Aviva Investors reduces allocation to comms high yield

Aviva Investors is maintaining an underweight stance on the communications sector within its high yield allocation as it believes it faces a higher default rate. 

In an allocation update, Brent Finck and Sunita Kara, global co-heads of high yield at Aviva Investors, shared where they are favouring and disliking within the high yield space. 

Finck said: “The communication sector, encompassing telecoms, media and technology, faces several secular challenges. These include evolving consumer behaviours and intensified competition between wireless and cable companies. Numerous companies are struggling with high levels of debt, making it difficult to adapt to new market conditions. 

“This has led to the sector being the poorest performer in the high-yield market last year, a trend that has continued into 2024.”

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His co-head, Kara added: “The communication sector is also facing upcoming debt maturities. Historically, due to its ability to generate consistent cash flows, it was able to sustain higher debt levels. However, the current secular challenges and looming maturity walls are causing investors to pay close attention to these companies’ credit histories, and to their ability to refinance and extend their debt maturities.”

Finck concluded the firm is opting to remain underweight as it believes these challenges are likely to persist which is likely to lead to a higher default rate among those issuers. 

On the other hand, the firm is positive about high yield opportunities in capital goods, construction machinery, diversified manufacturing, basic industries and chemicals.

Kara said: “A significant portion of the chemicals sector within high yield is comprised of commodity chemicals, which are highly sensitive to the economic cycle. The prevailing opinion is that this cycle may have reached its peak in terms of pricing and margins. However, our exposure leans towards specialised chemicals, such as those involved in water treatment, which are less cyclical and offer better margins.”

It has also increased allocations to triple-C rate debt after it experienced outperformance compared to the broader market. Triple-C debt posted returns of almost 20 per cent compared to 14 per cent by the market last year. As a result, Aviva has opted to increase allocations to this asset by 100 basis points, specifically identifying those which have strong refinancing prospects and capture positive convexity.

“This adjustment reflects our analysis of financing conditions and spread ratios between triple-C and double-B rated debt, which suggests potential opportunities for compression, particularly from triple-C to single-B ratings,” Kara commented.