A leading corporate credit investor has estimated that large companies issuing in the high-yield credit market have an average of around eight months of liquidity.
Neuberger Berman, which manages the ASX-listed NB Global Corporate Income Trust, stress tested all 506 issuers in its portfolio, looking at the potential length of closures and disruptions, ability to cut cost and defer capital expenditure, short-term liquidity, available bank lines and the timing of maturities.
The trust holds a portfolio of corporate high-yield bonds issued by large, liquid global companies, with an average credit rating of B+.
Its biggest holdings include telecommunications companies Numericable Group and Frontier Communications, Ford Motor Co, energy company Petrobas, aerospace company TransDigm, bank holding company CIT Group, healthcare companies Bausch Health and Teva Pharmaceuticals, gas distributor Targa Resources and Merlin Entertainment.
At the end of April it had no defaults in its portfolio.
Neuberger Berman said: “One of the key conclusions from our team’s stress-testing exercise is that the median issuer within the high-yield market has an estimated eight months of liquidity available to manage through a period of minimal revenues.”
It says high-yield market default rates were below long-term averages in February but “we expect default rates to increase in the months ahead given the unprecedented temporary shutdown of non-essential economic activity.”
At the end of March Neuberger Berman reported that credit spreads in global high-yield markets widened towards 1000-plus basis points.
“Larger, more liquid securities were sold first, as mutual fund and ETF outflows have caused some managers to sell what they could instead of what they would have chosen to sell,” it said.
In its April investor report, Neuberger Berman said spreads had come back in to an average of 760 bps.
It reduced its exposure to bonds issued by companies in the media, leisure and consumer goods sectors, and increased exposure to issuers in the automotive, and real estate sectors.
It reduced its positions in BB and B rated bonds and increased positions in bonds rated BBB and above.
In February the fund’s NTA was down 2 per cent, in March it fell 16.8 per cent and in March it regained 5.6 per cent.