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Fallen angels – Roundtable THE PANEL


Manuel Hayes Director, senior portfolio manager Mellon


Stuart Trow Credit strategist and trustee European Bank for Reconstruction and Development


Dinesh Visavadia Director


Independent Trustee Services


Kate Hollis Director, manager research Willis Towers Watson


ners and losers. We like volatility and we like downgrades. Visavadia: On one hand the pandemic is causing uncertainty in the markets and on the other some tech company valua- tions are sky high. This is a recipe for dis- aster. Therefore, trustees shy away because this is beyond their risk spec- trum. That is a big challenge. This is a good asset class but given the timing a lot of trustees might shy away because there is only one way for this market to go. Could I ask, to what extent have down- grades been exaggerated by poor ESG credentials? Hollis: Some issuers that have been down- graded lately have lower than expected ESG credentials. That is not so much an ESG effect per se, it is a function of the oil price trading negatively last year. Occi- dental, as an example, did an aggressive merger a year or so before Covid, so its financial metrics changed and became more risky.


Anand Kwatra


Investment risk manager Phoenix Group


angels are a higher quality segment. In the past 15 years, they have had 0.6% defaults on a par-weighted basis, while broad high yield has 1.61%. It is less than broad high yield since it is higher quality. You always have to mitigate falling knives or the big jumps that happen from invest- ment grade to something much lower. At some point the structural premia, the value that is initially presented, goes away and BB companies may continue to dete- riorate. So, at some point you have to look at the fundamentals and ask if a compa- ny’s leverage is too high or its low profita-


David Weeks Co-chair


Association of Member Nominated Trustees


bility will continue to deteriorate over time verses their peers. You have to have that mechanism in place to mitigate and monitor that exposure.


PI: What impact is the economic uncertainty having on risk assessments? Hayes: No one has an answer as to when things will stabilise and companies will rebound. We are excited about the volatility. We take a quantitative systematic approach and so any period of dispersion is good for models to differentiate between win-


This is different from thermal coal com- panies at the bottom of the CCC spectrum where ESG is going to have a different effect and the industry is in long term decline. Some retail is in long-term decline due to online competition, but that is not so much an ESG effect. Avoiding issuers with long-term ESG headwinds which make them less likely to bounce back is probably a good idea. Trow: There are structural changes that the pandemic has accelerated. People hosting conferences online has had a knock-on effect for airlines.


What I am nervous about with ESG is that it is difficult to quantify. It is obvious if you are a coal miner, but if you are in the middle and your ESG rating is not great, but it could be improved, or a green com- pany with little to add to the story, the reg- ulators are not clear what direction they want to take. Is it a reward for people improving? Or only in favour of green industries?


That has led to confusion about what is Issue 102 | April 2021 | portfolio institutional | 45


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