21 Oct 2021 4 min read

What’s in a name? There’s more than the pound in sterling cr

By Corinne Lewis-Reynier , Ian Hutchinson

A rose by any other name may smell as sweet, but in the investment-grade world, UK credit and GBP credit are not the same thing.

 

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Sterling credit and UK credit are terms often used interchangeably, leading many investors to assume that the world of issuance in British pounds is the ‘UK credit market’. In several important ways, this assumption is false.

Only half the issuers in the iBoxx index, one of the most widely used benchmarks in the British credit space, are UK-domiciled. When we look at sales, the picture is even more international, with approximately 80% of the iBoxx’s corporate revenue coming from outside the UK.

Sterling-denominated credit is popular around the world

The pound sterling credit[1] market is worth £670 billion, with over 1,200 investment-grade bonds issued in the currency. Compared to the giant US credit market, this may look small -- but one thing often overlooked is that most of the major global issuers have outstanding debt denominated in sterling.

That’s because global companies, supranationals and financials want diversification – both for their currency mix and their investor base. Among the top 100 global issuers of corporate debt, the top 15 all issue in sterling.

Issuer diversification

This diversification is well represented at the sterling index[2] level, and as the chart below shows, half of the issuers in sterling investment grade are non-UK from a country-of-risk perspective (i.e. the location from which an issuer is domiciled, and its reporting currency). The list also shows the top ten issuers in the index by percentage weighting and where they are domiciled: we can see the mix of countries represented.

Take Electricite de France* (EDF), the French energy company. It’s a heavyweight in the index’s[3] utility sector, with a 1.6% share. Its revenue mix is very much global (60% France, 14% UK, 11% Italy, and 15% from the rest of the world, as per 2019 revenue data) and its issuance is also diversified by currency: most is in euros, as one would expect, followed by sterling and US dollars. Given the amount of capital the firm employs in the UK, in pounds -- a legacy nuclear plant and the new project at Hinkley Point -- we expect EDF to continue playing a major part in the sterling credit markets.

Revenue diversification

As previously stated, the sterling credit index’s revenue is mostly sourced outside the UK, and this trend has only accelerated since the Brexit vote of 2016, as the following chart shows. A combined total of 55% comes from North American and European sources. In addition, revenue from Asia, Latin America, the Middle East and Africa is very much represented.

Sector diversification

Finally, since the financial crisis, the universe of issuers in which we can invest keeps getting broader. Exposure in our sterling credit portfolios covers a wide range of sectors, such as pubs, roads, airports, hospitals, housing associations, building societies and universities. We believe this provides great diversification across geographies and issuers.

Investors looking for exposure to long-dated credit and higher yields

Beyond diversification benefits, the sterling credit market offers specific and, in our opinion, credit-enhancing characteristics that are hard to replicate elsewhere. For example, the share of over-15-year duration in the index is much bigger than in the euro index, making sterling a space that appeals to pension schemes.

The sterling corporate market has also offered historically higher yields and returns than those found in euro or US dollar corporate markets.

In conclusion, we believe the sterling credit markets offer global issuers with unique characteristics in the form of diversification and duration benefits, as well as yield-enhancing features that we expect to continue to offer attractive investment opportunities for active managers.

 

*For illustrative purposes only. Reference to a particular security is on a historical basis and does not mean that the security is currently held or will be held within an LGIM portfolio. The above information does not constitute a recommendation to buy or sell any security.

[1] Source: Bloomberg, as of October 2021

[2] Markit iBoxx Sterling Non-Gilt index

[3] Markit iBoxx Sterling Non-Gilt index

Corinne Lewis-Reynier

Head of Fixed Income Investment Specialists, Active Fixed Income

More interested in the intricacies of global finance than sunshine and the beach, Corinne originally left the south of France for a City of London career. She grew to enjoy the British weather, fish and chips, tea and Jaguar E-Types, but retains a preference for Gallic cheeses and ciders. She joined LGIM in 2018 and previously worked at BlackRock, where she was Head of European product specialists for short duration strategies. She has also worked at Morgan Stanley Investment Management as a senior portfolio manager, and started her career at JPMorgan Asset Management, where she was a portfolio manager and government bonds trader. Corinne earned an MA in Financial Risk Management from the University of Aix-en-Provence and a Master’s degree in International Economics from the University of Sussex. Corinne holds an MBA from London Business School.

Corinne Lewis-Reynier

Ian Hutchinson

Portfolio Manager

Ian manages LGIM's sterling credit investment grade portfolios and is lead manager for the over ten year strategy. Ian joined LGIM in 2004 and has previously worked for Insight Investment and Aviva Investors.

Ian Hutchinson