Real Asset Debt
A Better Default Outlook for Real Asset Debt
Chart
May 07, 2024
High-yield bond default rates continue to rise, amid higher interest costs and refinancing needs. However, we find most of the defaults over the past 12 months have been concentrated in non-real asset sectors—and we expect this trend will continue.
The chart below shows how real asset companies’ interest burden and debt maturity profile remain manageable. Relative to issuers in non-real asset sectors, we find that issuers in real asset sectors have a relatively lower average coupon, a higher proportion of fixed rate debt, and relatively lower maturities over the next five years.
In addition, based on historical data, we believe bonds of issuers backed by real assets may have higher recovery rates in cases where they do default. We attribute this to real asset companies’ stronger underlying collateral (i.e., hard assets vs. retail inventory assets) generating the cash flows that creditors have a priority claim on. As a creditor, we prefer the collateral advantage of companies backed by high-quality assets.
Disclosure Information
All investing involves risk. The value of an investment will fluctuate over time, and an investor may gain or lose money, or the entire investment. Real assets include real estate securities, infrastructure securities and natural resources securities. Fixed income risks include interest-rate and credit risk. Typically, when interest rates rise, there is a corresponding decline in bond values. Credit risk refers to the possibility that the bond issuer will not be able to make principal and interest payments.
Brookfield Public Securities Group LLC (“PSG” or “the Firm”) is an SEC registered investment adviser and is registered as a portfolio manager in each of the provinces and territories of Canada and represents the Public Securities Group of Brookfield Asset Management Inc., providing global listed real assets strategies including real estate equities, infrastructure equities, multi-strategy real asset solutions and real asset debt. PSG manages separate accounts, registered funds and opportunistic strategies for institutional and individual clients, including financial institutions, public and private pension plans, insurance companies, endowments and foundations, sovereign wealth funds and high-net-worth investors. PSG is an indirect, wholly owned subsidiary of Brookfield Asset Management Inc., a leading global alternative asset manager.
The information in this publication is not and is not intended as investment advice, an indication of trading intent or holdings, or prediction of investment performance. Views and information expressed herein are subject to change at any time. Brookfield disclaims any responsibility to update such views and/or information. This information is deemed to be from reliable sources; however, Brookfield does not warrant its completeness or accuracy. This publication is not intended to and does not constitute an offer or solicitation to sell or a solicitation of an offer to buy any security, product or service (nor shall any security, product or service be offered or sold) in any jurisdiction in which Brookfield is not licensed to conduct business and/or an offer, solicitation, purchase or sale would be unavailable or unlawful.
Opinions expressed herein are current opinions of Brookfield Public Securities Group LLC, including its subsidiaries and affiliates, and are subject to change without notice. Brookfield Public Securities Group LLC, including its subsidiaries and affiliates, assumes no responsibility to update such information or to notify clients of any changes. Any outlooks, forecasts or portfolio weightings presented herein are as of the date appearing on this material only and are also subject to change without notice. Past performance is not indicative of future performance, and the value of investments and the income derived from those investments can fluctuate. Future returns are not guaranteed, and a loss of principal may occur.
Forward Looking Statements
Information herein contains, includes or is based upon forward-looking statements within the meaning of the federal securities laws, specifically Section 21E of the Securities Exchange Act of 1934, as amended, and Canadian securities laws. Forward-looking statements include all statements, other than statements of historical fact, that address future activities, events or developments, including, without limitation, business or investment strategy or measures to implement strategy, competitive strengths, goals, expansion and growth of our business, plans, prospects and references to our future success. You can identify these statements by the fact that they do not relate strictly to historical or current facts. Words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe” and other similar words are intended to identify these forward-looking statements. Forward-looking statements can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. Many such factors will be important in determining our actual future results or outcomes. Consequently, no forward-looking statement can be guaranteed. Our actual results or outcomes may vary materially. Given these uncertainties, you should not place undue reliance on these forward-looking statements.
Index Provider Disclosures
Brookfield Public Securities Group LLC does not own or participate in the construction, or day-to-day management of the indices referenced in this document. The index information provided is for your information only and does not imply or predict that a Brookfield Public Securities Group LLC product will achieve similar results. This information is subject to change without notice. The Indices referenced in this document do not reflect any fees, expenses, sales charges, or taxes. It is not possible to invest directly in an index. The index sponsors permit use of their indices and related data on an "As Is" basis, makes no warranties regarding same, does not guarantee the suitability, quality, accuracy, timeliness, and/ or completeness of their index or any data included in, related to, or derived therefrom, assumes no liability in connection with the use of the foregoing. The index sponsors have no liability for any direct, indirect, special, incidental, punitive, consequential, or other damages (including loss profits). The index sponsors do not sponsor, endorse, or recommend Brookfield Public Securities Group LLC or any of its products or services.
Index Definitions
The ICE BofA U.S. High Yield Index tracks the performance of US dollar denominated below investment grade corporate debt publicly issued in the US domestic market.
The Morningstar LSTA US Leveraged Loan Index tracks the performance of more than 1,400 U.S. dollar-denominated loans, deriving its constituents from syndicated term leveraged loans (also known as bank loans or senior secured loans) that are held within top-tier institutional investor loan portfolios tracked by PitchBook and LCD.
Definition of Terms
Debt maturity is the date at which the final repayment of a debt instrument is due.
The par weighted coupon is the par weighted average of all coupon rates of the bonds in the index.