05 May 2020 3 min read

The (w)ides of March

By Mark Benstead

We answer your questions on credit markets


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The spread of COVID-19 and its impact on global financial markets continues to cause widespread volatility and dominate investors’ minds. While the unprecedented support from central banks around the world has provided some relief, there is still significant uncertainty as to how the outbreak will affect economies and businesses in the medium and long term. It is now more important than ever to focus on durable investment strategies to navigate these challenging times.

To help investors better understand the insights and views shaping our investment decisions, in this blog we share some of our answers to the questions we have received from our wealth manager and advisory intermediary clients on the wider implications for the credit market.

How has the credit market fared in 2020 so far?

Credit spreads widened dramatically in March when investors assessed the impact of COVID-19’s rapid spread and this led to an indiscriminate panic sale of assets in a bid to raise liquidity. It took only three weeks for US corporate spreads to go from 120 basis points (bps) to 350 bps; in comparison it took 15 months for this move to materialise in 2007-2008. The co-ordinated and unprecedented measures taken by global central banks in an attempt to curb further economic damage came just in time. While a future equity selloff may lead to wider credit spreads, we believe we have already witnessed the wides of 2020 in late March.

Amid the volatility and uncertainty, there has been a very high demand for credit, with a degree of oversubscription based on central-bank support. Tesco* is an example that demonstrates the recent surge in credit demand. The supermarket issued a £450 million 10-year bond in April, with initial price talk of gilts plus 295 bps. At this level, the company actually gathered an order book of £4.5 billion – 10 times the intended trade. As a result, Tesco reduced the bond spread and the deal came in at 245 bps.

How will COVID-19 affect the credit market?

While we are bullish on credit overall, we have reservations on what will happen at a single-company level, especially given the potential impact of a second wave of the virus and how this will affect sovereign creditworthiness given the amount of fiscal expansion we’re witnessing.

Our analyst team has ranked every company we invest in for COVID-19 vulnerability and we are using this in-house research to make portfolio decisions. So far, it has shown the sterling market is relatively more defensive because utilities make up around 23% of the index and that sector should be more resilient in a coronavirus environment.

However, as we mentioned, it is important to look at this on a single-company basis. For example, you may expect the healthcare sector to be a COVID-19 safe haven, but there are some names that have suffered big sales downgrades over the past quarter.

Investment-grade companies in general are doing exactly what you would expect amid the uncertainty and cutting down on costs and preserving liquidity – but this has been at the expense of leverage, which is ticking up. Many companies are drawing down on their revolving credit facilities, which could lead to potential upgrades in creditworthiness becoming potential downgrades.

In this current market volatility, does anything now look oversold or ‘too’ resilient?

We are currently worried about sovereign ratings and believe some of the sectors and names that have implicit links to sovereign ratings may seem more resilient than expected – and we are cautious about what that means for the future. Historically fiscal injections have negatively impacted a country’s credit rating and we have seen some significant measures taken by central banks globally. In the UK, housing associations are closely tied to the sovereign rating so could be impacted. In France, the state may in theory fight very hard to maintain energy provider EDF’s single A rating, but if the country gets downgraded there is not a lot that can be done. We are monitoring exposure to names vulnerable to sovereign downgrades carefully.


*For illustrative purposes only. Reference to a particular security is on a historic basis and does not mean that the security is currently held or will be held within an LGIM portfolio. The above information does not constitute a recommendation to buy or sell any security.

Mark Benstead

Head of Pan European Credit

Mark is the Head of Pan European Credit with responsibility for sterling and euro investment-grade credit teams. He is the lead fund manager on the sterling flagship retail funds. Mark joined LGIM in 2014 from AXA Investment Managers where he held the title of Head of Credit, UK. Mark was closely involved with AXA’s successful entry into the buy and maintain credit strategy as well as delivering above-target performance on a range of segregated and annuity funds. Prior to that, he was at the Royal Bank of Canada in a variety of senior capital market roles, latterly as Managing Director, Head of Syndicate and European Debt Capital Markets. Mark graduated from the University College of North Wales with a BA (hons) in Economics in 1984 and from the University of Bradford Management Centre with an MBA in 1985. He also holds the Investment Management Certificate.

Mark Benstead