What You Need in Bond Rout Is Courage, Oppenheimer's Memani Saysby
Plus, do your homework to find opportunities amid energy slump
Glencore among companies with flexibility to survive, he says
The worst of times for U.S. corporate-debt investors can actually be the best of times, according to Oppenheimer Funds Inc.’s Krishna Memani.
"You just have to do a bit of work, have a long horizon and some courage to buy in this environment," the chief investment officer at Oppenheimer Funds, which manages about $217 billion, said in an interview.
U.S. high-yield debt is off to its worst start to year since 2008, with energy issues posting the largest losses, as an economic slowdown in China helped push oil to a 12-year low last week. The prolonged slump in crude, which has shaved almost 70 percent off its price in 19 months, promises more pain for commodities-related debt and threatens to spread to other parts of the leveraged-finance market, UBS Group AG said this week.
The premium over Treasuries that investors demand to hold junk energy bonds widened to a record 1,790 basis points this month, compared with a 10-year average of 546 basis points, a Bank of America Merrill Lynch index show.
Commodities trader Glencore Plc is among the companies to see its bonds tumble as China’s slowest economic expansion in a quarter of century clouded its business outlook. And Freeport-McMoRan Inc.’s bonds slid on Thursday after Moody’s Investors Service cut the natural-resources company’s credit rating four levels to junk status, citing a fundamental shift in the operating environment.
"It’s not to say Freeport or Glencore or others don’t have issues," said Memani. "But are they going bankrupt tomorrow or in two years’ time? I don’t think that’s a realistic thing."
Glencore will survive the downturn, he said, because it has flexibility to continue to deleverage the balance sheet with a cost structure that isn’t too onerous. He also said resource prices won’t remain "at their current depressed levels forever.”
Oil prices have risen 28 percent from the 12-year low reached on Jan. 20, and jumped Thursday on a report that the Organization of Petroleum Exporting Countries may consider an output cut.
"For some companies, operating performance is going to fall off the cliff," Memani said. "However, that’s not the whole sector. Right now, nobody wants to touch any parts of any of these companies. That’s where you see opportunities are created."