Rising Stars – What’s Next?

15. Feb 2024

Steffen Ullmann

Senior Portfolio Manager Investment Grade

Rising Stars were one of the most successful credit themes in 2023, and in our view, current trends continue to support this theme. Given the significant decline in potential returns, we are currently focusing on a select few promising candidates.

Rising Stars were one of the most prominent credit themes in 2023, and investors who positioned themselves correctly enjoyed strong performance. Netflix and Ford were arguably last year’s best-known Rising Stars. Looking back, however, the circumstances could not have been more different: While Netflix was one of the biggest beneficiaries of the COVID-19 pandemic, Ford was among those hardest hit. Nevertheless, both companies managed to achieve investment-grade status last year—one of the few things they have in common.

In addition to significantly improved operating results, the focus on a stronger balance sheet played a decisive role in many upgrades. This is because the new interest rate environment has significantly increased the incentive to reduce leverage—and we are currently also observing restraint in large, debt-financed corporate acquisitions, capital expenditure on expansion, as well as dividends and share buyback programs.
This is a positive trend from a lender’s perspective. Despite the many global uncertainties, we assess the risk of a short-term reversal of current trends as low.

Since the return potential for potential Rising Stars has decreased significantly in recent months (see Chart 1), we are currently focusing on a few promising candidates identified through our detailed company analysis.

Risk Premium of BB Bonds Over BBB Bonds

Source: Bloomberg (Bloomberg Euro High Yield BB Rating Only Total Return Index Value Unhedged EUR; Bloomberg Euro-Aggregate: Industrials Baa); as of February 9, 2024.

Risks

Price losses due to rising yields and/or increased risk premiums are possible. Even a total loss cannot be ruled out. Past performance is not indicative of future results, nor can future performance be guaranteed.

Disclaimer

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