How companies cut their debt and deleverage their balance sheets is going to be one of the major inv...
How companies cut their debt and deleverage their balance sheets is going to be one of the major investment themes over the next few years.
That is the view of Paul Read, head of fixed interest retail investment at Invesco Perpetual. He feels increased debt, difficult market conditions and the bursting of the tech bubble has resulted in very difficult conditions for corporate bonds with high yield paper in particular suffering defaults. There could be one or two more big bankruptcies, he predicted.
Last year 18% of all global corporate bonds where downgraded and it has been 17 consecutive months were downgrades have exceeded upgrades.
According to Read, what companies do with this debt will be key for all capital markets in coming years.
He said: 'One option for companies is to ignore it. Swiss Air did, a lot of Japanese companies do, Enron did.' A lot of companies will manage their way through it, said Read, and the next few years will see a lot of good companies deleverage through the cycle. Others are dealing with it. BT, for example, with rights issues, disposals such as Yell and mmO2 and cutting dividends.
Read said this means equity markets will be used for what they are supposed to be used for, and that is to provide money for companies rather than for tricky financial engineering to make management rich.
This deleveraging process also keeps a lid on equity markets. Convertible bonds issuance will increase, as will rights issues, disposals and deleveraged IPOs.
As this deleveraging trend increases, Read said there will be a lot of opportunity in investment grade A, BBB and in high yield bonds.
He added: 'In a low growth, low inflation environment, the returns available in single A and BBB are 6%-8% yields from very solid companies. High yields offer 8%-10% yields.'