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Clients are buzzed about the whole low rates environment, negative yields and capacity for bond investors to
capture nice income.

Context: In the prospect for rates to remain in negative space for longer, how that translate for an
income strategy like the one for the credit opps.

Fund: All.

Impact for the fund: Positive, in time of uncertainty and low rates, the subordinated debt of
European financials is a liquid, heavily regulated and strengthening sector still offering incomes
above 4% in EUR.

I would point the attention on the article we have been published lately on Lower rates for longer.
There we explain how actually for the sector of financials and in the specific, subordinated debt of best quality
issuers, this challenging environment, when considered in parallel to the regulatory changes we are
experiencing actually translate in a positive credit story for the GAM Star Credit Opportunities.
To give a little of context, from the macro/political aspect we have been experiencing uncertainties, contrasted
by “simultaneous” policy easing by central banks.

This was reflected by
• Drop in inflation expectation vs tight labor market
• Global trade and manufacturing under pressure vs. resilient services and domestic consumption.
• Simultaneous easing by central banks should help contain potential market volatility and limit
downside risk
• A good environment for fixed income investors, especially for active managers as macro/political

regain the upper hand—stay up in the credit quality.
Monthly Q&A – GAM Star Credit Opportunities 3 Atlanticomnium – September 2019
Yields on sovereign debt has indeed keep getting lower and negative yielding fixed income securities are now
at all time high:

• 10 years sovereign debt of Austria, France, Germany, Sweden, Netherland, Switzerland and Japan
currently report negative yields,
• More than 25% of EUR IG corporate market already has negative yields and there is even a handful
of HY corporates which are currently in the same situation,
• Cash is not an option as deposit rates also are in negative space,
o EU -0.4% and CH: -0.75%.
In such environment, in order to capture positive yields, there are different options: either higher interest rate
risk or higher credit risk, OR something a different like what the Credit Opps is proposing.
• Quality beta, such as choosing the best national champions of the financial sector for then descending
their capital structure in order to capture a higher income

o This translate in IG issuers with low risk of default with a nice and steady income from
descending down their capital structure, up to 4% for EUR sub debt.

While many Investors have been pushed up the risk scale to capture some income, subordinated debt allows
to reach a high income from safe and secure investment grade companies.
In particular for European Banks:

• Banks have strengthened the quality and quantity of regulatory capital
• Increased capacity to absorb losses in a severely adverse scenario
• Banks have cleaned up their balance sheets and asset quality keeps on improving
• Structural reduction of risk-taking activities
• Strong solvency, capital and liquidity ratios
• Highly regulated and liquid market



Monthly Q&A – GAM Star Credit Opportunities 4 Atlanticomnium – September 2019
This bring us to what we believe is a very big opportunity for this asset class, stronger names which are heavily
scrutinized and forced to continuously improve their balance sheets, nice capacity to generate income by the
juniority of the asset class and valuation which remains still very attractive as the spreads on such securities
yes tightened YTD but remains still very wide:

• Pre-GFC, it was not unusual to capture spreads of less than 100bps for high quality issuers, so ca.
4x lower than what we are capturing now
• Spread have tightened year-to-date but still remain much wider than 18 months ago:
• From FEB2018 to DEC2018, spreads widened by 230bps to 480bps
• Since then, spreads have only tightened by 100bps or not even half of the widening
experienced last year



Monthly Q&A – GAM Star Credit Opportunities 5 Atlanticomnium – September 2019

To conclude we do have a very constructive tone and while performances has been strong YTD we remain
very constructive for the remaining of the year.

While macro/political uncertainties have somewhat reduced during July, the dovish stance by central banks
should help contain potential volatility that these might create over the coming months, due to the low interest
rates environment, it is getting even more challenging for investors to find yielding securities, without taking
excess interest rate or credit risk.

We feel that subordinated debt from national champions remains the sweet spot as we do see strong
fundamentals, attractive valuation levels and supportive technical.

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