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Low & Wide BBB Credits Our Analysts Like
CreditSights Staff
EXECUTIVE SUMMARY
- We surveyed our analyst team for low BBB credits with wide spreads that they have a favorable view on and we came up with thirteen names across the same number of sectors. The parameters for our search were that the bond had to trade wide to the low-BBB averages, which currently show an OAS of +245 for 5-7 year maturities and +265 or wider for 7-10 year maturities (Sept 20 pricing).
- Our analysts like Ally Financial 2031s, AerCap ‘32s, Boardwalk Pipeline ‘31s, Celanese ’29s, General Motors ‘32s, HollyFrontier ‘30s, HP ‘32s, JBS ‘32s, Suzano ‘31s, Vale ‘250s, VICI Properties ‘30s and Warner Bros Discovery ‘29s. These bonds show an average OAS pf +279 and median OAS of +284.
- We have framed the reports as a Why do spreads trade wide, Why does CreditSights like the name and Credit Metrics & Outlook for each name as well as a link to recent relevant research. We encourage clients to reach out to the analyst teams behind each name either via the Ask-an-Analyst feature or e-mailing them directly.
- This report from our fundamental analysts follows our strategy team report last week on the BBB market that looked at, among other things, BBB spreads relative to historical levels, changes within the ratings tiers of the BBB index over time and leverage trends.
FINANCIAL METRICS
Banks: Ally Financial (ALLY), $10 bn Mkt Cap, $25 bn Debt
Jesse Rosenthal, jrosenthal@creditsights.com
Why are spreads wide? We tie the YTD poor performance squarely to market risk retrenchment and macroeconomic recession fears driven by expectations for a weakening US consumer as the affects of pandemic era stimulus begin to wane, as well as some headline fears over auto loans and delinquencies. Management itself noted the risk overhang amid inflation pressure and recessionary fears on 2Q22 earnings but stressed the higher-quality nature of its book, no real signs of fundamental erosion beyond normalization trends of COVID-era support burning off, and healthy consumer balance sheets.
Why do we like it? The recent weakness provides an attractive buying opportunity as ALLY 8% 2031s are now 50 bp wide to low BBBs for the first time since regaining IG ratings, versus 40 bp inside low BBBs at YE19 before the pandemic. Current duration adjusted spreads are similar to early 2019 levels when loss rates were still manageable, but 2-3x higher than what we are seeing today. Additionally, the company has limited exposure to the areas of auto loans seeing real weakness (i.e. lower income consumers, deep subprime-type credit).
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