Bearing Asset Management "Market Uncertainty Remains... Need to Increase Interest in Collateralized Bond Investments"

Bearing Asset Management Report
"Collateral Bonds Enhance Advantageous Position in Capital Structure During Default Situations"

[Asia Economy Reporter Minji Lee] Baring Asset Management stated on the 5th that although the overall market, including high-yield bonds, has recovered due to abundant liquidity supply from central banks, investment should be made in secured bonds as market uncertainty remains.

The global financial market saw significant strength in the high-yield bond asset class, supported by abundant liquidity supply from central banks to mitigate the market shock caused by the novel coronavirus disease (COVID-19). After the Federal Reserve (Fed) announced plans to purchase fallen angels and high-yield ETFs, their second-quarter returns recorded 9.7% and 9.71%, respectively.

However, as the real economy recovery slows, concerns over profit realization and risk management are increasing due to heightened uncertainty surrounding economic growth and corporate earnings.

Martin Hohn, Head of Global Public Bonds and Global High-Yield Bond Investments at Baring, said, “Issuers are reflecting these concerns by increasing the issuance of secured bonds,” adding, “Secured bonds accounted for about one-third of total issuance in the U.S. and about two-thirds of total issuance in Europe.”

Many companies, including well-known firms such as global cruise operator Carnival Cruise Line and U.S. airline American Airlines, are issuing senior secured bonds, which have higher priority in the capital structure than unsecured bonds and are backed by issuer assets as collateral.

Hohn explained, “Secured bonds hold a higher position in the capital structure, so if the issuer defaults, they can pursue debt restructuring from a more advantageous position compared to unsecured bondholders,” adding, “In some cases, they can seek higher long-term recovery rates through equity acquisition.”

The report also analyzed that collateralized loan obligations (CLOs) are suitable for meaningful returns and risk management relative to bond assets. Hohn stated, “Compared to traditional bonds and loans, CLOs offer additional yields, diversification benefits, and structural characteristics that can provide defensive strength,” and added, “Considering that emerging market corporate bonds also performed well despite the challenging external environment, they may present investment opportunities.”

This content was produced with the assistance of AI translation services.