(Bloomberg) -- The lowest rated blue-chip corporate bonds are attractive, given fatter yields and less downgrade risk than higher-quality debt, according to Monica Erickson at DoubleLine Capital.
“Companies learned a lesson in 2020 that being investment grade is a significant advantage,” said Erickson, the firm's head of investment-grade corporates, in a phone interview.
The difference in spread between U.S. bonds rated BBB and BB -- the highest rung of junk -- peaked at 124 basis points last month, implying bigger interest payments for those below investment grade. Borrowers need to monitor their access to capital, which is more volatile in junk markets, added Erickson, whose company manages $134 billion in assets.
Companies graded A and higher have less incentive to defend those ratings, while also offering a lot less spread, Erickson notes. She cites as an example Oracle Corp., whose funding for a nearly $30 billion acquisition spurred downgrade warnings in December.
“There was really no advantage, especially from an equity standpoint, for them to maintain that super-high rating,” said Erickson. “It made sense for them to allocate capital toward the equity class.”
DoubleLine is avoiding debt from certain large technology and pharmaceutical companies, given tight spreads and downgrade risk. Erickson declined to name them.
“We're just more careful when we look at credits that are higher-rated, we have to have a level of comfort that they are interested in remaining at the higher credit rating,” said Erickson.
DoubleLine also seeks to buy bonds of junk companies that could be raised to investment grade, though some of the gains may already be priced in. The amount of investment-grade debt being evaluated for an upgrade recently swelled to $203 billion, the most since 2010, according to Bank of America.
“Kraft Heinz is a perfect example,” said Erickson. “They got downgraded right before Covid hit. And if you look at spreads, they're fairly tight.”
DoubleLine also likes sectors that were heavily impacted by the pandemic but continue to recover, such as travel and restaurants. Erickson also notes lingering concerns about Federal Reserve policy.
“Historically, when the Fed raises rates to fight inflation, it's very hard to walk that tightrope of getting it all done without killing growth,” she said.
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