Even if you’re an equity investor, there’s a huge advantage to understanding credit risk.
That’s according to Bob Kricheff, portfolio manager and global strategist at Shenkman Capital Management.
In a new edition of his book “A Pragmatist’s Guide to Leveraged Finance: Credit Analysis for Below-Investment-Grade Bonds and Loans,” Kricheff unpacks emerging dynamics with respect to the high-yield leveraged bond and loan market, now valued at over $4 trillion.
Kricheff spoke with Benzinga about the implications of fast-changing markets, as well as what to look for when it comes to the world of issuance, evaluation and investment for high-yield debt securities.
About The Author: Kricheff is a credit market veteran.
Prior to his role at Shenkman Capital, Kricheff worked at Credit Suisse for nearly 25 years in credit, as well as high-yield bonds and loans.
“I ran the research and strategy group,” he said. “I worked on a number of different areas, including emerging markets.”
After undergraduate studies in economics and journalism at New York University, Kricheff attended a financial economics program at the SOAS University of London (the School of Oriental and African Studies).
“It was taking the statistical quantitative aspect of economics and applying it to finance,” Kricheff said of his studies at SOAS. “It was a fascinating subject nobody really talked about until the Great Financial Crisis, and then everybody was talking about it.”
Kricheff's Motivations: Leveraged finance is opaque in some respects.
Kricheff said that newcomers in the industry are difficult to train due to the depth and breadth of knowledge needed to do the job.
“I was talking to a great friend of mine who is a portfolio manager at Capital Research. We realized that in bringing people into the industry, there was no tool to train them,” Kricheff said. “When you look at junk bonds or below-investment-grade credit, high-yield credit, whatever you want to do, it is not the normal stuff you study in college.”
In writing the book, Kricheff said he aimed to make it easier to hire and train newcomers.
“I decided to do it is not in an academic or theoretical way, but really a practical, step-by-step of what you need to know to work in the industry.”
The Second Edition: The updated book includes new sections on fallen angels, environmental, social, and governance (ESG), interaction with portfolio managers, CLOs, new issues and data science.
“Markets are changing much faster,” the author said in a statement on the emergence of new investment regimes.
“Just last year, in 2020, we saw the amount of double Bs in the high-yield market increase probably six percentage points. You’re seeing a ton of leveraged buyouts and technology companies issue debt.”
As these trends emerge — increased risk-taking as a result of changing market incentives — participants must be cognizant of looming risks, Kricheff said.
“A trend we’re seeing is a lot of issuances,” he said. “When that happens, you worry that the proper credit work isn’t being done ... so the issue you buy today could be tomorrow’s bankruptcy statistic if you’re not careful.”
Why Equity Investors Should Care Too: The strength of the retail investor, given the commission-free trading revolution and fintech innovation, is back, the author told Benzinga.
“You’re seeing that in fund flows,” Kricheff said. “For many years, everybody talked about how the retail investor didn’t matter that much. Now, it’s really re-emerged back the other way.”
New investors, Kricheff suggests, should consider what happens after the so-called COVID-19 and reopening trades are over.
“During COVID, the Fed cut rates and a lot of companies, that faced risk from shutdowns, were able to issue high-yield bonds and loans, and put a lot of debt on their balance sheets,” the author said, pointing to cruise lines, hotels and casino businesses as examples.
“They’re entering the reopening trade with a lot more debt and how they manage their balance sheets, going forward, will probably have a big impact on their equity valuations, as well as obviously how their debt trades.”
Things To Keep In Mind: Do you have the wherewithal to participate in markets in which uncertainty and concerns loom over pandemic responses?
That’s what Kricheff said in a final pitch.
“If you’re going to be an investor, even if you’re investing in equities, you’ve got to make sure you understand the basics of the rest of the balance sheet because you got to understand your downside, and the balance sheet is what can cause bankruptcy and get a company into trouble.”
Investors who want to learn more can pick up a copy of Kricheff’s new book at this link.
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