Investors should take advantage of ‘unjustified’ fears over BBB bonds and look for opportunities in what remains an attractive hunting ground for fixed income investors, according to the Legg Mason affiliate Western Asset.
Fears have been growing for this segment of the market in recent years following a substantial expansion of the BBB credit universe.
More and more businesses have issued debt since the financial crisis, taking advantage of record low borrowing costs to fund their expansion.
BBB bonds have seen their share of the fixed income space increase substantially to 45% of the Bloomberg Barclays Credit Index, with investors growing increasingly concerned about just how close to junk many of the bonds are.
Michael Buchanan, deputy chief investment officer at Western Asset, said the fear is that a downturn could quickly see many such bonds downgraded, causing stress in credit markets as demand vanishes and holders struggle to offload the debt.
However, Buchanan said companies are tackling this head on in 2019, taking responsibility for previous debt binges and creating a healthy backdrop for investors.
“That fear of the BBB segment was very real last year, and there was a lot of acquisition activity in the BBB space funded by leverage,” he said.
“However, this year the trend is definitely for lower leverage, a debt diet if you will. A lot of companies are really focused on paying down debt now.”
Buchanan said this clear shift in mindset is being reflected from some of the top issuers in the BBB space, and while there will undoubtedly be companies which do not tackle their debt piles, there are opportunities for investors who focus on those who are taking it seriously.
“We do think there is an opportunity here, and we believe investors can take advantage of that fear that is still prevalent in markets and buy some of these BBB corporates that are likely to start deleveraging, or which are already doing so,” he said.
Examples of credits which the team believes are taking part in the ‘debt diet’ are banks, energy companies and basic industries.
“Those are the sectors where you are seeing more upgrades than downgrades now, and also the sectors where the goal is to deliver,” he said.