LONDON Jan 22 Widespread enthusiasm for
corporate bond investments in 2009 is starting to look like
hype, and investors should inject some caution into their
outlook, said Andrew Sutherland, head of credit at Standard Life
"This is more of a curate's egg than a golden goose," he
told journalists at a briefing on Thursday. SLI manages some 43
billion pounds ($59.24 billion) in fixed income assets and is
one of the top five UK fixed income managers.
Corporate bonds have attracted a lot of attention from
investors in recent months as spreads seem to have widened out
beyond the likely risk of default.
Sutherland said that with bank base rates heading towards
zero, and continued equity market volatility, retail money is
now moving in to corporate bonds which seem to offer low
volatility and a higher income than gilt yields or cash.
But he warned that problems in the banking sector are likely
to keep spreads wide for some time, so in the medium term there
is little possibility of capital gains. In bond markets, prices
rise as rates, or yields, fall and spreads come in.
Sutherland also warned of concern about the amount investors
would recover in the case of corporate defaults, which SLI
predicts will continue at higher sustained levels than in recent
"For Lehman bond investors, the recovery rate was about 10
cents in the dollar, and for some of the big SIV unwinds it was
15 to 20 cents in the dollar," he said.
Historically, the recovery rate has been about 40 cents in
the dollar, and Sutherland is concerned this is still being used
to assess the attractiveness of current bond spreads. "We think
it is going to be lower," he said.
The subordinated bank debt market is already in disarray
following Deutsche Bank's (DBKGn.DE) December decision not to
call a lower-tier 2 bond in January due to cost reasons -- the
first major bank to make such a move.
"The market had been discounting early repayment for a lot
of subordinated bank debt so this sent prices down...All the
subordinated tranches are now trading very cheaply," he said.
Subordinated bank debt had been popular with some credit
managers up to Sept 2008, as spreads widened out to their March
levels and the top tier names were seen as unlikely to go bust.
But the Deutsche decision to delay repayment until final
maturity has flummoxed the market. Those managers who held less
subordinated debt have performed better, as they have not had to
mark to market.
"We had only a modest exposure to subordinated bank debt,
owning mostly lower tier 1 and senior, but some investors have
large holdings in subordinated capital," said Sutherland. "That
is dead money at the moment, without government support." He
estimated that some 40 billion sterling of debt is at risk.
He added that although SLI had no exposure to U.S. brokers
last year, it was starting to build exposure to some of the big
He is also targeting telecoms and utilities -- regulated
names such as E.ON (EONGn.DE) and General Electric (GE.N), as
well as France Telecom FTE.PA and Telecom Italia (TLIT.MI).
He is less keen on Deutsche Telekom (DTEGn.DE) as it has
been more acquisitive, he said.
(Editing by David Cowell)