PGIM's Peters Sees Only Downside in Bank Loans, Favors Junk DebtBy and
Peters says he avoids bank loans because many are callable
He likes high-yield health-care debt, warns on retail, energy
Greg Peters, who helps oversee more than $650 billion at PGIM Fixed Income, said it’s a mistake to seek yield in the bank loan market because so many borrowers are able to exit the deals and find lower rates.
“There’s nothing but downside, there’s really no upside,” Peters said Friday on Bloomberg Television. “I’m much more skeptical around bank loans, I actually like U.S. high yield better. If you just look at the refinance ability in the bank loan market, it’s over 50, 60 percent that’s callable.”
Fixed-income managers in search of attractive yields are weighing whether it makes sense to plow into below-investment-grade corporate debt after junk bonds returned about 14 percent in the past 12 months. Peters, who said in March that it was time to reduce credit risk, said that junk still offers a better opportunity than bank loans.
That contrasted with the view of Bonnie Wongtrakool of Western Asset Management, who appeared alongside Peters on “Real Yield,” a program about fixed-income markets. She agreed that the callability of the loans could be an issue, but said they provide better relative value. Junk yields have plunged this year to an average of 5.48 percent, the lowest since 2014, according to Bloomberg Barclays index data.
“The valuations are a lot fuller than they used to be, particularly in high yield,” Wongtrakool said. “We have taken some of that exposure down, and put that into bank loans.”
Investors have been cautious toward junk bonds even amid a rally. They pulled about $568 million from funds that buy the debt in the week that ended May 24, according to data provider Lipper, bringing net high-yield outflows for the year to $8.6 billion.
Peters said that junk investors need to be selective and shouldn’t assume that energy debt will sustain the gains tied to increases in oil prices. Borrowers in the industry might not be able to count on easy access to credit indefinitely, and that could burn investors when the “music stops,” he said. Peters also warned about risk tied to the retail industry.
“Access to the capital has helped these balance sheets kind of limp along,” he said. “We think health care is a much, much better sector to play, and has done really well this year.”