Viewpoints

Discerning the Nuances in Distressed Credit: Why Active Management Matters

In distressed credit investing, careful legal and capital structure analysis must go hand in hand with fundamental corporate analysis.

Recent market volatility following a prolonged period of tightening across most corporate bond sectors serves to highlight the importance of an active and discerning eye toward the fundamentals in credit investing. Portfolio decisions should take into account not only the price of an investment, but where in the credit structure that investment has been made. Understanding the fundamentals of a company’s business and the sector in which it operates is a necessary though not sufficient level of analysis for successfully investing across the credit quality spectrum and throughout the credit cycle.

At PIMCO, we have hard-coded this degree of rigorous analysis into our investment and risk management processes. The nuances among seemingly similar issuers and issues that end up leading to very different investment outcomes are a great part of why we believe active credit management matters.

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The Author

Jonathan Horne

Portfolio Manager, Credit Absolute Return

Adam Gubner

Portfolio Manager, Distressed Debt

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Disclosures

Investing in distressed companies (both debt and equity) is speculative and may be subject to greater levels of credit, issuer and liquidity risks, and the repayment of default obligations contains significant uncertainties; such companies may be engaged in restructurings or bankruptcy proceedings. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and the current low interest rate environment increases this risk. Current reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Corporate debt securities are subject to the risk of the issuer’s inability to meet principal and interest payments on the obligation and may also be subject to price volatility due to factors such as interest rate sensitivity, market perception of the creditworthiness of the issuer and general market liquidity. The credit quality of a particular security or group of securities does not ensure the stability or safety of the overall portfolio. Credit default swap (CDS) is an over-the-counter (OTC) agreement between two parties to transfer the credit exposure of fixed income securities; CDS is the most widely used credit derivative instrument. Derivatives may involve certain costs and risks, such as liquidity, interest rate, market, credit, management and the risk that a position could not be closed when most advantageous. Investing in derivatives could lose more than the amount invested. Notional value is the total value of a leveraged position's assets. This term is commonly used in the options, futures and currency markets which employ the use of leverage, wherein a small amount of invested money can control a large position in the markets.

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Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. Outlook and strategies are subject to change without notice. Investors should consult their investment professional prior to making an investment decision.

This material contains the opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America L.P. in the United States and throughout the world. ©2018, PIMCO.