Secured bonds safe haven during pandemic: Barings

Amid the lingering business uncertainties from continued COVID-19 crisis, bond investors would be able to avert risks of companies’ default in case they have invested in secured high-yield bonds, a top Barings Asset Management official said on Tuesday.

“(Secured bonds) are on top of the capital structure and tend to recover better,” said David Mihalick, head of US public fixed income at Barings, in a teleconference.

“Secured bonds are attractive because of the extent the companies go through the default. ... That’s an area we think is particularly attractive today given the amount of uncertainty in terms of the near-term economic outlook.”

In line with the trend, Barings itself began to exercise investment strategies to bet big on secured bonds, by allocating 100 percent of its assets to secured bonds as part of its strategies.

“Clearly, the most important thing is active management trying to avoid default,” he said.

This was partly thanks to the efforts of central banks such as US Federal Reserve to keep the nations’ businesses afloat, as the shutdown took a toll on industries such as travel, leisure, retail and energy.

“We think that many of those companies have raised liquidity so you will start to see the default rates slow down because the markets have been so open. which is what the Fed intended,” Mihalick said.

“We have a lot of uncertainties around the economic outlook, but the Fed will continue to be supportive. The economic recovery continues to move on.”

According to Mihalick, there are still ample chances for bond investors to grab the opportunity, citing a recent increase in the global companies’ tendency to issue secured bonds -- which promise relatively lower returns compared to unsecured bonds, or instruments with higher risks of losing investment in case of a company’s default.

The ratio of secured bond issuance to all bonds rose to some 32 percent in the US in May 2020, up 2 percentage points from end-2019, according to Barings. The figure rose by 5 percentage points to 56 percent among the European companies.

“There will certainly be more defaults we think, but we are optimistic that fundamentally good businesses will be good businesses on the other side of the shutdown,” he said.

Barings Asset Management was overseeing some $327 billion assets across the globe as of end-March. The international investment house is wholly owned by Massachusetts Mutual Life Insurance.

The firm has a Korean subsidiary, which has pooled investments in its funds targeting global high-yield bonds and global senior secured bonds.

By Son Ji-hyoung (consnow@heraldcorp.com)