Bargains on Wall Street are hard to come by after a strong 2020 rally that went through stock and bond markets. Some investors are sifting through complex securities that were among the hardest hit during last spring’s panic.
Bonds backed by commercial real estate and corporate loans traded for less than 50 cents on the dollar after the spreads and margins fueled forced sales. Their recovery has been followed by a broad market reversal, partly due to the loss of sales with the finances of many companies that purchase these securities.
But now, with vaccine spreads and many other asset classes on the rise to prices that many did not expect to see, asset managers are seeing an attractive return in the year ahead.
The danger is clear to see. The bonds are rated below investment level and can be linked to properties and companies with a vulnerability to pandemic, such as hotels, slow sellers and airlines.
However, relatively low prices mean that the bonds offer “protections you won’t find anywhere else with this type of product,” said Jay Huang, a portfolio manager at CIFC Asset Management who buys loan obligations. accumulated, Wall Street reforms of lower-level debt. . “There is still a ton of catch to be made compared to the market as a whole. ”
CLO managers buy packages of corporate loans and then cut them up and repackage them into bonds with credit ratings ranging from the safest triple-A to a much more risky one-B. Investors like Mr. Huang are buying the bonds at a low rate, which pays higher interest rates but initially loses losses if physical deficits arise.
At the end of December, such CLO securities were offering an additional yield, or spread, of 8.8 percentage points to 13 percentage points above the London, or Libor, interbank offer rate. That’s far more than the 2.9-4.1 percentage point spread paid off by conventional corporate bonds with the same credit ratings, according to data from BofA Securities and ICE Data Services.
Bonds backed by real estate loans also attract bargain hunters.
In November, hedge fund manager Brigade Capital Management placed bonds backed by a $ 240 million mortgage loan to the owner of two luxury hotels in Portland, Ore. The bonds traded around 65 cents on the dollar, reflecting concerns over the taxes imposed by the coronavirus and political unrest on tourism in the city.
Prices mean “no one will ever travel to Portland and stay in those high-end hotels again,” said Dylan Ross, co-head of Brigade’s structured finance team that traded. Such a sad day situation is unlikely to go away, and mortgage lenders are soon allowing property owners to take over, he said.
Brigade bought similar debt with the support of a Nashville, Tenn. Hotel, last spring for about 60 cents on the dollar, Mr. Ross said. The bonds traded in December at about 88 cents on the dollar, according to data from ICE Data Services.
Brigade has been raising new funds to take advantage of the opportunity to invest in debt with low-level asset support, said someone familiar with the matter. Other asset managers are doing the same. Hildene Capital Management launched a fund in May to buy lower-level CLO securities. The investment vehicle returned about 26% in 2020, said someone close to the company.
John Kerschner, head of U.S. securities yields at Janus Henderson Investors, has increased mortgage-backed commercial holdings in the company’s multi-operator revenue fund to 9% from about 3%.
In more vulnerable segments of the market, it has focused on buying bonds at a higher rate. At the same time, it has bought underinvestment rate bonds in the multifaceted housing, industrial and biochemical sectors.
“For money like us, money managers, this is a great opportunity to look at what we think of as cheap bonds,” he said.
Asset-backed bonds trade at higher yields than corporate bonds at the same rate during market turmoil because they have a less stable buyer base. Money moves swiftly out of the region when investors turn fearful and slower to return when a better feeling ensues.
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Towards the end of the year, splits on CLO bonds with a double-B rating had tightened around 3.5 percentage points since May, bringing back 64% of the amount they extended earlier in the year, while splits on corporate bonds had an estimated 92% return, according to data from BofA Securities and ICE Data Services.
Leverage usage by many fund-backed bond buyers also played a part in the slow recovery of 2020, investors and analysts said.
When markets collapsed earlier in 2020, many companies felt pressure from banks to sell at a steep loss to meet or block margin calls. Months later, some people still lack the power to buy.
An obvious example is residential mortgage investment trusts, which typically buy residential mortgage debt but may also purchase commercial mortgage securities.
After facing severe pressure from banks, residential mortgage REITs in the FTSE NAREIT Mortgage RETS Index held $ 324 billion of assets on Sept. 30, down 37% from the end of 2019, according to a Wall Street Journal survey.
“A lot of people with good trades were brought in, tested for a normal recession, and then the world collapsed,” said Chris Flanagan, head of secure product research at BofA Securities. The result was a “capital downturn,” which has slowed the market.
Investors have been pouring more money than ever before into renewable energy such as solar and wind. WSJ will look at how the pandemic, lower energy costs and global politics have led the rally – and whether it can survive.
Write to Matt Wirz at [email protected] and Sam Goldfarb at [email protected]
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