Amundi Says Beware ‘Walking Dead’ Firms in High-Yield Credit

(Bloomberg) -- If a company disappears will anyone really miss it? That’s one of the key questions investors in U.S. high-yield credit should ask in the era of Covid-19, according to Amundi Pioneer.

Some firms are little worse for wear or have even benefited amid the pandemic, while a group of “walking wounded” saw earnings slide and may need fresh capital but are otherwise intact, according to Ken Monaghan, co-director of high yield at Amundi Pioneer, a unit of $1.9 trillion asset manager Amundi. But a cohort of “walking dead” companies may not recover, he said.

“The trick is obviously distinguishing between the last two groups,” Monaghan said in an email interview. “Perhaps the best question to ask is, if a company or an industry were to disappear, would anyone really miss them? There are some sectors and companies where the jury is still out on that question.”

The comments echo concerns about the possible proliferation of so-called zombie companies, which don’t earn enough to cover interest payments but survive thanks to official efforts to ensure cheap liquidity. Junk-rated U.S. issuers borrowed about $53 billion in August through Aug. 28, the second-busiest month on record, according to data compiled by Bloomberg.

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A potential example of the walking wounded are some airlines, as they are critical elements of national infrastructure, leading to an expectation that they will return to some level of normalcy, Monaghan said. He declined to mention instances of walking dead, citing the sensitivity of the matter.

On credit spreads, Monaghan said they are unlikely to widen again to levels seen during the worst of the selloff in March. The peak in defaults “always lags the recovery in high-yield returns,” he noted.

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