Analyzing The Middle Market Debt

2162 WordsOct 8, 20149 Pages
Leveraged credit suffered from heightened volatility over the third quarter as mutual fund investors withdrew from the sector amid concerns about frothy valuations and talk of a credit bubble. We believe the high-yield bond market correction this quarter is healthy and overdue, but investors can expect choppier waters ahead. One segment we believe may help limit near-term volatility risk while capturing strong returns is middlemarket debt. One way that we identify middle-market debt is based on deal size of up to $750 million, and we specifically find value in those between $300 million and $750 million, which we classify as “upper middle-market.” As a whole, middle-market debt historically had many attractive features relative to larger debt issues, including higher yields, better annualized returns, lower volatility, higher recoveries, a comparable default history and a stable investor base. Risk markets settled into a sense of complacency as we entered the third quarter of 2014. Volatility in July hovered near historic lows across most asset classes, from equities to fixed income to currency markets—a market climate reminiscent of the calm days during the summer 2007. Our Global Chief Investment Officer Scott Minerd warned at the time that investors should not be lulled, and instead should prepare for choppier days ahead. Federal Reserve Chair Janet Yellen echoed this concern, warning the U.S. Congress that low volatility and heightened investor complacency may be
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