Intermediate Capital Group Plc, an asset manager that oversees 13 billion euros ($18 billion), is increasing investments in European leveraged loans because they offer better value than high-yield bonds.
The volume of loans in ICG’s Total Credit Fund has risen to 42 percent from 36 percent when the fund started in July 2012, according to Garland Hansmann, a high-yield fund manager at ICG in London.
“We are finding it easier and easier to find attractive loan investments than in high-yield bonds, where value is evaporating a lot faster than loans on a risk-adjusted basis,” Hansmann said.
Returns on junk-rated corporate bonds in euros shrank to 7 percent this year from 21 percent in November 2012, according to Bloomberg bond index data, while the average yield on the securities fell to 4.2 percent from 5.6 percent over the same period. Demand for speculative-grade debt will erode credit quality among first-time issuers, Moody’s Investors Service predicted this week.
ICG also reduced the fund’s investments in collateralized loan obligations to 2 percent from as much as 20 percent last year, said Hansmann. The average spread of BB rated European CLOs tightened by 725 basis points over benchmark rates this year while A grade notes narrowed by 250 basis points, according to data from JPMorgan Chase & Co. A basis point is 0.01 percentage point.
CLOs pool high-yield loans and slice them into debt securities of varying risk and return that typically get ratings ranging from AAA to B.
ICG’s Total Credit fund generated returns of 9.2 percent this year, according to the money manager.