Building Robust Public and Private Credit Strategies

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Institutional Investor recently interviewed Voya Investment Management’s Chris Lyons, Managing Director and Group Head, Private Credit, and Travis King, Head of Investment Grade Credit, on building strategies in the fixed-income market. Here are their responses.

What is the major challenge facing fixed-income investors in 2016?
King: The search for yield continues to drive investors. While a 1.85 percent yield on ten-year U.S. Treasuries is low by historical standards, yields are even lower in Europe and Japan. As a result, we are seeing global flows into the U.S. market to take advantage of even that minimally better yield.

Lyons: Fixed-income investors are also seeking to diversify their holdings by adding public and private corporate credits to their portfolios.

Why is the U.S. corporate credit market so attractive?
Lyons: About 80 percent of corporate funding in the U.S. comes from the capital market and 20 percent from banks. That percentage is reversed in other parts of the world. Therefore, our credit market offers many more opportunities, and many international investors are expanding their mandates to include long-duration U.S. corporate bonds.

What trends are you seeing in the public credit market?
King: Today’s low-rate environment provides good support for continued long-term growth in the public credit market. However, there has been tremendous volatility in public corporate bonds in 2016, with spreads widening early in the year before recovering. Looking ahead, we expect volatility to remain high for the rest of the year, with spreads in the area of 160 basis points for investment-grade corporates.

Are there similar trends in the private credit market?
Lyons: We expect spreads in private credit to remain compressed for the next few months and then widen in the second half due to continued volatility in the public market. Since it typically takes 12 to 18 months to build a private credit portfolio, we think that investors now have an opportunity to catch a cyclical rise from the bottom.

Are there opportunities in the energy sector?
Lyons: Back in 2014, our public credit team recognized early signs of weakness in this sector and repositioned our credits from upstream [exploration] to midstream [transportation and storage] assets. That defensive approach paid off in light of the subsequent price decline. On the private credit side, we have protected our clients’ interests through covenant negotiations and have been paid down as we have in other cycles. If you take a contrarian approach, now might be a time to look for long-term opportunities in energy.

Please discuss the benefits of holding both public and private credit instruments.
King: The benefits of combining these two asset classes include diversification and liquidity, since the private credits are held within a sleeve of public bonds.

Lyons: A combination strategy also appeals to investors who don’t want to get involved with the extensive due diligence and face-to-face negotiations that characterize the private credit sector. Our team handles negotiating the covenants, make-whole provisions and other important aspects of a 70-page note-purchase agreement that must be signed in person.

How do you build a public-private credit strategy?
Lyons: Many investors who want to own public corporate bonds reach their credit limits quickly because there is a limited amount of new investment-grade issues. Expanding that mandate allows a manager to move a portion of those funds to the private sector, creating more tactical opportunities.

King: There are plenty of options when building a combination credit strategy. If an investor wants long-duration credits, we can buy 30-year bonds. If an investor wants to maximize the total return, we can create a flexible solution along the term curve to match the client’s goals.

Lyons: We have also developed a strategy that combines high-yield bonds, below-investment-grade bank loans and collateralized mortgage obligation [CMO] derivatives to deliver potentially high yield with lower volatility. That solution is in line with Voya’s overall goal of having a high Sharpe ratio, helping investors maximize their risk-adjusted returns.

Voya Investment Management (Voya IM) is a leading active asset management firm. As of December 31, 2015, Voya IM managed approximately $209 billion for affiliated and external institutions as well as individual investors. Drawing on over 40 years of experience and an ongoing commitment to reliable investing, Voya IM has the resources and expertise to help long-term investors achieve strong investment results. Voya Investment Management’s fixed-income strategies cover a broad range of maturities, sectors and instruments, giving investors wide latitude to create a new portfolio structure or complement an existing one. As of December 31, 2015, Voya Investment Management managed $125 billion in fixed-income strategies in the United States.

Want to gain the benefits of diversification? Contact us for more information on a solutions-driven approach combining both public and private credit.

Ken Sarafa
Senior Vice President
Head of U.S. Institutional Sales and Relationship Management
248-554-4802
Ken.Sarafa@voya.com

John Simone
Senior Vice President
Head of Insurance
IM Sales & Solutions
212-309-8413
John.Simone@voya.com