute investment advice or a guaranteed projection or prediction of returns.
PIMCO as a general matter provides services to qualified institutions, financial intermediaries and institutional investors. Individual investors should contact their own financial professional to determine the most appropriate investment options for their financial situation. This is not an offer to any person in any jurisdiction where unlawful or unauthorized. | Pacific Investment Management Company LLC, 650 Newport Center Drive, Newport Beach, CA 92660 is regulated by the United States Securities and Exchange Commission. | PIMCO Europe Ltd (Company No. 2604517) and PIMCO Europe Ltd - Italy (Company No. 07533910969) are authorised and regulated by the Financial Conduct Authority (12 Endeavour Square, London E20 1JN) in the UK. The Italy branch is additionally regulated by the Commissione Nazionale per le Società e la Borsa (CONSOB) in accordance with Article 27 of the Italian Consolidated Financial Act. PIMCO Europe Ltd services are available only to professional clients as defined in the Financial Conduct Authority’s Handbook and are not available to individual investors, who should not rely on this communication. | PIMCO Deutschland GmbH (Company No. 192083, Seidlstr. 24-24a, 80335 Munich, Germany), PIMCO Deutschland GmbH Italian Branch (Company No. 10005170963) and PIMCO Deutschland GmbH Spanish Branch (N.I.F. W2765338E) are authorised and regulated by the German Federal Financial Supervisory Authority (BaFin) (Marie- Curie-Str. 24-28, 60439 Frankfurt am Main) in Germany in accordance with Section 32 of the German Banking Act (KWG). The Italian Branch and Spanish Branch are additionally supervised by the Commissione Nazionale per le Società e la Borsa (CONSOB) in accordance with Article 27 of the Italian Consolidated Financial Act and the Comisión Nacional del Mercado de Valores (CNMV) in accordance with obligations stipulated in articles 168 and 203 to 224, as well as obligations contained in Tile V, Section I of the Law on the Securities Market (LSM) and in articles 111, 114 and 117 of Royal Decree 217/2008, respectively. The services provided by PIMCO Deutschland GmbH are available only to professional clients as defined in Section 67 para. 2 German Securities Trading Act (WpHG). They are not available to individual investors, who should not rely on this communication. | PIMCO (Schweiz) GmbH (registered in Switzerland, Company No. CH-020.4.038.582-2), Brandschenkestrasse 41, 8002 Zurich, Switzerland, Tel: + 41 44 512 49 10. The services provided by PIMCO (Schweiz) GmbH are not available to individual investors, who should not rely on this communication but contact their financial adviser. | PIMCO Asia Pte Ltd (Registration No. 199804652K) is onetary Authority of Singapore as a holder of a capital markets services licence and an exempt financial adviser. The asset management services and investment products are not available to persons where provision of such services and products is unauthorised. | PIMCO Asia Limited is licensed by the Securities and Futures Commission for Types 1, 4 and 9 regulated activities under the Securities and Futures Ordinance. PIMCO Asia Limited is registered as a cross-border discretionary investment manager with the Financial Supervisory Commission of Korea (Registration No. 08-02-307). The asset management services and investment products are not available to persons where provision of such services and products is unauthorised. | PIMCO Australia Pty Ltd ABN 54 084 280 508, AFSL 246862. This publication has been prepared without taking into account the objectives, financial situation or needs of investors. Before making an investment decision, investors should obtain professional advice and consider whether the information contained herein is appropriate having regard to their objectives, financial situation and needs. | PIMCO Japan Ltd, Financial Instruments Business Registration Number is Director of Kanto Local Finance Bureau (Financial Instruments Firm) No. 382. PIMCO Japan Ltd is a member of Japan Investment Advisers Association and The Investment Trusts Association, Japan. All investments contain risk. There is no guarantee that the principal amount of the investment will be preserved, or that a certain return will be realized; the investment could suffer a loss. All profits and losses incur to the investor. The amounts, maximum amounts and calculation methodologies of each type of fee and expense and their total amounts will vary depending on the investment strategy, the status of investment performance, period of management and outstanding balance of assets and thus such fees and expenses cannot be set forth herein. | PIMCO Taiwan Limited is managed and operated independently. The reference number of business license of the company approved by the competent authority is (107) FSC SICE Reg. No.001. 40F., No.68, Sec. 5, Zhongxiao E. Rd., Xinyi Dist., Taipei City 110, Taiwan (R.O.C.), Tel: +886 2 8729-5500. | PIMCO Canada Corp. (199 Bay Street, Suite 2050, Commerce Court Station, P.O. Box 363, Toronto, ON, M5L 1G2) services and products may only be available in certain provinces or territories of Canada and only through dealers authorized for that purpose. | PIMCO Latin America Av. Brigadeiro Faria Lima 3477, Torre A, 5° andar São Paulo, Brazil 04538-133. | No part of this publication may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America L.P. in the United States and throughout the world. ©2020, PIMCO.
CMR2020-0407-1143829
