Credit Universe

Key takeaways

  • In search of higher returns investors started to tap the high yield bond (“HY”) market as the new “hunting ground” to compensate for the former low (or even negative) yielding interest rate environment.
  • The credit market is not limited to HY bond investments but rather offers a wide and deep investment universe.
  • Investors can capitalize on a wide variety of income streams. Such income sources are, for example, specific local or niche markets, complexity premiums in the structured credit market or illiquidity premiums for less traded instruments or private debt loans.
  • Sourcing and analysis of credit investments are complex and time-consuming. Credit risk is not limited to default and duration risk, and therefore, the analysis requires both deep expertise and a long-lasting experience.
Credit Fixed Income Investment

Tapping the depth and breadth of the credit universe

The credit universe is deep and wide. Besides government and investment grade bond investments, many investors have started to tap the high yield bond (“HY”) market. As a consequence, the global HY market has substantially grown to more than USD 2 trillion in size over the last years. 

However, there exist many other credit markets, which differentiate in terms of risk (i.e. expected corporate default risk), liquidity, complexity and return expectations. For example, we prefer investments in senior secured loans vs. traditional high yield bonds thanks to their superior default statistics. In addition, loans don’t face a relevant duration risk given their embedded floating rate mechanism they bear. Please see below the total return chart of the S&P US Loan Index in a historical perspective for the asset class, which resulted so far in an return of ~5% p.a. with a constant yield income.

US Leveraged Loan TR index – Attractive long term yield generation

US Leveraged Loan TR index - Attractive long term yield generation

Source: : Moody’s (average between 1981-2017)

As outlined above, the credit investment universe is characterized by its depth and breadth. Our investment team has a multi-decade long experience in investing in the asset class and has enhanced the investment approach on an on-going basis. It is our experience that: The investment universe does constantly evolve; many niche markets exist, inefficient market pricing comes and goes, complexity premiums can be gathered and that active sourcing and risk management is warranted.

Portfolio framework for a constant efficient yield generation

Portfolio framework for a constant efficient yield generation

Source: Alpinum Investment Management

Spread level between large & middle market loans

Private debt markets offer an attractive “illiquidity” premium, which can be gathered by investors who can and/or willing to invest in less liquid investment vehicles. The chart below illustrates the additional spread level generated between liquid large-cap and middle-market loans.

Please find more information about private loans in the section direct lending on our web-site.

Spread Level Large and Middle Market

Source: Alpinum Investment Management

Short maturity bonds

Bonds with a short maturity bear a low duration risk, given the fact that they pay back the principal in a short time frame and the capital can be re-invested at potentially higher interest rates. However, even more, important is another beneficial feature of short term bonds: Corporate bonds with a short maturity tend to suffer a much lower default rate, which is true for both investment grade (“IG”) and high yield bonds (“HY”). The table below of Moody’s cumulative default rates for corporate bonds well illustrates this observation. Please find more information on this topic in section short maturity bonds on our website.
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