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Investment grade credit – focus on the idiosyncratic

Tightening credit spreads over recent months mean many of the opportunities within investment grade are increasingly company specific. 


An example of such an opportunity is when a company raises capital outside of its domestic market. Often, a lack of familiarity with the issuer can mean that such issues attract a premium over their domestic bonds. As global investors with an extensive research capability, we are able to harvest these premiums and a recent example is US bank Capital One’s euro denominated bonds 


We have high regard for Capital One’s risk capabilities, its operation and management team. From an investment perspective this means consumer sentiment can have a material influence on Capital One’s bond prices.  


We saw this dynamic unfold through 2023 as rising rates led to a deterioration in consumer sentiment. In turn, this led to Capital One’s bonds coming under pressure. This meant that even though Capital One is a solid investment grade name with a high BBB/low single A rating, its bonds started to be priced with a spread typical of a crossover credit, low BBB or high BB. 


In Europe, less familiarity with the company meant the valuation discrepancy was even more pronounced. Capital One’s Euro issued bonds that have exactly the same duration as equivalent US issuance were trading as low single B credits. Like their US equivalents, these were investment grade bonds, but they were being priced as though they were high yield. 


Our in-depth knowledge of the issuer meant we had comfort with the idiosyncratic risk and so could recognise and capture the value on offer.


Capital One’s senior euro bond offers additional spread over its US dollar issuance

Capital One’s senior euro bond offers additional spread over its US dollar issuance

Data as at 30 April 2024. Source Bloomberg. COF is Capital One.


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