Short duration bond funds

aroominyork

masonic said:

Bonds are issued with a final bullet repayment of capital. They are not amortising. Therefore the company must either be able to issue more bonds at an affordable coupon, or have enough capital reserves to repay bondholders at maturity. A company that is struggling may be able to limp along for a while, but an event such as one of their bonds maturing would precipitate an insolvency. As a rule, you don't hold debt-based securities from higher risk borrowers to term. 

I am restarting this thread on short duration bonds and picking up masonic's comment about the risk associated with the final bullet of repayment or refinancing. 

Covid is giving many companies short-term finance problems - some companies will recover over time while others will fold. For companies with maturing bonds some will presumably be able to access refinance once their businesses are again reliably trading but would have difficulty accessing refinancing for bonds which mature soon; likewise some companies would be able to repay bonds which mature in several years' time but not those maturing soon. 

The consequence might be that short duration bonds funds carry an additional risk over longer-term bond funds. However over the last three months the fund I hold, Royal London Short Duration Credit, has continued to be less volatile (has fallen less) than most strategic bond funds. What point/s am I missing, please?

EdGasketTheSecond

Maybe it has been lucky so far with no defaults on any of the bonds it holds. That could change going forward.

aroominyork

I doubt that's it, Ed. Although most of the fund's holdings mature within five years, few will have matured within the last three months. The fund is priced on perceived future prospects. For info, 46% of the fund's holdings are rated BBB, 30% better (A or higher) and 24% below (BB or below); presumably several of those BBBs would now be considered sub-investment grade/junk.

EdGasketTheSecond

Wasn't that basically what I said?

aroominyork

I read, Ed, that you said there have been no defaults on maturing bonds. I am saying it is too early to see defaults. My question is whether Covid is creating increased risk in short-term (ie maturing in the next few years) compared to longer-term bonds.

2unlimited91

I'm not at all convinced by this theory that short-term bonds carry more credit risk than long-term ones. The usual theory is the opposite, that the longer the term, the more time there is for SHTF moments, hence the greater the credit risk.

Some refinancing is happening at the moment — credit markets have not seized up — though naturally bondholders will consider how Covid-19 is affecting a company when deciding both whether to give them refinancing at all, and if so at what price (interest rate).

Note that many companies have both short- and long-term bonds currently outstanding. And if they fail because they can't refinance a short-term bond, then all their bonds will end up in the same situation of hoping for some recovery from the liquidation.

And they can also fail when they don't have any immediate need for refinancing, due to other cash flow problems. Or, if they are borrowing via both bonds and bank loans, when they can't refinance or extend their bank loans.