Market updates

Ultimately, the fact that the Klockner deal is not marketed as a green loan but still includes ESG-related covenants is proof that ESG needs to be integrated into an investor’s credit work as a matter of course, something we have been arguing for years.

We think it is indeed time to begin the search for recovery stories and deleveraging credits in sectors where the execution strategy is likely to succeed.

I think it’s likely we’ll see new cycle tights for the European CLO sector this year, so in addition to healthy income we believe there is plenty of room for capital appreciation as prices are being pushed higher in the secondary market.

We think this current pause in the global rally is healthy and gives investors a rare moment to reassess, but from a fixed income credit point of view we would not expect too much of a dip.

European ABS primary markets have started 2021 at the solid pace that most market participants expected. The market saw a patchy Q4 in which activity petered out early, not helped by the dominant UK market suffering some hesitation whilst tightrope Brexit deal talks went to the wire, but also as a result of a rather more simple fatigue that appeared to have set in.

In our view the rationale for the premium is certainly weakening and, of course, we can no longer call it a ‘Brexit’ premium.

George Curtis discusses credit markets in Q4 2020 and provides his outlook for the year ahead

TwentyFour AM partner and portfolio manager Douglas Charleston discusses Q4 performance for ABS markets and provides his outlook for 2021.

TwentyFour AM partner and portfolio manager Chris Bowie looks back at investment grade credit market performance in 2020 and provides his outlook for 2021

The market craves stability and transparency. As an efficient auction mechanism, it relies on visibility to price stocks and economic activity. Typically, the market—and people in general—do not like change, but this time, as we stand at the precipice of a tremendous change, what we are seeing is actually a potential return to real stability, normality and transparency.

For high yield issuers 2021 has started in a similar vein to 2020, with the technical backdrop providing an attractive environment for capital raising.

Our analysis indicates European ABS investors can carry forward little concern about nasty default surprises, and this is likely to be important when considering total returns for 2021.

At the moment CLO spreads are tightening, as they are right across credit. However, we haven’t had any CLO primary deals come to market so far in 2021, so we are operating in a bit of an informational vacuum, at which point these cross-asset class comparisons can be useful.

As we have said many times over the past few months, this cycle is likely to be remembered (among other reasons) as being exceptional for its unprecedented momentum.

So while we do believe inflation will push higher in 2021, we don’t think this will be a major issue for the central banks.

Elena Rinaldi looks back at the performance of European CLOs in 2020 and explains how post-vaccine sentiment should help boost recovery in 2021, providing a positive outlook for CLOs.

Partner and portfolio manager Gary Kirk discusses why he thinks AT1s continue to look attractive in the search for yield. 

Partner and Portfolio Manager Felipe Villarroel reflects on markets in 2020 before giving his inflation outlook for 2021

In his latest video, George Curtis discusses our views on high yield defaults over the last few months and what he thinks we can expect in 2021

While we enter 2021 with plenty of negative headline news on the virus, along with the associated inevitable downgrade or delay to the economic recovery, in our view the technical position remains just as firm as it has been in the last nine months.

Yesterday the ECB released their guidance to banks regarding shareholder distributions. They have reiterated that banks should exercise extreme moderation on variable remuneration (bonus payments) and have set limits for dividend payments to equity holders and prudence on any share buy-back schemes.

As we are nearing the end of 2020 and assessing pockets of potential value going into 2021, we have to question the strong rally we have just experienced and assess the attractiveness of the hybrid spread multiple and whether or not we can expect further compression.

ESG investing was tipped to be the biggest theme of 2020 for financial markets, but was swiftly superseded by the COVID-19 pandemic, which has dominated investors’ thoughts since Q1. We thought it was important to revisit this topic and explore if and how the pandemic has changed the world of ESG.

We have now retraced some 90% of the March widening in European high yield (on a spread basis and relative to the January tights), a recovery trend we expect to continue as economies open up and demand bounces back.