Asset Management – SFI Group
Fixed Income Seminar Stressed Credit Investing
George Heyward September 2015
Core and Specialized Fixed Income Key Information
Comprehensive Offering
USD 39.8 bn assets under management 42 investment professionals with an average of 16 years of experience Global developed and emerging market fixed income solutions across sectors and rating categories Relative and absolute return solutions with customized benchmarks and bespoke investment guidelines Tailor-made investment solutions for institutional clients, such as pension funds, central banks and corporates, independent asset managers, family offices, qualified investors and UHNW clients
Swiss Fixed Income and Liquidity Global Fixed Income and Overlay
UHNW and Absolute Return
Core and Specialized Fixed Income Global Credit and Convertibles
Asian Corporates
Investment process with a fundamental and relative value bottom-up security selection and top-down macro strategy
Emerging Market Corporates
Risk management, investment controlling and best execution are an integrated part of the investment process Source: Credit Suisse As of 31.07.2015 Asset Management
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September 2015
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Global Credit and Convertibles Team Overview Yearly Performance since Inception* Credit Suisse’s Multi Credit and Unconstrained Expertise A team of seven portfolio managers fully specialized in global credit investments. Investment hub in Zurich. Strong track record with attractive risk-adjusted performance of more than six years Solutions are actively managed in terms of their investment approach (top-down/bottom-up) Mutual funds and institutional mandates available across all client segments Investment Universe
Total Assets under Management: USD 5.3 bn
Return
Global Convertibles
11%
Unconstrained Credit
Global Multi Credit
28% 17%
Global High Yield
Global High Yield European Credit
Global Multi Credit
Global Securitized 19%
High Grade Corporates
25%
Global Convertibles
Risk
Global Securitized
Source: Credit Suisse As of 29.05.2015 Asset Management
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September 2015
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Challenging Market Environment Differentiating Corporate Bond Concepts Credit risk premiums have rallied to historic lows with some volatility since summer 2014, driven by retail outflows and idiosyncratic opportunities Credit risk premiums still compensate for risk in the higher quality part of the high yield universe, but do not reward a buy-and-hold approach in the lower-rated segments, such as B and CCC Buy-and-hold may not compensate for possible future defaults
Default Risk Compensation 100%
2000 1800 1600 1400 1200 1000 800 600 400 200 0
80% 60% Average
40% 20%
12/04 07/05 02/06 09/06 04/07 11/07 06/08 01/09 08/09 03/10 10/10 05/11 12/11 07/12 02/13 09/13 04/14 11/14
Spread in Bps
Global High Yield Credit Risk Premiums
0% AA
Barclays US Corporate High Yield Average OAS Barclays Pan-European High Yield Average OAS Sources: Barclays, Bloomberg Monthly data: 31.12.2004 to 30.04.2015
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A
BBB
BB
B
CCC/C
Min Min traded Mean 4Y cumulative default rates Sources: Bloomberg, Credit Suisse As of 31.12.2014
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Challenging Market Environment Historical Beta Returns Mathematically Difficult to Replicate Global funding rates and credit spreads are close to all-time lows, with market-implied default rates indicating fair value for the asset class versus long-term expected losses associated with defaults A global credit portfolio1 constructed today, conservatively assuming no change in rates and spreads for the next five years, would generate approximately 2% total return per year on average Traditional credit investors who expect the same risk/return profile enjoyed by the asset class over the last 20 years will need to complement their current exposure with innovative solutions US BBB Market-Implied Default and Maximum Five-Year Default Probability
Five-Year Expected Credit Beta Total Return 4.0%
10%
3.5%
8%
3.0%
6%
2.5%
4%
2.0% 1.5%
2%
1.0% 2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
0%
US BBB Market Implied Default Rate
0.5% 0.0% Year 1
Max 5Y Default Probability
Year 3
Year 4
Year 5
5Y Expected Credit Beta Total Return
Sources: Credit Suisse, Bloomberg Monthly data: 04.01.1999 to 11.12.2014 1
Year 2
Sources: Bloomberg, Credit Suisse As of 11.12.2014
Global portfolio weighted 67% US, 33% EU, liquid corporate bond universe. Asset Management
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Investment Concept Systematic Investing in Fundamentally Undervalued Bonds Tighter bank regulation, lower trading limits and inventory for investment versus the high growth rates of the corporate bond market has led to higher volatility in individual corporate bonds and sharper moves, as recently experienced Historically, credits that suffered from selling pressure performed well after the initial repricing, with approximately three-quarters of the bonds stabilizing or recovering earlier losses Tactical positioning produces potential outperformance (upside optionality) versus a buy-and-hold approach in high yield
Fallen Angels Development
Fallen Angels versus High Yield
100% 28%
40.0% 20%
20.0%
43% 44%
40%
0.0% -20.0%
Migrating Tighter
Stay in Range
Migrating Wider Source: Barclays As of 31.12.2013
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Avg. of Stressed
2012
2011
2010
2009
200-400bp
2008
400-800bp
2007
800-1200bp
-60.0% 2006
0%
-40.0% 2005
28%
2004
37%
2003
54%
2002
20%
60.0%
2001
60%
20%
26%
2000
80%
80.0%
US HY Source: Barclays As of 31.12.2013
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Investment Concept Characteristics of Deep Discount to Par Investing Credit barbell with a mix of low volatility investments and fallen angels may provide a floor compared to a 100% allocation to high yield bonds, which will have a higher probability of default in aggregate Bonds trading at a deep discount to par do provide a lower downside risk when the bonds are trading to or below expected recovery rates Fundamental positioning creates a credit barbell effect, which lowers downside risk and generates upside optionality
Portfolio Credit Barbell
Deep Discount to Par Profile 120
Portfolio Value in %
100 80 60
Default Rate
40 20
PHONES4U 9.5 2018
100% BB
04/15
03/15
02/15
01/15
12/14
11/14
10/14
Liquidiation Recovery
Going-Concern Recovery
Source: Credit Suisse
Asset Management
09/14
08/14
07/14
06/14
05/14
04/14
03/14
02/14
75% IG, 25% CCC
01/14
0
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Sources: Bloomberg, Credit Suisse Data until 29.05.2015
September 2015
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Performance US Distressed Credit Ten-Year Performance Rebased to 100 Bank of America Merrill Lynch US Distressed High Yield Index
All performance figures are gross figures. Historical performance indications and financial market scenarios are not reliable indicators of current or future performance. Performance indications do not consider commissions, fees and other charges, including commissions levied at subscription and/or redemption. Asset Management
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Source: Credit Suisse Data from 08.08.2005 to 07.08.2015 September 2015
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Investment Concept Finding Optionality throughout the Capital Structure Corporate Capital Structure Hierarchy
Key Takeaways
Lower Optionality Potential
The Credit Suisse (Lux) Focused Bond Fund takes a holistic approach to finding relative value throughout corporate capital structures Maximum flexibility within the fund’s investment guidelines affords its investment professionals full license to construct high-conviction trade pairs Combining both a top-down and bottom-up approach to portfolio construction ensures the risk reflects the prevailing systemic/idiosyncratic themes driving performance Leveraging Credit Suisse’s global network as a leading corporate lender, coupled with our third-party credit partners, delivers deep and thorough credit analysis Target portfolio will reflect a well-diversified base portfolio coupled with cheap upside and downside optionality sourced throughout the corporate capital structure
Low
Bank Loans
Low
Senior Secured Debt
Low
Senior Debt
Medium
Subordinated/ Convertible Debt
High
Preferred Equity
High
Common Equity
Debt
Equity
Higher Optionality Potential
Source: Credit Suisse Asset Management
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Portfolio Construction Major Building Blocks Return
Tactical Opportunistic
Strategic Fundamental
Expected Return1 10%–15%
Expected Return1 >20%
Base Portfolio Expected Return1 2%–3%
Investment Horizon 1 Expected
return indications and financial market scenarios are not reliable indicators of current or future performance. Asset Management
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Portfolio Construction Overview Building Blocks Strategies
Investment Horizon
Current Allocation
Expected Return1
Current # of Positions
Base Portfolio
Liquid corporate bonds primarily in the investment grade space Target to earn stable carry Cash pocket to maintain high degree of liquidity
2–3 years
20%
2%–3%, coupon-driven
#7
Strategic Fundamental
Bonds with valuations that are fundamentally disconnected from the value of the firm’s assets Expected improvement of credit metrics coupled with pull-to-par effect over the medium-term horizon generates optionality
6 months– 2 years
30%
>20%, price- and coupon-driven
#8
Tactical Opportunistic
Tactical positions where the market temporarily “overshoots” fundamental valuations creating attractive short-term relative value Expected short-term normalization of price-typical down- and up-move generates potential upside optionality of 10% to 20%
1 month– 1 year
40%
10%–15%, price-driven
# 13
1 Expected
return indications and financial market scenarios are not reliable indicators of current or future performance. Asset Management
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Source: Credit Suisse As of 29.05.2015 September 2015
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Portfolio Construction Top-Down, Bottom-Up Investment Process The investment process begins with a top-down view on where we are in the volatility cycle and its implication on valuation within the credit sector The process then shifts to intensive bottom-up research where we assess the attractiveness of an individual company’s assets within the context of our top-down view and mine through the entire capital structure of the target company for relative value A dedicated independent risk management process runs parallel to the investment process to ensure that the portfolio managers maintain an in-depth understanding of the portfolio risk taken Portfolio construction initiates the transition from a collection of potential opportunities to a holistic portfolio
Screen
Identify Define volatility regime Diagnose liquidity drivers Assessment across multi asset classes Determine longversus short-term trends
Identify relative attractiveness of market betas Leverage proprietary capital structure and fundamental credit models to screen the investment universe
Analysis
Construct
Manage
Relative evaluation of idiosyncratic credit assets on a matrix of pricing and credit fundamentals Overlay quantitative analysis of firm capital structure
Determine tradesizing stop losses, interest rate and currency hedging, and predefined exit strategies Execute all trades through an internal trading desk
Constant reevaluation of portfolio positioning Reconstruct the portfolio as current opportunities are realized and new opportunities present themselves
Source: Credit Suisse Asset Management
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September 2015
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Bottom-Up Investment Opportunities – Examples Corporate Bond Volatility across the Globe Canada: Metals and Mining
Russia: Corporates
US: Energy
India: Software
Brazil: Energy
South Africa: Financials
For illustrative purposes only. This document constitutes marketing material and is not the result of a financial analysis or research. Asset Management
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Turkey: Infrastructure
Sources: Bloomberg, Credit Suisse Data until 30.07.2015 September 2015
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Strategic Fundamental OAO TMK We bought the respective bond in February 2015 with an initial allocation of about 2.8% Rationale for investment case as per investment date (February 10, 2015): EBITDA stable despite negative market dynamics as it relates to Russia Significant debt reduction (16%) in the fourth quarter of 2014 on the back of positive FCF generation and modest equity raise Weaker ruble and higher steel prices remain key risk to domestic profits Russian OCTG and pipes market drives growth as Russia builds its oil and gas infrastructure east 1 Therefore, we assumed a return of approximately 51.2% over one year
95 90 85 80 75 70 65 60 55 50
Entry Price 10.02.2015 10.14
11.14
12.14
01.15
02.15
03.15
04.15
OAO TMK 6.75% 2020
05.15
06.15
YTM
64% 17.97%
Target Exit Level
90%
Expected Return over 1Y1
Calculation assumptions as per investment date, one year total expected return: capital gain: +26.0/coupon: +6.75/expected return: 32.75/64.98 = 51.2%. For illustrative purposes only. The view presented in this marketing material reflects the portfolio manager’s opinion. They may not correspond to the Bank’s official Research view. They do not constitute an offer nor an investment advice. Expected return indications and financial market scenarios are not reliable indicators of current or future performance.
51.2%
1
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Source: Credit Suisse Data from 01.10.2014 to 23.06.2015 September 2015
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Strategic Fundamental African Bank We bought the respective bond in February 2015 with an initial allocation of about 3.3% Rationale for investment case as per investment date (February 10, 2015): The company is currently under reorganization, with senior debt being transferred into a new entity Hair cut indicated by the Reserve Bank of 10% on notional interest rate and interest payments being paid after reorganization Recovery assumption in case of liquidation at current market prices Fair value of the bonds in the mid-1980s for the base case of reorganization 1 Therefore, we assumed a return of approximately 31.0% over one year Entry Price 10.02.2015
71.98%
YTM
n/a
Target Exit Level
90%
Expected Return over 1Y1 1 Calculation assumptions as per investment date, one year total expected return: capital gain: +18.0/coupon: +4.275/expected return: 22.3/71.98 = 31.0%. For illustrative purposes only. The view presented in this marketing material reflects the portfolio manager’s opinion. They may not correspond to the Bank’s official Research view. They do not constitute an offer nor an investment advice. Expected return indications and financial market scenarios are not reliable indicators of current or future performance. Asset Management
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31.0%
Source: Credit Suisse Data from 01.10.2014 to 23.07.2015 September 2015
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Credit Suisse (Lux) Focused Bond Fund – Key Portfolio Characteristics Portfolio Overview Key Figures Reference Currency
Maturity in Years
Industry Sector Allocation
USD
00-01
28.37%
8.19%
01-02
8.57%
24.59%
02-03
36.18%
OIL, GAS & CONSUMABLE FUELS
9.7%
6.97%
03-04
10.29%
BANKS
7.9%
3.37
04-05
11.42%
FOOD
6.0%
25
05-07
0.00%
METALS & MINING
5.8%
B
07-10
0.00%
COMMERCIAL SERVICES
4.7%
Average maturity in years
7.29
10-15
0.00%
CONSUMER SERVICES
4.6%
Top 10 issuer cumulated
49.8%
15-20
0.00%
ENGINEERING/CONSTRUCTION
3.4%
20+
2.65%
COAL
Discount to par Yield to Maturity Current Yield Modified Duration Number of Positions Average Rating
Largest Position Current AuM in m Data as of
13.78% 34.13
0%
20%
40%
CASH
18.2%
SOVEREIGN
15.5%
3.1%
OTHER
21.1%
23.06.15
Country Allocation
Currency Allocation
Rating Allocation *
UNITED STATES
43.0%
USD
98.7%
LUXEMBOURG
18.2%
EUR
0.9%
AAA AA
13.8%
BRAZIL
8.6%
GBP
0.0%
A
18.2%
SOUTH AFRICA
5.3%
CHF
0.4%
BBB+
0.0%
TURKEY
4.7%
JPY
0.0%
BBB
0.0%
HONG KONG
4.6%
CAD
0.0%
BBB-
0.0%
MEXICO
3.4%
RUB
0.0%
BB+
CANADA
3.0%
SGD
0.0%
BB
SWITZERLAND
2.7%
MYR
0.0%
BB-
INDIA
2.6%
SEK
0.0%
B+
13.7%
OTHER
3.9%
0.0%
1.6% 11.2% 5.6%
KRW
0.0%
B
10.7%
CNY
0.0%
< B-
22.1%
OTHER
0.0%
NR
3.1%
* Rating sources are external as well as internal providers.
For illustrative purposes only. This document constitutes marketing material and is not the result of a financial analysis or research. Asset Management
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Source: Credit Suisse As of 23.06.2015 September 2015
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Contact George Heyward Multi Credit & Unconstrained Director +41 44 332 07 15
[email protected]
Credit Suisse Asset Management Fixed Income, Kalanderplatz 1, 8070 Zurich www.credit-suisse.com
Source: Credit Suisse As of 30.07.2015 Asset Management
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Disclaimer The information herein is intended for reporting purposes only and does not constitute an offer. This document is not suitable for tax purposes. The information and views expressed herein are those of CS at the time of writing and are subject to change at any time without notice. They are derived from sources believed to be reliable. CS provides no guarantee with regard to the content and completeness of the information and does not accept any liability for losses that might arise from making use of the information. If nothing is indicated to the contrary, all figures are unaudited. The information provided herein is for the exclusive use of the recipient. Neither this information nor any copy thereof may be sent, taken into or distributed in the United States or to any U. S. person (within the meaning of Regulation S under the US Securities Act of 1933, as amended). It may not be reproduced, neither in part nor in full, without the written permission of CS. Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments. Emerging market investments usually result in higher risks such as political, economic, credit, exchange rate, market liquidity, legal, settlement, market, shareholder and creditor risks. Emerging markets are located in countries that possess one or more of the following characteristics: a certain degree of political instability, relatively unpredictable financial markets and economic growth patterns, a financial market that is still at the development stage or a weak economy. Copyright © 2015 Credit Suisse Group AG and/or its affiliates. All rights reserved.
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