issuance and corporate events and consequently gets “wall crossed” and restricted from trading around 400 times per year, typically for periods between hours and weeks. Sona wants to stay liquid and therefore needs to envisage a cleansing event before restricting the team. Reasons for wall crossings include new issues, market soundings, SPAC/PIPE mergers, and convertible bond activity. These situations provide both investment opportunities and market colour: “New issues can be a good way to deploy capital in size and gather intelligence,” says Aylward.


Four books but one cohesive team The four books – European high yield, European investment grade, US high yield and investment grade, and convertible bonds and equity linked – also provide a broad perspective on credit markets, but trading is within rather than between the verticals. Sona does not take cross asset class views such as between financials and high yield. All four books aim to use long/short strategies to generate all weather returns and have achieved that aim in most months. The four books have been lowly positively correlated but will have their best opportunity sets at different points of the cycle, such as 2020 for investment grade and 2022 for high yield, or even at different times of the day, since discussions are continuous, and allocations are fluid. “The firm is structured as one team rather than pods or siloes, so portfolio managers accept that capital may sometimes need to flow to other areas, and there is no pressure to allocate fixed or minimum amounts of capital to any strategies. We have a lot of dry powder most of the time and rarely pedal to the metal. That said, European leveraged finance has been the dominant strategy over the cycle, and it displays the most dispersion and idiosyncratic opportunity,” says Aylward.


Europe predominates European credit is especially inefficient in the context of credit markets that are generally prone to anomalies because a high proportion of the market is long-biased, index-focused, and credit ratings driven. “Ratings downgrades can lead to mechanical outcomes such as forced selling that generate opportunities for others,” says Aylward. “European credit markets are less efficient than US credit markets, given 27 countries and jurisdictions and many languages. Sona has invested in businesses that have a footprint in all 27 markets, but the corporate structures have been mainly in the major domiciles of UK, France, Germany, Italy and Luxembourg. There have also been cases of firms moving between domiciles. We do also find anomalies between US and European markets sometimes relating to the same issuer, and the European team share views with the US credit team led by Chris Louw,” adds Aylward.


Eclectic trade types Individual trades can be one or more of fundamental, event driven and relative value in nature and the opportunity set for each ebbs


and flows. “Summer 2021 was very quiet for event driven while spring of 2022 started to see more activity. All three interplay to some extent. Ultimately, we need to understand why credits are going higher or lower and we cannot do event driven without understanding relative value. Fundamentals alone can be a value trap without any catalyst. Relative value is not just about numbers, we need to understand companies, capital structures and asymmetries between capital structures,” says Aylward.


Sometimes the repertoire of trades is applied to the same names, such as a cruise line operator, which was traded long, short and via capital structure arbitrage trades at different times. “Expertise spans the credit spectrum. On a European credit management merger, we covered a short and then took advantage of capital markets activity to use CDS to create an asymmetric long/short structure,” recalls Aylward. Cash versus CDS basis trades that are arbitrages can also interact with event triggers such as re-financings.


Multiple legal features are analysed: “They include make wholes, exchanges, tenders, change of control provisions and ratchets. Anything that might change pricing based on events around the company could be relevant. We are at the forefront of being accurate and insightful over these developing situations, and mainly use external counsel,” says Aylward.


Some sub-asset classes, and trade types, are sensitive to the market regime. SPACS are one example. “In the low interest rate regime SPACs provided a variety of opportunities for merger arbitrage, volatility arbitrage, and document arbitrage. For instance, low duration cash box SPACs sometimes had yields around 2% with upside optionality. Now that there is pressure on growth companies in a higher interest rate regime, they are generally less relevant but there are still some interesting oddities,” says Aylward.


Bearish and murky 2022 outlook The strategy has swiftly adapted to the volatility of 2022, which has had multiple drivers: Russia’s invasion of Ukraine, spikes in energy prices, food insecurity, quantitative tightening, rising interest rates, flattening yield curves and inflation/ stagflation. “The first half of 2022 was very unusual in having an 11-week hiatus of high yield issuance between early February and late April,” says Aylward. Some issuers were perhaps psychologically in denial about the change of environment and hoping for a swift normalization of the sort that they had grown accustomed to over so many years. Aylward observed that credit spreads in aggregate are still not as wide as after the 2011/12 Eurozone crisis, though there are some individual position level relative value dislocations.


In April 2022 Aylward saw potential for more adjustment: “Given how far rates have moved we


11


“European industry faces enormous challenges: gas costing 15x as much as in the US, huge budget deficits, slowing economies, and withdrawal of ECB


support.” — JOHN AYLWARD


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