European credit “warrants greater attention from investors”, given its “patchwork quilt” of bankruptcy regimes, superior fundamentals to US peers, and its “vibrant” financials marketplace, according to Man Group.
Sriram Reddy, head of client portfolio management, discretionary and Mike Scott, head of global high yield and credit opportunities, said European credit remains “underrepresented” in most global portfolios as a result of its “modest presence” in global credit benchmarks.
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Reddy and Scott observed that, while more than 60 per cent of global indices are weighted towards US credit, this is “not always where the best opportunities” are.
With varying bankruptcy regimes across Europe and “limited legal precedent” compared to the US, they said this can lead to structural inefficiencies which, in turn, creates opportunities for investors.
By comparison, the “well-established” Chapter 11 framework in the US is built on “decades of legal precedent” and “offers a way to restructure an entire corporate group operating in multiple jurisdictions” – with no equivalent single process in Europe.
Man Group’s Reddy and Scott also argued that European fundamentals are superior to US fundamentals.
“European companies tend to have more conservative balance sheets than their US peers and this is backed up by leverage data and interest coverage ratios,” Reddy and Scott said.
“The European Central Bank is ahead of the Federal Reserve in terms of interest rate cuts and this should also help to alleviate some of the interest cost burden for companies looking to refinance.”
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Additionally, they suggested European credit could “perform better in a slowdown”, on the basis that the US is slightly more tilted to cyclicals at around 70 per cent, compared to 60 per cent in Europe.
Reddy and Scott cited Europe’s “vibrant financials marketplace” as another reason for greater allocation to European credit in global portfolios.
Europe’s covered bonds to Additional Tier 1 (AT1) bonds issuance serve as contingent convertible capital instruments for banks.
“This creates attractive inter- and intra-capital structure opportunities for selective investors with the skills to do the deep research needed to capitalise on the most attractive opportunities and to avoid potential pitfalls,” Reddy and Scott said.
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