In this video, Multi‑Sector Income portfolio managers John Lloyd and Seth Meyer, discuss why credit ratings may not be an accurate reflection of risk and could obscure opportunities for active managers to capitalise on.
- Fundamental, bottom-up credit analysis provides opportunities to find companies that have improving credit quality, getting ahead of rating agencies that are often late to recognise credit improvement.
- Rating agencies rate the company, not the bonds. Because it is easier to forecast short-term risk than long-term risk, a lower rated short-dated bond could have less risk than a higher rated bond with a long maturity.
- Bank loan credit ratings are often capped by the parent company but a particular loan could have a structure that would allow it to be rated higher if it was a standalone company