8 International Financing Review March 21 2020Top news
UK property funds halt redemptions for
second time in less than four years
People & Markets Investors are gated again after significant wave of outflowsBY GARETH GOREUK property funds have become
THEûlRSTûTOûHALTûREDEMPTIONSû
as a result of the global
coronavirus crisis, with six asset
managers saying they will no
longer honour requests from
clients to cash out of their
investments, a decision that will
put more than £12bn behind
gates.
Kames Capital and Janus
(ENDERSONûWEREûTHEûlRSTûTOû
announce a halt to redemptions
late on Tuesday. They were
followed by Aviva, BMO Global
Asset Management, Columbia
Threadneedle, Standard Life and
Legal & General on Wednesday.It is unclear how long the gating
will last.
All are heavily exposed to
retail, which is expected to be
severely hit by growing
restrictions on the general public
designed to halt the spread of the
disease. Between 20% and 40% of
the funds’ portfolios are made up
of retail parks, shopping centres
and shops.
The funds had seen a wave of
OUTmOWSû!LTHOUGHûTHEYûHAVEû
some capacity to meet such
redemptions – the six hold
between 11% and 26% of their
assets in cash – the decision to
GATEûWASûTAKENûTOûPREVENTûAûlREû
sale of assets, which would hurt
ongoing clients.“We have historically
maintained a cash position to
meet a reasonable level of
redemptions,” said Janus
Henderson, which owns £2bn of
real estate in its UK property
FUND ûINCLUDINGûANûOFlCEûPARKûINû
Cambridge, and out-of-town
retail parks in Derby, Wigan and
Crayford.
“However, the Covid-
PANDEMICûHASûCREATEDûSIGNIlCANTû
market uncertainty. Given this
material uncertainty and
considering the FCA’s updated
rules in this regard, we believe
we need to protect the interests
of all investors by suspending
dealing in the fund and the
feeder.”NEW RULES
The Financial Conduct Authority
last year announced new rules –
to come into effect this
September – on open-ended
vehicles that invest in assets
such as property, in a bid to
address the fundamental
mismatch of offering daily
liquidity to clients when the
asset base is deeply illiquid.
The measures, which came in
response to the same funds gating
inventors following dislocations
in markets after the Brexit vote,
include increased liquidity
disclosures, risk warnings in
promotional material, enhanced
depositary oversight, as well as
contingency planning.Fallen angel risk increases
Bonds Downgrades to high-yield loom amid shaky earnings outlooksBY WILLIAM HOFFMANThe Triple B space that has
treated investors so well looks
set to turn nasty as deteriorating
fundamentals stemming from
the coronavirus and the oil
shock threaten to unleash a
series of downgrades to junk.
After Triple B US companies
started to heed warnings about
potential downgrades and
attend to leverage in late 2018,
many such credits quickly
turned the corner.
According to ICE BofA data,
Triple Bs brought investors
15.91% in total returns last year,
making them the best bond
market performers out of any
ratings category.
But as the US economy looks
likely to fall into recession,
corporate earnings will take a
hit, and Triple B companies’
ability to pay down debt will
become constrained, again
RAISINGûREDûmAGSûABOUTûAûSURGEûINû
companies falling out of theinvestment-grade bracket – and
becoming so-called fallen angels.
“Strategists have been worried
about an earnings slow down in
the Triple B sector and that
obviously could precipitate a
move more quickly to
downgrades,” one syndicate
banker said.WAIT FOR THE DROP
With travel restricted,
employees working from home
and public gathering spots shut
down, sectors such as retail,
tourism and leisure will be hithard, while the energy sector is
certain to be hurt by the fall in
oil prices.
Occidental Petroleum received
ITSûlRSTûHIGH
YIELDûRATINGûWHENû
Moody’s cut it to Ba1 from Baa
on Wednesday.
Moody’s said the company
would be under pressure to pay
down leverage it piled on via a
US$13bn bond last year given
the drop in oil prices and a likely
inability to complete asset sales
amid the volatility.
Bank of America calculates
that an additional US$20.5bn of
energy debt is poised to fall into
junk territory, with Continental
Resources, Western Midstream
and Ovintiv likely candidates to
be moved to Double B.
That does not include Mexican
oil company Pemex, which
could remove US$58.6bn of
high-grade eligible debt if it loses
its full investment-grade rating,
though as an emerging markets
credit it would not fall into the
US high-yield index.“It would not be formally
labelled a US fallen angel and
would actually leave the
remaining IG Triple B complex
cleaner and tighter than before,”
according to the BofA report.
Investment-grade airlines
Delta and Southwest are also
expected to take a major hit as
revenues could decline globally
by at least 20%, despite the fall in
oil prices, according to an S&P
report.
And carmaker Ford, which
was already trading like a junk
credit before the coronavirus
outbreak, is now on an
accelerated path that will turn
US$36.3bn of debt into high-
yield securities.
In the food and beverage sector,
Kraft Heinz already got the ball
rolling after being downgraded to
junk earlier this year.
Conagra Brands and Molson
Coors could be next because
ratings agencies already gave
them a long runway to delever,
according to CreditSights.“Strategists have
been worried about an
earnings slow down
in the Triple B sector
and that obviously
could precipitate a
move more quickly to
downgrades”4 IFR Top news 2325 .p 2 - 12 .indd 8 20 / 03 / 2020 19 : 08 : 59