SCIO News

& Insights

4 min read

May 14, 2024

Over the last decade, much has been made of the ongoing erosion of financial covenants in leveraged loans and high yield bonds. Thanks to the incessant hunt for yield, these degradations continued to be accepted by investors desperate for higher-yielding paper. Whereas at the onset of the global financial crisis 30% of US leveraged loans were considered covenant lite (cov-lite), by the beginning of the most recent rate hike cycle this rate had risen to more than 90%1.

4 min read

May 14, 2024

Markets are currently swallowing a bitter cocktail of significant stresses – rising inflation, volatility, and interest rates – which are being shaken and stirred vigorously by the recent pandemic and ongoing geopolitical turmoil. Authorities remain challenged by the complexities of monetary and fiscal policy and markets react with lightning speed. Such uncertain and unpredictable times highlight the primacy of a front-footed approach to risk management throughout the transaction lifecycle. Of course, navigating these markets is challenging! From a risk management point of view, there are numerous quantitative measurement metrics – no doubt many of the performance triggers are under pressure – but by their nature these measures are often backward-looking and may take time to raise the alarm. But what can be done on a qualitative, forward-thinking basis ahead of such triggers, breaches and events to preserve and enhance investments, returns and profitability? I want to highlight a more qualitative and intangible aspect of risk management: specifically, the fine art of knowing and understanding your counterparty.

4 min read

May 14, 2024

Consistently beating the market requires the willingness to be different. As Oaktree’s Howard Marks noted years ago, ‘You can’t take the same actions as everyone else and expect to outperform.’ Asset prices rise when an investment is popular, driving its return potential down. Shunned assets, conversely, have lower prices, offering greater reward potential. However, quite often there is a good reason why an asset should be avoided… as I often told my traders, ‘Just because a bond’s price is low doesn’t make it cheap!’ The trick, therefore, is to identify assets where the perceived risk is significantly greater than the actual risk.