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Sterling corporate bonds: an investor’s guide

 

The essential :

KEY POINTS

  • Similarly to EUR corporate bond markets, the sterling credit market experienced the effects of crisis-induced evolutionary forces, namely a rebalancing of weights between financials and industrial issuers, and the sharp rise of speculative grade debt, though from very low levels.
  • The current structure still shows a strong presence of financials (40% of overall debt value), while defensive sectors such as telecoms and utilities dominate among non-financial issuers.
  • One of the most attractive features of the sterling corporate bond market is represented by its higher component of “non-domestic” issuers with respect to Euro and US corporate bond markets. UK issuers in fact account for less than 50% of both non-financial and financial IG sterling corporate debt.
  • However, the most peculiar feature of the IG Sterling corporate bond market is represented by the high average duration of its debt. Modified duration of Sterling IG corporate bonds is close to nine years for non-financials and above six years in the financial sector. Time to maturity averages close to 14 years, as 40% of non-financial issuers have a maturity above 10 years.
  • In this respect, the more duration rises, the less outstanding debt is available in EUR corporate bonds, while the opposite is true for GBP non-financial corporate bonds: the latter is the only major provider of yield and spread in the very long duration buckets, as EUR core financial and non-financial debt is very limited in size.
  • In a nutshell, the sterling market has strong characteristics that can be summarised as good quality and long dated which, in fact, are a reflection of domestic demand. A drawback is obviously the liquidity which, on average, is lower than EUR or USD, as you have large proportions of buy and hold investors.

Introduction

Along with the EUR denominated corporate bond segment, the Sterling credit market plays an important role in matching European companies’ funding needs with corporate bond investors’ demand.
Therefore, the aim of this focus is to provide investors with an overview of the Sterling corporate bond market, its recent trends and the main features of the current structure, together with its positioning in the global credit arena. In particular we analysed the peculiarities of this market and investigated the role of long-term investors behind them: a section is therefore dedicated to pension funds and recent news on regulation affecting their activity. The portfolio manager’s actual view is a relevant part of the piece, offering an insight of real market players on opportunities available to investors, especially in terms of diversification and credit quality enhancement.

 

Valentine AINOUZ, Strategy and Economic Research at Amundi
Sergio BERTONCINI, Strategy and Economic Research at Amundi Milan
Grégoire PESQUES, Head of Global Corporate London

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