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Is it time to break up?

Goodbye for now to the corporate bond market

Investing newsroom
David McLeish, Senior Portfolio Manager — Fixed Interest

David McLeish
Senior Portfolio Manager — Fixed Interest | Email David »

17 April, 2019

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David McLeish’s tongue in cheek “Dear John letter” to the global corporate bond market.

Dear Global Corporate Bond Market,

It’s with a heavy heart that I write this letter. But after almost ten beautiful years it’s clear we’ve begun traveling down different paths.

It’s just everything you seem to do at the moment is wrong. If it’s not one thing it’s another. Please don’t take this the wrong way, but you’ve changed.

You just don’t treat my funds with respect anymore. Don’t get me wrong, the times when you would use the money you borrowed to grow and improve were really special. It made me feel like we really understood each other. You needed capital to expand and fulfil your potential and I needed security and income. It really was a match made in heaven.

Don’t think I don’t see how those other bond investors look at you though. Their desire to fund you at cheaper and cheaper interest rates must be very flattering. But instead of dealing with their advances with modesty and respect you’ve chosen to lower your standards.

Offering very few protections to investors via what are known as “covenant-lite” deals is just one of your more deplorable acts of late. I know what you’ll say, investors, are free to make their own decisions. But just so you know, I’m choosing not to play that game. Your selfishness is exposing investors to untold risks when the next downturn hits. You’re not without responsibility here.

I know I’ve been distant lately, but it’s because I can see your attentions have clearly shifted elsewhere. Showering shareholders with gifts of stock buybacks and dividends with the money I lend you is nothing short of reckless at this stage in the economic cycle. I am sick of being used like an ATM.

Besides, have you noticed what this has done to your balance sheet? Your penchant for borrowing has left you, some may say, a little out-of-shape. But the truth is, outside of recession, I have never seen you so indebted.  Whatever happened to all that talk about maintaining a high degree of credit worthiness? It’s no surprise your BBB-rated bucket is bulging at the seams.

Maybe it’s these ultra-low interest rates that have clouded your judgement. Maybe it’s the easy funding terms which have over-massaged your ego. But with us nearing the longest period of economic expansion in history, you surely can’t blame me for insisting on a bit more security than you’re currently willing to offer me.

After all, we know what happens when the tide goes out on the credit cycle. We find out who’s been swimming naked. So, my advice to you is, enjoy all those wannabe naturists while you can. Because when earnings begin to shrink, I think there is going to be some embarrassed investors around and I don’t plan on being one of them.

We both know this is not goodbye.  Truth be told, parts of you still have some appeal. But I think it’s important we recognise that our involvement is going to be limited until you change.

For now, it’s not me, it’s you.

Global Corporate Bond Market - Graph 1Global Corporate Bond Market - Graph 2Global Corporate Bond Market - Graph 3Global Corporate Bond Market - Graph 4


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