“We think the credit risk in the marketplace is probably a bit below average.”
While governments worldwide continue to struggle with debt and budget issues, for the most part, corporations have turned lemons into lemonade and have become lean and mean. While not without risk, corporate credit actually looks to be in fairly good shape, according to Eric Takaha who, as senior vice president and portfolio manager of Franklin Strategic Income Fundspends a good deal of time analyzing the space.
“The environment has actually been pretty good for corporations, both high yield as well as investment grade, and some of the bank loan issuers out there. Default rates for the last couple of years have been generally well below long-term averages for both high-yield credit as well as for bank loans. In general, management teams have been pretty conservative with their balance sheets. There’s been a lot of liquidity; a lot of refinancing activity has gone on, so they have pushed out their debt maturities over the next couple of years. We think the outlook—at least for the near term—is for a continuation of those trends. Investment-grade companies have been able to refinance at very low interest rates, so that’s helped their cash flow and earnings potential. So while default rates could tick up a bit, we think the corporate credit fundamental environment looks relatively tame. We think the credit risk in the marketplace is probably a bit below average.”