The Long View
Chart of the Week
A visual snapshot of the trends shaping the economy and the market.
By James Faunce | January 11, 2018
Junior subordinated hybrid debt and perpetual preferred stock issuance jumped meaningfully for midstream issuers in the second half of 2017, as this week’s chart demonstrates. The midstream sector, dominated by… Read More
By Scott Ellis | January 4, 2018
First, Happy New Year to everyone out there! For the first chart of the week of the new year, I’ve taken a deeper look at the potential winners and losers… Read More
By John Swarr | December 21, 2017
Before bitcoin grabbed all of the headlines this November, a widely talked about trade in 2017 had been the short-volatility trade. One popular trade investors have used to monetize the low volatility environment, XIV, has gained almost 200% this year. Although these returns don’t stack up with bitcoin’s run in 2017, the fundamentals driving short-volatility strategies are much clearer. But before discussing why the past year has been supportive of short-volatility strategies, I want to discuss two types of strategies first.
By Jason Merrill | December 14, 2017
The lifecycle of a collateralized loan obligation (CLO) is typically characterized by an initial warehouse/ramp-up period, during which the CLO manager purchases collateral to back the CLO. This is followed by the reinvestment period, during which the CLO manager actively trades the portfolio based on a particular strategy. The reinvestment period is then followed by the amortization period, during which time the proceeds from sales or paydowns are used to amortize the CLO debt tranches and wind down the deal. The length of the reinvestment period is sometimes used by investors as a proxy for the length of the deal in general, with an adjustment for where in the capital stack the investor is located. CLO debt investors used to complain about reinvestment periods getting longer. For post-crisis deals, it was common for the reinvestment period to be four years long. Then, five-year reinvestment periods became the “new normal,” and managers that could get away with it would opt for the longer reinvestment period, thus locking up management fees and AUM for a longer period of time. The industry was aware that extending the reinvestment period was a positive for CLO managers and equity holders, but a negative for debtholders. What could debt investors do to counter this sea change in the industry?
By Jen Ripper | November 30, 2017
Nearly a year ago, the commercial mortgage-backed securities (CMBS) market officially adopted risk retention rules as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The rules were designed to align the interests of sponsors and investors. Risk retention requires lenders originating loans to retain a 5% slice of each CMBS deal for five years, thereby forcing issuers to have “skin in the game.”
By James Faunce | November 16, 2017
As the cycle progresses further into its late stages, upward rating migration may continue due to improving fundamentals, operational enhancements, and active balance sheet repair. After spending a good portion of the past year repairing their balance sheets through asset sales and debt pay downs, energy companies have been the prime beneficiaries of positive rating actions in 2017. According to Barclays, of the credits that have seen upgrades into investment grade year to date, a full 60% of the volumes have occurred in the energy sector. Credits outside the commodity related sectors have only represented 30% of total volumes and those were largely driven by credit specific factors.
By Mark Heppenstall | November 9, 2017
After five years of disappointing returns, this year’s double-digit gains in gold prices have surprised many investors, especially in light of the Federal Reserve’s (Fed) continued monetary policy tightening. Conventional wisdom held that as the Fed hiked short-term interest rates, the higher opportunity cost to own gold would put additional downward pressure on prices.
By Scott Ellis | November 2, 2017
With the energy markets seemingly rebalanced and oil prices hovering near $55 per barrel, we have decided to take a closer look at the Oil Field Services sector. This subsector is the weakest link in the energy supply chain as these companies largely rely on exploration and drilling capital expenditures. It was the most distressed energy subsector in 2016 and has been the last to recover. Still, enough has transpired to suggest a potential inflection point in fundamentals in 2018 or 2019, with many of the survivors effectively extending their own runways via opportunistic refinancings. Despite the spread compression in 2017, as seen in this week’s chart, this subsector of High Yield Energy still has higher credit spreads than the overall High Yield Energy sector and therefore is worth drilling into further (pun intended).
This material is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
Opinions and statements of financial market trends that are based on current market conditions constitute judgment of the author and are subject to change without notice. The information and opinions contained in this material are derived from sources deemed to be reliable but should not be assumed to be accurate or complete. Statements that reflect projections or expectations of future financial or economic performance of the markets may be considered forward-looking statements. Actual results may differ significantly. Any forecasts contained in this material are based on various estimates and assumptions, and there can be no assurance that such estimates or assumptions will prove accurate.
Investing involves risk, including possible loss of principal. Past performance is no guarantee of future results. All information referenced in preparation of this material has been obtained from sources believed to be reliable, but accuracy and completeness are not guaranteed. There is no representation or warranty as to the accuracy of the information and Penn Mutual Asset Management shall have no liability for decisions based upon such information.
High-Yield bonds are subject to greater fluctuations in value and risk of loss of income and principal. Investing in higher yielding, lower rated corporate bonds have a greater risk of price fluctuations and loss of principal and income than U.S. Treasury bonds and bills. Government securities offer a higher degree of safety and are guaranteed as to the timely payment of principal and interest if held to maturity.
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