Why Industry Reports Matter in Corporate Bond Research

Industry reports are essential in corporate bonds research, allowing analysts to compare and contrast financial statistics and ratios against the sector average. This brings in the element of relative value, which is at the core of any corporate bond recommendation. It also helps to give a broader context to sector performance and highlight those underperforming and outperforming their peers.

Even though Gimme Credit analysts primarily use a bottom-up approach to corporate bond research, understanding sector health, trends, and market dynamics is also more than helpful. Even during more challenging times, identifying struggling companies could enhance the prospects for better-financed and better-positioned companies. It’s not simply a case of identifying the strongest companies, but those best positioned to benefit going forward.

When corporate bond analysis is stripped to its basics, it all comes down to relative value. If a company performs particularly well but its peers are outperforming, then in relative terms, it’s going backwards. This highlights the dangers of reviewing company finances and prospects in isolation without a degree of context – it also demonstrates the value of our industry reports.

In strong markets, investors can sometimes ignore research methodology and data sources, especially where there has been a trusting relationship. We take a very different approach, outlining our methodology in detail, identifying data sources and making them an integral part of our bond recommendation notes. Using the same methodology and data sources across an industry, as we do with individual companies, ensures consistency, which is critical when making investment decisions.

One of the challenges for analysts is to identify the moment when short-term volatility morphs into a long-term trend. Even when the trend appears to have turned, when do you call it? When is the right time to go positive and update your recommendation? Looking at companies in isolation this point may take time to filter through; looking at companies and the broader sector will help with relatively early clarity.

When reviewing an industry, there are numerous factors to consider, including:-

• Market size and growth rate
• Profit margins 
• Regulatory environment
• Competitive landscape
• Consumer demand
• Technology trends
• Economic outlook

While the raw data is beneficial, the experience of individual analysts and the team mentality proves valuable here. Suppose a sector is positioned to take advantage of technology trends, reducing costs and enhancing margins. In that case, this can have a considerable knock-on effect on finances, cash flow, and the relative value of corporate bonds.

The key is to see past short-term noise and focus on the fundamentals and the industry’s short, medium, and long-term prospects. Coupled with bottom-up research into individual company bonds, this can help identify strong companies best positioned to exploit sector growth.

When analyzing companies in isolation, identifying long-term trends can be challenging and not always obvious. However, by examining companies within the broader context of their industry, patterns and opportunities often become more apparent. A prime example of this is the recent surge of M&A activity in the pharmaceutical sector where major players like AstraZeneca, Bristol-Myers Squibb, Pfizer, and Merck have strategically utilized the corporate bond market to fund acquisitions..

These mergers and acquisitions often involve short-term financial strain, such as increased debt levels, which might negatively impact credit ratings. In this scenario it’s important to consider the broader context as these moves tend to be geared towards longer-term benefits. 

The key to expanding pharmaceutical operations is to balance what can be significant research costs with immediate cash flow and finances. There have been instances where some companies have overstretched their balance sheets in the short term and paid the price with a credit downgrade. However, since many of these acquisitions effectively purchase cash flow, potential, and established treatments, it’s essential to appreciate the overall industry landscape.

To calculate the relative value of corporate bonds, you need a base from which to compare and contrast raw data. Our industry reports provide a broad outlook on individual sectors, while our company specific research highlights those with relatively strong balance sheets and others with potential issues. Using this combined data allows our analysts to assess the relative value of different companies and bonds, against their peers.

Please contact us if you would like more details about our industry reports, and we can schedule a convenient time to discuss this in more detail.