Spares and heirs in the capital markets

18 January 2023/No Comments
By Nick Dunbar

Like Prince Harry, corporate bonds often feel like the spare part of a company’s capital structure, overshadowed by equities enthroned by ownership and deal-making privilege. But now, like the estranged British royal, they are finding a moment in the limelight.

Far more than their equity siblings, corporate bonds march to the beat of central banks. In the last year, that meant a gloomy story with surging inflation and the fear that rising rates would spark a recession.

Bad as it looks, the performance of corporate bonds has to be benchmarked against government debt. Is an annual return of minus 10 per cent bad compared to an average US Treasury bond return of –12% or French government bond return of –18%, measured in local currency? Companies with longer maturity portfolios did worse, but that has to be measured against the similar performance of long maturity government bonds.

Screenshot of interactive visualisation available to subscribers

At first sight, equities performed even more miserably, but the S&P 500 is dominated by its large cap tech giants. If you start with a universe of corporate bonds globally, and compare their 2022 performance with the equity returns of their parent company, a more diverse picture emerges.

Risky Finance has tweaked its corporate bond visualisation to illustrate this. For 1,200 companies with listed equity and debt tracked by Markit iBoxx, we plot equity return on the horizontal axis versus the company’s average bond return on the vertical axis over the same time period. The size of each bubble indicates the amount of outstanding debt each company had at the start of 2022.

For 19 different industry sectors, we can classify them according to how their equity versus bond performance sits within a quadrant. Some, such as Automobiles & Parts, Construction & Materials and Media, sit in the bottom left quadrant, which means both bonds and equities for companies in those sectors did badly. For corporate debt we define ‘badly’ as meaning a performance worse than government bonds.

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