Oftentimes the credit markets fly under the radar.
That’s because most investors are focused on the equity markets. It’s easy to understand why — when the markets are climbing and there’s hope of the Dow Jones Industrial Average hitting a new milestone, investing in equities is a far sexier story. Equity investments can provide a bigger return, and if the investments include dividend checks, there’s income every quarter plus the shot of capital appreciation on the shares.
In the credit world, the investment on debt instruments is more about the world of steady, predictable income known as fixed income. The investor buys the bond, gets the interest payment for a set period of time, and is repaid on the principal when due — and that can be rather boring for some investors.
Debt instruments are comprised mostly of bonds and mortgages. The securitization of IP assets that back investment-grade bonds are also part of the marketplace. So too are bankruptcy loans on the distressed side.
For companies that issue short- or long-term bonds, they are borrowing money from the investor and are promising to repay the principal when due, as well as the agreed-upon interest. The advantage for them is the investors have no claim on either the equity or the profits. And they get a deduction for the interest payments on the corporate tax return. The disadvantage is that they have to repay the borrowers, and if the fixed rate of interest is high, the risk is there could be financial issues down the road for the company in an economic downturn.
So who are the investors? Hedge funds are one; institutional investors are another. Those that feed on the distressed side dealing in bank debt and trade claims are often known as vulture funds.
PIMCO and BlackRock, because of their size, also invest in fixed-income investments through bond funds. They also have an alternative investment component that can take a look at the distressed side.
Other financial firms, such as Crystal Financial and Back Bay Capital, often have a group that specializes in debt capital as part of their commercial finance programs. Private equity firms can also be a player in the credit markets. Blackstone Group has its GSO arm, which invests in the corporate credit markets, ranging from high-yield bonds to leveraged loans. And liquidation companies, such as Gordon Brothers, have evolved their businesses to become financial services firms. Gordon Brothers now has debt investment capabilities that they can use when appropriate.