Interesting investment environment for the long term
Strong Q3 reports were overshadowed to some extent by intense activity in the primary market, inflationary effects that are feared to be longer-lasting, and new mutations of Covid-19 impacting risk appetite − a combination of factors that are leading to increased volatility and fluctuating risk appetite.
Price movements that reflect short-term market dynamics rather than the underlying credit risk create a favourable and interesting investment environment for the longer-term investor, and there is a clear upside for anyone prepared with the right credit analysis.
We initially reduced our holding in ICE Group in November by selling the bond maturing in 2022 when it became too expensive in terms of the fund’s underlying return target. Towards the end of the month, the company surprised with a Q3 report containing updated targets with higher growth ambitions and also a desire to sort out its somewhat complicated capital structure. All in all, this means that the company sees a need for 2.5 billion in new capital before reaching break-even. The news caused the share to halve, and the bonds lost 3–7%, which seems like an overreaction.
The company is the third-largest operator in Norway and has explicit support from the state, a market share of just over 10% (target of 20%), a nationwide network it has invested 5–10 billion in building, and total debt of 3–5 billion. An oligopolistic market and defensively leveraged infrastructure assets mean that even with modest assumptions we see the credit risk as attractive. The company’s bonds with 1.5 years to maturity are trading at +900 bps, which in our world is unjustifiably high and we therefore chose to increase the holding again towards the end of the month.
The increased volatility caused by Omicron, and a high level of activity in the issue market, mean that a slightly higher cash balance comes in handy and allows us to be selective. We continue to view the Nordic credit market positively, and in the short and medium term are optimistic about being able to create a certain excess return from company-specific factors in addition to current coupons, in order to have a longer-term expectation in line with the underlying rate of return in the portfolio.