Muzinich veteran: corporate credit in best shape for generations

By on

Muzinich Credit Opportunities manager Mike McEachern says corporate credit is in its 'best shape for generations' despite a view that volatility is set to pick up.

His unconstrained fund is currently avoiding treasuries, has no investment grade bonds, and is wary of interest rate sensitive securities.

Credit veteran McEachern (pictured) told Citywire Global: 'Spreads are at a historic average but the fundamentals are much better than average and probably in the best shape for generations To us, in a low interest rate environment the optimal strategy is to hold earning assets and then the issue is about where you place your money. We like short duration high yield and bank loans and we like some European high yield.'

The fund was launched to US investors in January and the New York-based specialist credit boutique is planning to launch a Ucits version to UK and European investors within the next three months.

It has an absolute return strategy, targeting Libor plus 5-7%, with around half the volatility over the market cycle and will be able to invest across the globe, with the flexibility to move between investment grade, bank loans, and investment grade bonds.

The fund is currently split one third in US high yield and US bank loans respectively, with a further 10% in European high yield, while the remaining 25% is in US 'special situations' with a focus on the energy sector, and in particular the winners and losers of the US shale gas revolution.

'There is a lot going on in the [natural gas] sector with companies spending a lot of money looking for natural gas and investing in exploration. Some are better at it than others and geography is very important as those with natural gas fields further away from the central hub generally at a disadvantage.'

Bank loans positioned for rise in interest rates

McEachern likes bank loans because the risk is spread by the bank selling on the term loan to a raft of institutional investors. He believes coupon returns will start to go up, as banks can reset the coupon depending on the inflation rate, which he expects to tick up in the next couple of years.

'A fairly deep list of institutional investors now own these term loans and they have a maturity that can be prepaid at any time. The banks still retain the servicing rights and the relationship with the client, so they keep a portion of it, but instead of lending $200m-$300m to a company, they will lend $25m and syndicate the rest. 

He added: 'The yields are generally comparable to BB/B bonds but the banks can have the ability to reset the coupon based on where interest rates are.'

McEachern is eyeing an uptick in interest rates over the mid term that will make the bank loans a more lucrative investment.

'We think bank loan coupons will start to go up and that's where they will differentiate themselves [from conventional bonds] in terms of performance. We don't know when interest rates will move up but it's obvious that the next cyclical move will be higher and we need to manage that risk and think bank loans are positioned well for that.'

Elsewhere, McEachern is eyeing further opportunities in European credit where he says many companies have remained cautious and hoarding piles of cash.

'High yield has done extremely well but there are still credit-positive events going on in Europe because it's such a tough environment. Companies are reacting to that by remaining conservative in the way they manage their balance sheets, which suits us.

'Right now we like yield and higher yielding assets but at a different point in the credit cycle the strategy will have no high yield in it. This is not a permanent allocation to high yield. When things in the economy are difficult we de-emphasise credit risk but we don't see that in the next year or two.'