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By Sarah Bush | 04-24-2013 11:00 AM

First Eagle's Slein: High-Yield Fundamentals Solid

The current credit environment is benign and stable, and investors should expect a coupon-type return over the coming years, says First Eagle's Sean Slein.

Securities mentioned in this video
FEHAX First Eagle High Yield A

Sarah Bush: Hello. My name is Sarah Bush for Morningstar, and I'm here today with Sean Slein from First Eagle High Yield. Thank you for joining us today, Sean.

Sean Slein: Well, thank you.

Bush: So we've seen just very strong performance in the high-yield market in recent years. What's your outlook, and where do you see fundamentals in the market today?

Slein: Fundamentals in the market still very good. Over 60% of proceeds of primary issuance are still being used for refinancing purposes, which lowers the default risk of the market, as well as idiosyncratic default risk of various issuers. So, issuers are terming out near-term maturities, and essentially buying time to go into their capital structures. That's good. That's in contrast with what we saw in 2006 and 2007, when we saw more equity-friendly issuance, more dividend activity; more activity that was to the detriment of the high-yield investor.

Corporate managements in this environment remained chastened by their near-death experiences of 2008. So they’re more incentivized to manage their balance sheets and to ensure that they have a margin of safety regarding cash on the balance sheet, as well as availability of committed financing. So they are allocating capital a lot more efficiently and a lot more prudently than they had been in the past. And we feel that in this benign and stable credit environment that returns and risk are going to remain relatively manageable for the near term.

Bush: So, against that backdrop, where are you finding opportunities today?

Slein: We're finding opportunities in Europe, and we're certainly finding opportunities in the loan market, as well. We're concerned with interest-rate risk, and we're more than happy in this benign credit environment to take more credit risk versus interest-rate risk. And we feel that investing in the loan market, though we're giving up call protection and we're also giving up some basis points in terms of yield, that floating-rate nature helps insulate us from the possibility of an increase in interest rates.

As far as Europe goes, we've been participating more and more in European issuance over the last three years. The European market has tripled in the last four years. And as a result of Basel III [regulations] and banks having to manage their capital--banks historically had been intermediaries of credit in Europe--and as a result we're seeing the European capital markets begin to develop.

So, we're participating in that issuance primarily in Western and Northern European higher-quality larger companies. So, companies in the telecom industry, companies in the automotive industry, as well. The yield enhancement that we've been able to achieve versus a dollar-denominated--let's say, euro-denominated tranche versus dollar-denominated tranche--has narrowed somewhat over the last few years as risks of disintegration in Europe have receded. But we're still seeing some premium that we are able to pick up as a result.

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