Asian institutions stocking up on junk, says Neuberger Berman
Even conservative Asian institutions are turning to US non-investment grade fixed-income products such as high-yield bonds and collateralised loan obligations (CLOs) to generate returns, says Neuberger Berman's Asia-Pacific head Nick Hoar.
The New York-based asset manager is seeing interest from a range of institutions, including sovereign wealth funds, family offices and insurance firms in addition to ultra-high-net-worth investors.
“There are Asian-based insurance companies which, by their nature are conservative, but in this low-rate environment are seeking higher returns and they are looking to the US credit markets to get them," he notes. “If you’re a Hong Kong-based insurance company and need to pay out [premiums] at a certain rate, you have got to earn at a certain rate to avoid a mismatch.”
At the core of these products are US corporate bank loans generally issued as a result of a corporate action and are rated as sub-investment grade. The debt is issued to institutional investors in the form of high-yield bonds ad leveraged loans.
They are part of a more than $500 billion market for high-yield debt financing in the US, including funds that invest in debt securities, or are portfolios of managed loans, or CLOs. Due to their high-yields – with an average IRR of 17% for CLOs – and low default rates, such products are attracting institutions with a typically conservative profile, reflects Hoar.
Over the past two years, Asian institutions have started to look again at CLOs, essentially a cash vehicle of US corporate bank loans with leverage, to get exposure to the US credit markets, he adds.
The historical average default rate on high-yield debt is “under 1% today”, says Hoar. “The historical average is about 4%. Our house view is that we think defaults will continue to be around 2% for the next few years.”
During the first quarter of 2012, investors allocated $31 billion to high-yield bond funds globally, according to research firm EPFR Global.
Within Neuberger Berman, high-yield and corporate bank loan products, including CLOs, comprise $25 billion of its total $200 billion in AUM.
It has an offshore high-yield fund with about $6.5 billion in assets, of which about 85% is institutional money, including sizable allocations from pension funds globally, Hoar notes.
The firm sees growth in its non-investment grade fixed income products globally, as they provide exposure to US firms “and corporate America is in very good shape”, says Hoar.