Why we see opportunities rather than pitfalls in BBB-rated credits
Why the concern? Because BBB-rated debt, which includes credits rated BBB-, BBB, and BBB+, has grown sharply over the past several years. This credit tier represented nearly half of the $6.2 trillion U.S. IG credit market as of January 31, 2019, according to the Bloomberg Barclays U.S. Credit Index. Additionally, its size relative to the high-yield and leveraged loan markets has caused concern that a pickup in credit downgrades could have negative implications for the high-yield market. In Europe, the BBB-rated sector has also grown substantially. Although others—both media and asset managers—have amplified fears concerning BBB credits, we think differently. We believe the growth of this sector offers opportunities. Within this paper, you’ll find reasons for growth in BBB-rated credits as well as an assessment of the risks and credit metrics most relevant for investors to consider. We also share ways you might consider using BBB credits in an effort to add alpha and diversification to an IG portfolio. These ideas range from where our analysts see relative value, mispricings that active managers may capitalize on, and ways to further diversify amid BBB credits.
While the BBB-rated credit space has grown rapidly in market value, this growth is not necessarily a cause for fear. Several innocuous factors have contributed to the growth, including an uptick in issuers, a positive credit trend that has led to rising stars, and elevated M&A activity that is typical for this stage in the cycle. Although these BBB-rated credits tend to be more volatile, this sector presents opportunities for active managers to add alpha through an intense focus on security selection while offering diversification.