Three in Five Podcast

Episode 28: Three public credit questions for Linda

Steve sits down with Linda Kong Ting, Director, Fixed Income Credit Analyst at SLC Management, to discuss trends in issuance in the investment grade public market and the shift towards longer tenors.

Steve Peacher: Hi everybody, this is Steve Peacher from SLC Management, thanks for listening in to this episode of “Three in Five,” and today I’m joined by Linda Kong Ting who's an analyst in our fixed income group in New York. Linda thanks for taking a few minutes.

Linda Kong Ting: Thanks so much for the time, Steve.

Steve Peacher: So we want to talk about the investment grade corporate markets, one of the big stories of course in the coming out of the pandemic has been how strong risk assets have been, and in fixed income spreads for corporate bonds have tightened dramatically from the from their wides in the middle of the pandemic. And are actually now fairly skinny I suppose by historical measure. So where do you see that investors can go if they're looking for extra yield in public credit?

Linda Kong Ting: Well, Steve that's a pretty interesting question because very little really looks cheap these days. Corporate index spreads are you know call it the high 80s. The long corporate indexes is sustained the low on 20s, on corporate spread curves are really historically flat, whether it's long or intermediate or seven to ten years versus three to five years. On the short end we've been involved in business development companies or BDC’s which are private lenders to mid market companies. Those spreads can be sort of in the high one hundreds. We kind of feel that the most prominent a long-standing managers can still offer a bit of incremental yield without compromising credit quality. In the long end some emerging markets sovereign credits are interesting, especially those of commodity exposure as remain somewhat wide, despite the rally in energy and a lot of other more directly commodity exposed names.

Steve Peacher: You know the investment grade public market is a huge market much bigger than many people think, and it's very much a new issue market, so you've got companies issuing in the market all the time. If you look at issuance trends, trends in new issues that have been brought to market, has anything changed after the pandemic versus what you would have seen before the pandemic?

Linda Kong Ting: Oh yeah I’d say that you know one thing I’ve observed, is that since the financial crisis we've seen issuers try to do longer and longer issuances to try and lock in rates, but these tended to be names on sectors were already kind of active in the long end. Overall I’d say the drift toward longer papers pretty well justified by the flatness of the credit curve the past 10 years for the vast majority of IG issuers. Now I think we're seeing issues that traditionally focused on shorter paper are now doing longer and longer issues like REITs some business development companies. Pre-pandemic there was really no market longer than five years for BDC paper, for instance, and now we have multiple issues with 7-year people are standing and even just got a 10-year issue in the marketplace.

Steve Peacher: So I if I was a CFO at any entity that was issuing this market, I would be trying to borrow with the longest tenor I could, given how low rates are and, as you say, the credit spreads are flat so I’m not paying a lot more spread as an issuer to go out the curve, so I get why it's attractive for issuers, but why has the buy side embraced these longer tenors you know from an investment standpoint?

Linda Kong Ting: Well, I think there's really a variety of factors. In terms of the general move in favor of 20 or longer date of issuance, I’d say that the low interest rate environment globally has meant that hitting yield bogeys of 3% or 4% for real money buyers like insurance and pension funds has just become that much more difficult in shorter dated paper or even a high yield. At the same time, long dated obligations to meet have also increased at insurers and pension funds have moved more to de-risk their assets, as their funding statuses improve. Therefore, short of moving into say alternative assets, this is one of the few easy levers you can pull for some yield. So sub-sectors like REITs and BDCs have also greatly improved in credit quality since the financial crisis and operators that remain are far more conservative than they had been before. 

Steve Peacher: Well you know the corporate bond markets are huge markets, so even in a market where spreads have tightened a lot, I think your comments highlight, there's always you can always find some opportunity in the market because it's so big and there's so many different issuers. So let me end with a personal question, of course, you moved from our Toronto office to New York, just before the pandemic so, you know I don't know if that was good luck or bad luck, but now that New York's kind of coming out and things are have opened up in New York, what have you been doing in New York to enjoy the fact that things are opening back up?

Linda Kong Ting: Well Steve, moving to New York was definitely a great move for me personally. I don't know if you know this, but I’m a huge comedy fan, so it's been really great to get back to the comedy clubs. Even though I really enjoyed the outdoor shows with guys yelling and parks. Recently I discovered that the actor who plays Mafee on “Billions”, Dan Soder, is actually really hilarious as a comedian as well.

Steve Peacher: Well, “Billions” is actually one of my favorite, you know, we've done some binge watching on “Billions,” so that's great. And now that I know that if we set up an internal comedy club you'll be the first person we call to do some stand-up. So listen, thank you for taking a few minutes great comments on the market, and thanks to everybody for listening to this episode of “Three in Five.”

Linda Kong Ting: Thanks, Steve.

This podcast is intended for institutional investors. The information in this podcast is not intended to provide specific financial, tax, investment, insurance, legal or accounting advice and should not be relied upon and does not constitute a specific offer to buy and/or sell securities, insurance or investment services. Investors should consult with their professional advisors before acting upon any information contained in this podcast. This podcast may present materials or statements which reflect expectations or forecasts of future events. Such forward-looking statements are speculative in nature and may be subject to risks, uncertainties and assumptions and actual results which could differ significantly from the statements. As such, do not place undue reliance upon such forward-looking statements. All opinions and commentary are subject to change without notice and are provided in good faith without legal responsibility.