The Compelling Opportunities In The High-Yield Market

Andrew Susser is an Executive Managing Director and Head of the High-Yield Team at MacKay Shields. Prior to joining MacKay Shields in 2006, he was a portfolio manager with GoldenTree Asset Management and Head of High Yield Bond Research at Banc of America Securities. From 1999 to 2004, Andrew was named to the Institutional Investor All-America Fixed Income Research Team; from 2002 to 2004, he was ranked by Institutional Investor as the No. 1 analyst in the high yield gaming sector.

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Susser manages the MainStay High Yield Corporate Bond Fund (MHCAX). Over the last 15 years, the fund has ranked in the 12th percentile of its Morningstar peer group. Over that period, its annualized return was 8.45%, 395 basis points ahead of the Bloomberg Barclays US Aggregate Bond total-return index and 95 basis points greater than its peer group average.

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I spoke with Andrew on June 28.

Please discuss the mandate of the MainStay High Yield Corporate Bond Fund (MHCAX), as well as your portfolio-construction and risk-management processes.

The High Yield Group at MacKay Shields has been around since 1991 and currently has about $23 billion in assets under management, of which the Mainstay High Yield Corporate Bond Fund is about $10 billion. It is mandated to have at least 80% invested in high-yield bonds, which are bonds that are rated below investment grade by the independent rating agencies.

We have a simple and straightforward investment philosophy that has remained consistent since our group’s inception in 1991. We are bottom-up investors with a value orientation and a long-term perspective.

Because of the asymmetric reward and risk profiles, investing in high-yield bonds requires special attention to downside protection. Our investment process focuses on asset coverage, which we define as the value of a company compared to the amount of its debt it has. It is a similar concept as loan-to-value. We look for additional cushion, or “margin-of-safety” through that asset coverage.

We narrow the high-yield universe using our investment process into a focused list. From there, we assess relative value through our system of risk groups. Every bond in our portfolio is grouped into different risk buckets, each of which has an assumed long-term default rate. Group-one credits are our highest quality bonds which are least likely to default. We think of group-two credits as our typical high-yield bond. Group-three high-yield bonds are higher on the risk scale, and they are the most research intensive bonds, often trading at a discount to par. They still have one-and-a-half times asset coverage, of course. Last, we have a group four for special situations, which are typically a small part of the portfolio.

We compare the spreads of credits both within an individual risk bucket and also between risk buckets to determine whether or not we are getting paid appropriately for the risk. For example, the spread of a group-two bond would have to be sufficiently wider than a group-one bond to represent the better relative value to us, in order to compensate for the higher long-term default rate.

By Robert Huebscher, read the full article here.

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