Technical drivers in Europe have caused credit spreads to widen. At the same time, the gap between U.S. and European monetary policy continues to grow. In this piece, we outline three key reasons why, in this environment, a global approach may make sense.
Technical drivers in Europe have caused credit spreads to widen beyond what fundamentals would suggest. At the same time, the gap between U.S. and European monetary policy continues to grow. We believe the combination of these factors is creating an interesting opportunity for U.S. investors to consider exposure to European senior secured loans.
Below, we outline three key reasons why, in this environment, we believe a global approach—particularly for its exposure to Europe—makes sense.
REASON 1: POTENTIAL YIELD PICK-UP
A global strategy gives investors exposure to senior secured loans issued by below-investment grade companies outside of their domestic market—for U.S. investors, this means exposure to the European market. While investing in European loans could carry separate risks, we see many benefits to a global (versus a U.S.-only) strategy. One particularly compelling benefit today is the opportunity for investors to earn incremental yield on loans that are issued by European companies (in euros) and then hedged back to U.S. dollars.
This potential pick-up comes from two components:
1. Wider credit spreads in Europe for comparable credit risk
2. The value provided by Euribor floors due to still-negative base rates in Europe
Wider European Credit Spreads: In recent months, spreads on European loans have widened—in some cases significantly—in response to headline risk. Today, based on our observations, a carefully selected portfolio of single B European loans can offer spreads of around, or upward of, 400 bps. This widening is in spite of the fact that European GDP growth is on solid footing and issuer fundamentals remain healthy—defaults are very low and companies continue to demonstrate robust sales and EBITDA growth.