O’Connor Supply-chain finance gains attention in O’Connor’s hedge fund portfolio

Supply-chain finance is gaining attention in O’Connor’s hedge fund portfolios as the operating difficulties of several important players in the ecosystem have created a significant supply/demand imbalance that favors investors. 

18 Apr 2021

Now trending: trade finance

"We’re finding tremendous value in the trade finance space.

Prepared investors can capitalize on a highly inefficient market and construct what we view as the best risk-adjusted return portfolio in corporate credit."

Kevin Russell, Chief Investment Officer, O'Connor

For more of Kevin Russell's views, read his Q1 letter to investors.

Supply-chain trade finance getting our attention right now, as the operating difficulties of several important players in the ecosystem have created a significant supply/demand imbalance that favors investors. Recent negative press surrounding supply chain finance is a product of localized, firm-specific issues, not a blight on the asset class as whole. In fact, these difficulties at several important players in the ecosystem have created a significant supply/demand imbalance that is enhancing the attractiveness of the opportunity set for investors.

Against the backdrop of tight credit spreads in both the investment grade and high yield markets, we are seeing tremendous value in the trade finance space (Figure 3).

Figure 3: Spreads are tightening in corporate bond markets

Source: Bloomberg, as of 30 March 2021.

Spreads are tightening in corporate bond markets charts credit spreads for US Investment grade (all sectors) and US High Yield all sectors from December 2019 through March 30 2021.

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Magnitude of relative premium in trade finance makes it one of the most compelling opportunities

In addition to the shorter duration, lower default probabilities, and higher recoveries available for corporate credit exposures taken via trade finance, we are also currently enjoying substantial yield pick-up ranging from 100 bps to as much as 2,000 bps in some cases, relative to observable benchmarks in the investment grade and high yield markets. While there is some additional complexity and operational intensiveness involved with supply chain finance compared to corporate bonds, the magnitude of the relative credit premium is undeniable and presents one of the most compelling opportunities that we see across all asset markets.

We are fortunate to have been focused on supply chain finance for the past two years and find ourselves fully prepared to capitalize on this market dislocation for our investors.

For more of Kevin Russell's views, read his Q1 letter to investors.

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