Investment Opportunities in EU Corporate Credit?

Thank you for being here, Roman.

Roman Gaiser: Hello.

Luque: Well, we're going to talk about credit opportunities, and my first question is what has changed in the credit landscape since we experienced the credit crunch in 2008?

Gaiser: I think there has been one big change and that is really related to the lack of liquidity which is now available in the markets. If you think about prior to Lehman, there was lots of liquidity, lots of lending and borrowing going on and all that at very low cost.

So people were using a lot of cheap money to create leverage and to invest in credit in general, but also in credit. And that was CLOs, that was CDOs, that was structured products, those was prop desk at banks, so a lot of people were using cheap money to lever up and create returns through leverage on the spreads. And that has completely changed in our view. That liquidity is not available anymore. It's much more expensive where it's available. Banks have to control how much they lend with regards to Basel III and so on. And that has led to the fact that the investors are now looking much more in detail what they are investing in because there are many more opportunities.

So, the industrial purchasing of credit as we have seen and the leveraging up prior to Lehman doesn't exist anymore. It's much more manufacturing now. You look at the individual credits because you haven't got the liquidity to just go out, lever up and create returns through massive leverage.

So prior to that, we had a lot of leverage, very aggressive borrowing and now that has disappeared and that has opened opportunities up for investors like us, who like to look at credits and understand the quality of a name.

Luque: Yes. And my next question is quite logical, where are those opportunities in the fixed income area, specifically in the credit market?

Gaiser: I think there is one great area, obviously, my background is in high yield, and there are a lot of companies in the European space, for example, but also internationally, which could not refinance, which could not access the markets in 2008 and in 2009. So, some of these companies have now balance sheet structures, maturity structures which have become too short actually to be sensible or too short for comfort.

So, these companies do look to extend the maturities they have so they bring new bonds to market, maybe they'll replace bank debt, extend the maturities or they're just replacing bonds, which have now a 2012-2013 maturity and are extending that again. And that reorganisation of balance sheets in corporates creates a lot of opportunities because it might sound easy in theory but in reality these are of many steps that you have to take and that can take easily one, two years time to achieve that.

Luque: One of the secret in the credit market is to avoid the losers. I mean, what are the companies or the sectors or even the segments that are avoiding in your fund?

Gaiser: We're, generally, still very cautious in all the names which are in our view over-levered and that can be cyclical companies, that can be growth companies, that can be found in many various sectors because we don't believe that we will have a very strong growth. We think that we will have ongoing moderate growth and that growth will not be strong enough to bail out companies which are over-levered today. If you got six, seven times leverage on your balance sheet today, we just believe that is too much and we do avoid these companies.

On the other hand, companies which have benefited somewhat from the recovery that we've seen since the very dark days at the end of '09, many companies have reached levels again where they can survive, they have the right balance sheet, yes, they might have to delever going forward a little bit, but they are in a position to achieve that even with very moderate growth going forward. And these are the names that we prefer, the names which are still over-levered, especially when they are cyclical we are still avoiding.

Luque: Okay. Well, let's speak about that the fund that you are managing, the Threadneedle Credit Opportunities. Can you tell us how the fund portfolio is constructed?

Gaiser: Yes, quite simply put, it has two big blocks in the fund. The one is what we call the core portfolio and then we got the other part of the fund, which is the tactical overlay. The core portfolio have very short-dated maturities, while we look for opportunities with short-dated risk if it’s high yield within one year; if it's investment grade up to two years, where we can take active credit risks, but where we have to analyze the short-term survivability, so mainly the liquidity situation of a company.

So that creates a lot of carry opportunities with short maturities. So this is so to say the core of our strategy is currently about 50% of the NAV of the fund. We are looking to keep this between 50%, maybe 80% of the fund. So that generates a nice, steady income of LIBOR plus well, maybe 250-350 basis points.

And then on top of that, we have a second block which is much more tactical, where we look at all kind of ideas. These are directional ideas. It can be long, short or it can be pair trades. We are also looking at basis trades. We are also looking at capital structure arbitrage trades. We are also looking at basis trades, for example.

So it's a whole series of trades, which go into the overlay, which quite frankly are the best ideas that we have from our credit process, where we look where we can use the knowledge that we have of this situation to achieve returns for our investors.

So we have those two blocks; one is the core portfolio, which generates some steady income, and on top of that, we have a more active portfolio, which is a tactical overlay, with all kind of credit ideas in it.

Luque: Okay. Thank you, Roman, and thank you for your views on the credit markets. Thank you very much for this interview.

Gaiser: Thank you.