When writing for Credit, journalists have always been reminded that the credit market is not some abstract dance of the giants, where large investment firms buy pieces of paper for huge sums of money from vast corporations. In fact the market is keenly relevant to their everyday lives. After all, a large proportion of the writer’s own pension, savings and probably insurance will be invested in credit.
So when a company behaves poorly towards bondholders – such as subordinating them in the capital structure – it isn’t simply an interesting piece of financial chicanery. It is the start of a gentle slide from retirement in Biarritz to Bournemouth.
As a result, Credit has frequently taken the side of the asset managers (bondholders in reality) against the banks and corporate raiders in any dispute. But this magazine is about the best interests of the market, and by extension the people whose money it represents. It is not the unquestioning supporter of any one group.
And so, at length, to credit derivatives. Since the credit crunch of 2002, credit derivatives – and especially collateralised debt obligations (CDOs) – have been perceived by many traditional long-only investors as opaque, illiquid instruments for offloading banks’ unwanted debt.
Two years ago this may have been true, but with the introduction of standardised instruments such as iTraxx, tranches of CDOs that are both transparent and liquid can be traded. And so, though Credit is not calling on investors to plough straight into credit derivatives, we are calling for investors to be able to invest in them if they offer value.
At the moment investors’ inability, through their mandates, to use credit derivatives is like being able to only invest in General Motors bonds. That’s great when General Motors bonds are performing well, but when they start tanking I’d rather my pension fund could invest some money into other bonds. Investing in credit derivatives should be at the discretion of the manager, not the consultant.
The only thing more worrying than an asset manager restricted by mandates is an asset manager that restricts himself from certain assets because he doesn’t want to, or is unable to take the time to understand them.