US Credit Market Surviving Turmoil from Europe: CIO
Despite extreme turmoil in the credit markets abroad, the U.S. leveraged loan market has been "holding up pretty well," Mark Okada, co-founder and CIO of Highland Capital, told CNBC Wednesday.
"When we think about what's going on in Europe, there are a couple of connection points into the U.S. credit markets, number one is confidence. When you have them trying to wrestle a market together, when you don't have a fiscal union and you just have a monetary union, that's difficult. And so confidence is reflected in our space," Okada explained.
He noted that market activity had been "fairly light" but that credit has been "outperforming," which is why Okada often tells investors to focus on contractually-based asset classes, rather than valuation-based asset classes.
"When you got a contractually-based asset class, you know certain things that are going to determine your returns," he went on to say. "When we talk about bank debt, I know my coupon, I know my collateral, I know my maturity [and] I know the cash flows of the underlying companies."
Specificially, Okada suggests buying high-yield bonds, distress, private equity and bank loans, because they help to "cushion" the downward volatility in the market.
As for the "schizophrenia" in the markets, Okada said the volatility would most likely continue, making it difficult to hedge portfolios. "When you have thin secondary markets coupled with this yo-yo sentiment, you've got a market that's fairly hard to trade."
But he did note one bright spot in the economy. "One of the nice things about what's happened with this topsy-turvy market with confidence is, it's given the buyside (guys who are buying debt in the market) much more buying power versus issuers."
Lastly, Okada cited a senior security floating rate of 6 to 8 percent. "Those are nice returns, I would argue that we are getting paid very nicely for the risk."
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