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  • April 24, 2018
    Fixed Income
    Hybrids revisited – opportunities across the Atlantic
    Andrey Kuznetsov, CFA
    Almost two years ago, Andrey Kuznetsov, Credit Portfolio Manager and Audra Stundziaite, Senior Credit Analyst, at Hermes Investment Management, argued that the market for European hybrids was attractive for both issuers and investors. Today, they revisit the case for hybrids and ask: in the growing global hybrid market, where is the relative value? In 2016, we argued in favour of an increased allocation to the European hybrid market in an issue of our quarterly commentary Spectrum, “Putting two and two together: how hybrids can add up for investors.” The central premise was that hybrids were attractive for investors due to the inherent investment benefits they offer and a supportive economic backdrop
  • April 17, 2018
    Fixed Income
    Hybrids revisited: opportunities across the Atlantic
    Andrey Kuznetsov, CFA
    Almost two years ago, we argued that the market for European hybrids – instruments that blend features of debt and equity – was attractive for both issuers and investors. Today, we revisit the case for hybrids and ask: in the growing global hybrid market, where is the relative value?Hybrids have developed a track record with both issuers and investors in recent years: investors are attracted by the yield pick-up they offer, while they are a relatively cost-effective funding instrument for issuers.
  • February 7, 2018
    Fixed Income
    Fuelling change at Pemex: Why ESG analysis matters in credit decisions
    Audra Stundziaite
    Engagement is an integral part of the investment approach adopted by Hermes Credit. By engaging with issuers, we can encourage them to adopt better environmental, social and governance (ESG) practices, and thereby, deliver a better financial return and a public good. Here we explain how we addressed our ESG concerns by engaging with oil producer Pemex.
  • November 23, 2017
    Fixed Income
    Back in black: The energy sector’s cash-flow focus is good for credit
    Audra Stundziaite
    As energy companies focus more on balance-sheet strength and less on maximising growth, the sector is likely to become more attractive to credit investors. Back when commodity prices were peaking, production volumes were arguably the key drivers of Exploration & Production (E&P) companies’ equity valuations. The underlying logic was simple: the faster the company grew production, the more barrels of oil it could sell at high prices. Expansion strategies were justified by high internal rates of return, exceeding those of returning capital to shareholders.
  • August 29, 2017
    Fixed Income
    Petrobras and Pemex: Putting ESG analysis in the oil mix
    Audra Stundziaite
    Undoubtedly, oil poses more than a few headaches for ESG investors. Besides the obvious high carbon content of petroleum products, the industry as a whole has accrued a reputation as risky across a range of ESG measures. These include: environmental preservation, workers’ health and safety, executive pay and, as demonstrated by the Petrobras scandal, political corruption. Yet in spite of – or perhaps because of – its blatant shortcomings, the oil industry attracts long-term investors who are prepared to engage on ESG matters. Despite rising sales of electric cars and the risk of fossil-fuel deposits becoming stranded assets, the oil industry is not disappearing any time soon. According to OPEC, global oil demand should increase until at least 2040. (see figure 1). That said, even if OPEC’s own growth expectations of 109m barrels of daily intake by 2040 prove to be overly optimistic, engagement on ESG factors – including climate change scenarios - will remain as important as ever.
  • March 28, 2017
    Fixed Income
    Three risks that could slip up oil investors
    Audra Stundziaite
    The fragility of oil prices has been tested by a confluence of factors over the last few weeks. We identify three further downside risks to the oil price that could drive volatility near term. By remaining aware of these risks, investors should be able to successfully navigate this environment. After three months of relative stability, WTI oil prices have dropped below $50 a barrel, falling 10% in two weeks. This sharp correction, prompted by persistently high US inventories and confusion related to Saudi Arabia’s February production levels, reminded investors of global oil market fragility and how quickly sentiment can turn. Our long-term view remains the same: range-bound oil prices at $45-55 a barrel. Despite this, investors may have to endure further shorter-term oil price volatility. We believe three factors could fuel near-term risks to the downside: