Norway $3 Billion Manager Bets on Bonds ECB Effect Missed

  • Allianz, HSBC Holdings, Barclays subordinated debt attractive
  • Corporate hybrid debt has lagged European Central Bank effect

The European Central Bank’s bazooka doesn’t hit them all.

The ECB’s announcement in March to include corporate bonds in its quantitative easing program has sent borrowing costs toward record lows for issuers in the region. That has investors, such as Daniel Berg, head of global fixed income and currency at the asset management unit of Norway’s biggest bank, looking beyond senior debt to find bonds that may have been overlooked.

Corporate hybrids “have lagged the ECB effect -- there we see value,” Berg, who manages 24 billion kroner ($3 billion) at DNB ASA, said in an interview in Oslo on Friday. Mispricing in hybrid bonds and subordinated bank debt is providing an opportunity for excess returns for managers that are able to make the right picks, he said.

Hybrids issued by Siemens AG, Electricite de France SA, Volkswagen AG and General Electric Co. are among Berg’s top picks, while the subordinated debt of “solid” banks and insurance companies, such as Allianz SE, HSBC Holdings Plc, Barclays Plc and Citigroup Inc. are also attractive.

Hybrid bonds share some of the characteristics of both debt and equity, while ranking in between the two on a company’s capital structure. While the DNB Global Credit fund’s exposure to subordinated debt is capped at 25 percent, there are plenty of options available, Berg said.

“There’s a lot of opportunities within callable subordinate debt in Europe,” he said. “The movements are big because spreads are high. We’ve had some great returns buying callable subordinated debt.”

The bid yield to next call on Allianz Finance II BV’s perpetual note was little changed at 1.47 percent as of 12:09 p.m. in Oslo, according to Composite Bloomberg Bond Trader data. It has fallen from 3.14 percent in mid-February.

While there’s value in subordinated financials, Berg is “skeptical” to the rebound in commodity prices and the potential for a quick recovery in energy companies.

“There we’ve been short relative to index and had great success,” he said. “We’re positive to the big ones -- Total, Shell -- you can be negative to the stock but the debt can be very attractive.”

ECB quantitative easing may have negative consequences on liquidity in the corporate bond market and investors need to get used to higher volatility in price and returns, according to Berg. That provides an opportunity for smaller credit funds with smaller deal size.

“European corporate credit spreads can narrow a bit more,” he said. “The eternal question is how sustainable this is. Fundamentals perhaps don’t justify current spreads, but then you have the central bank. The question is how long the ECB will continue until they stop.”

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