European High Yield June Survey - Results!

Summary

*** THE JULY EUROPEAN HIGH YIELD SURVEY IS NOW OPEN – PLEASE PARTICIPATE >HERE< ***

The June European High Yield Survey had 52 respondents. c50% of respondents were Portfolio Managers, with CIOs, Strategists, Credit Analysts, Sales and Syndicate Desks making up the remainder. The aggregate estimated AuM represented by the survey is a meaningful proportion of the European High Yield market with both Long Only and Hedge-funds participating.

We split the respondents into 2 groups – “Risk Takers” PMs and CIOs and “All” – all respondents we do this to differentiate between those with authority on fund positioning and those with input on fund positioning.

Overall current positioning remains defensive in terms of ratings and sectors. European High Yield (EHY) ‘s current valuation is predominantly fair to expensive with only 19% of Risk taking respondents seeing current valuations as cheap. Despite fair to expensive valuations Risk Takers positioning is expected to be overweight in the next 6 months with c.52% of respondents bullishly positioned.

This maps relatively well to expectations of increased fund flows for the remainder of 2020 as well as return and year end spread levels. FY 20 returns expectations appear heavily reliant on low default rates. Covid and Economic growth remain the key risks to High yield performance according to Risk Takers with defensive positioning recognized as the consensus trade. That said, there are Sectors with positioning at both extremes of the spectrum suggesting issuer specific / contrarian bets. Weak covenants are a known known with investor Acceptance attributed the 2nd most important factor for its’ growth.

Returns

The majority of respondents expect European High Yield to Return return between 0 and + 5% for 2020 implying a c5 to 10% return in the second half. Default rates expectations are lower for Risk Takers with 37% seeing default rates 2 to 5% vs 28% of all respondents. Year end spread expectations are more uniform across the 2 groups with c50% of respondents seeing spreads at 250-500bps at year end.

For context the Barclays Bloomberg Pan European Index currently has a spread of 500bps. With an option adjusted duration of c.4 and a starting H1 total return of -5.82%, spreads and default rates will need to be at the low end of survey expectations to hit the 0 to +5% FY20 return.

Risks

Stock selection is a one of the most important themes coming out of the survey with expectations of poorer restructuring outcomes, especially in the more Junior parts of the capital structure expected. Over 80% of respondents see Idiosyncratic risk being more important than beta in driving EHY returns in the next 6 months. Issuer specific CDS is ranked the best hedge for European High Yield over the next 6 months by risk takers and 2nd overall when looking at all respondents, and default risk is ranked 3rd in terms of out right risks to Portfolio returns in 2020.

In terms of outright risks to portfolio performance Covid Resurgence ranks highest across both Risk Takers and All respondents, Interestingly the top 3 risks to portfolio returns are the same across Risk Takers and all respondents Covid Resurgence, Defaults and Economic Growth. For risk takers Defaults sit in 3rd place whilst across all respondents the Defaults and Economic growth take joint second position.

Positioning

Current Portfolio positioning reflects this with the sectors with the largest underweight being Retail Leisure, Energy and Autos. Largest Overweight positions were Telcos, Technology,Media, Healthcare. 8 out of 19 sectors have both Very Underweight and Very Overweight suggesting whilst the general consensus trade is defensive there are areas where Risk Takers are willing to take contrarian views.

In terms of ratings Risk BB+ or better has the largest overweight at 46% of positioning, followed by single Bs at 40.7% of positioning. BBs have a reasonable overweight at 37% of positioning but are regarded by far the most Neutral of rating buckets at c48% of positioning CCCs have the most extreme positioning with Underweight accounting for c63% of positioning. Cash is has the 2nd largest underweight position at c41%.

Overall It appears risk takers are taking a barbell approach to risk rating wise High BB or better vs. Single Bs. The consensus defensive up in quality, BB, defensive sector trade is in play but it does look like there is contrarian risk taking within sectors.

New Issues and Covenants

Issuers are expected to continue to have the upper hand with the majority of respondents expecting a decline in covenant protection and bond documentation. “Reach for Yield” is listed as the number 1 factor explaining weak bond and loan documentation. Number 2, is investor acceptance. 51% of respondents disagreed or strongly disagreed that June’s new issues had better than average documentation compared to just 3.7% who agreed. Similarly c48% of respondents strongly disagreed or disagreed that new issuance documentation was better than average compared with 7.4% agreeing.