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Kames’s Milburn: Avoid ‘hairy’ new high yield issues
Although the market has been starved of high-yield issuance recently, the new issues that have been launched are a mixed bag in terms of quality, Milburn warns.
Phil Milburn, manager of the Kames High Yield Bond fund, has warned that a lot of new issuance in the high-yield market has been of ‘questionable quality’, and he said investors should not fall for the latest issues ‘if they are a bit hairy’.
The Citywire Selection pick fund manager said although the market has been starved of high-yield issuance recently owing to ongoing concerns over the eurozone, the new issues that have been launched are a mixed bag in terms of quality.
Swiss steelmaker Schmolz & Bickenbach, for example, recently did a high-yield issue, but only six weeks later the firm’s chief executive was sacked. ‘It shows there is a high-yield market where issuance is mixed – we didn’t buy Schmolz,’ Milburn said.
‘WOW – which stands for Wide Open West – is a regional telco company in the US,’ said Milburn. ‘While we like that sector, this company has too much debt on its balance sheet for us to be comfortable with.’
At the other end of the quality scale, he said he has recently bought a new issue from the Swiss telecoms firm Sunrise, yielding 5%, which he believes does not carry a high level of risk.
Risk of default
In terms of defaults, Milburn warned economies must not slip into deep recession, otherwise default rates will rise substantially. He believes the default rate in the US high yield market will be 3% this year, but double that in Europe at about 6%.
However, the US does face significant headwinds, including a potential political clash in the autumn election on the raising of the debt ceiling, the end of the Bush tax cuts in January and a reduction in defence spending at the start of the year.
‘In the US, with the fiscal cliff in January, there are estimates this could wipe 4% off GDP,’ said Milburn. ‘We would love to see a majority win: if one party controls Congress and the presidency, then that will clearly be beneficial to help pass the policies. This is an important issue – the market is more worried about this as time goes on.’
In terms of exposure to banks, Milburn said he has a portion in Australia dollar RBS, offering a coupon of 6.5%, maturing in May 2018. ‘I anticipate RBS will exchange it into a more appropriate form of capital and we’ll get a small premium,’ said Milburn. ‘If they don’t call, the yield to maturity is still fine – I can hold it to maturity and it still yields 11.5%. So if the bank doesn’t call, it won’t offend me greatly.’
The only European bank the manager holds is ING, a firm that has been through government assistance, and is doing its best to repay its debts.
Milburn has delivered 69.6% over three years, beating the average return in the IMA sterling high yield sector of 46.8%.
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