Credit markets continue to evolve, especially as central banks around the world have started to cut lending rates.
Tshepo Shabalala, a credit portfolio manager at FirstRand's Ashburton Investments, spoke to Business Day about navigating portfolios with credit investments, given the prevailing economic climate and growing interest in diverse investment strategies.
Shabalala co-manages Ashburton's unlisted credit portfolios while also assisting in sourcing and originating assets for both the unlisted credit portfolios and listed credit retail funds.
How do you see the renewed optimism brought about by the government of national unity (GNU) driving SA’s credit market?
I agree, there is a sense of optimism brought about by the GNU. However, there are other factors generating optimism, like the consistent energy supply from Eskom, and a reduction in the inflation rate which is expected to reduce borrowing costs. This will alleviate a lot of financial pressure for indebted consumers and allow less pressure on corporate balance sheets.
The pervasive effect of this will, hopefully, translate into a positive outlook in GDP growth for SA. This will, in turn, lead to a positive business case for corporates to increase their budgets for growth capital and upwardly drive the capital markets through an increase in demand for credit from corporates.
With the long-awaited interest rate cutting cycle having started, how long will it take for risk appetite to turn, if at all?
The rally started following the formation of the GNU. Risk appetite improved before rates were cut by the SA Reserve Bank and the US Federal Reserve. The writing was already on the wall for these cuts, it was just a matter of when and by how much.
What options are there to give retail investors exposure to credit in their portfolios?
Credit adds diversification to an investment portfolio with relatively stable returns and less volatility, compared to equities and index trackers. There are collective investment schemes (unit trusts) that a retail investor can participate in either through a once off lump sum or a monthly contribution.
We have a suite of unit trusts which investors can participate in, depending on their risk appetite.
These range from low-risk investments, that leverage off credit funds to multi-asset funds which invest in range of local and offshore instruments including credit. A retail consumer can participate from as little as R500 per month.
What trends are you observing in credit market?
Banks have been the largest issuers of credit paper in the primary market, while corporates have taken a more cautious approach given where the country has been with Eskom, local elections, and global macro events.
However, there have been some high-quality corporates that have tested the local market and have been successful in reaching their targeted issuance volumes at decent credit spreads. State-owned enterprises (SOEs) have not been that active in the primary market except for the Development Bank of SA and most have relied on private placements.
Despite the moderate issuance in the primary markets, credit linked notes (CLNs) have gained traction among investors seeking yields in a narrowing credit spread environment. These bank-issued CLNs, which carry an underlying credit risk obligation, have proven to be attractive.
Are there any moves to rethink how credit risk is assessed in the listed/unlisted credit space?
The innovation in credit risk assessment lies in the additional use of quantitative data and artificial intelligence (AI) in future. There is no getting away from performing credit assessments using traditional fundamentals, however, the use of quantitative data and environmental, social and governance (ESG) data creates an edge in terms of credit risk assessment velocity and prediction.
In SA this is still a developing technique with asset managers at various stages of development, therefore credit risk assessment is still 85%-90% fundamental. It is an important scope of work that needs to be advanced further. This will result in more predictable expected credit loss models which will result in better risk-adjusted returns for investors.
Are there any new or innovative credit instruments or structures that you’re seeing in the market?
We have seen and participated in interesting, structured instruments mainly involving CLNs.
The main risk with a CLN is that it carries dual default risk. You are exposed to the risk by the issuer (normally a bank) and the underlying referenced counter which adds to credit risk.
Recently, we participated in a CLN which removed the bank risk but still obtained an upside through referencing a corporate unlisted loan and swapping an SA government bond (SAGB) from fixed to floating. Despite the complex structure, it is important to assess the risk from a “what if” basis.
These structures would normally reference high quality corporates with the SAGB contributing to a yield pickup. This minimises credit risk as SAGBs are risk-free assets.
How do you approach portfolio management from a credit perspective?
The key is to diversify credit among various issuers and sectors. The listed credit market in SA has a limited number of issuers. We have good relationships with various debt arrangers to participate through primary auctions and/or private placements.
In addition, we have unlisted credit funds that invest mainly in bank originated loans. This further optimises the portfolio as you obtain exposure to corporates that are not active in the listed credit market.
We also have a robust credit research process which ensures any credit exposure obtained has been vetted so that credit risk is minimised. Our funds have thus consistently performed on a risk-adjusted basis.
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