Fixed-income and equity portfolio managers may analyze and invest in the same companies.
“The drivers of equity value are sometimes the same drivers of credit quality,” says Nicholas Leach, vice-president of Global Fixed Income and High Yield at CIBC Asset Management, and lead manager of the Renaissance High-Yield Bond Fund.
That’s why it’s useful for both bond and equity teams to work together, and to “share our different perspectives,” he says.
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Say a company wants to “increase its debt to make an acquisition or pay a special dividend,” Leach explains. “That may be good for the [company’s] equity price but it’s going to be negative for bond prices.”
In that scenario, fixed-income managers would understand the company’s bond “trust indentures and the restrictive covenants that [can] limit a company’s ability to engage in shareholder-friendly transactions,” he says. So, those fixed-income experts could provide insight to equity managers on the benefits and challenges of the company making such a move.
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Leach has also called upon his firm’s equity resources team for help when researching the credit quality of oil and gas companies. “It’s important to understand the quality of the [company’s] assets,” and to be aware of the oil plays occurring where the company operates. For instance, if a fixed-income manager were comparing MEG Energy and Baytex Energy, she’d need to understand the difference “in terms of where their operating assets are” to determine credit quality, says Leach.
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He notes that due to the higher level of issuer concentration within equity markets—in Canada, in particular—both equity and fixed-income analysts often “have a deeper knowledge of some of the larger equity issuers.” So, if equity analysts have a target price for a holding, “we can actually look at that, as bond holders, as being a cushion [for us]. We know our claims are ahead of the cash flow claims for equities.”
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