Monday’s announcement that Microsoft intends to purchase Nokia’s handset business and license the company’s patents for a total of $7.2 billion has provided a major boost to Nokia’s bonds and highlights the investment case for investing in “fallen angels,” according to Fran Rodilosso, Fixed Income Portfolio Manager at Market Vectors ETFs.
“It is expected that Nokia will continue to exist and will move to focus on its network equipment business,” said Rodilosso. “I believe it will still be in a very competitive space, but the cash infusion from this deal, should it be completed, will be a big credit positive for the company and highlights one of the investment theses behind focusing on fallen angels.”
“In this case, we are dealing with a long established player and brand name in the handset business which, despite its falling market share and worsening business prospects, still possesses attractive assets that hold significant value,” he continued. “Rated B+ on average by the major rating agencies, Nokia’s debt may soon be considered for potential upgrades based on the success of this deal, which is expected to close in early 2014.”
Rodilosso pointed to another significant telecommunications player and “fallen angel,” Sprint, which has experienced very positive credit events in the past 12 months as Japan’s Softbank emerged as the leading suitor of the company.
“Part of the attractiveness of fallen angel bonds is that the issuers, formerly investment grade companies, tend to be larger, more established players in their lines of business,” said Rodilosso. “While some of these companies continue to decline, there is often value to be tapped in brand names, patents, capacity and various other factors. It is also helpful from a bond investor’s perspective that often a major goal of management of these companies is to regain their investment grade status.”
Rodilosso noted that not all mergers become credit positive events. “Fortunately for creditors the Sprint deal is not a leveraged buyout (LBO), and Nokia’s agreement to sell assets is being struck with a partner that is in a very strong financial position, in my view,” he said.
Market Vectors offers the Fallen Angel High Yield Bond ETF (NYSE Arca: ANGL), which tracks an index of below investment grade corporate bonds denominated in U.S. dollars, issued in the U.S. market that were rated investment grade at the time of issuance. ANGL invests in high-yield bonds, which may be subject to greater risk of loss of income and principal and are likely to be more sensitive to adverse economic changes than higher rated securities.
Mr. Rodilosso has 20 years of experience trading and managing risk in fixed income investment strategies, including 17 years covering emerging markets. In addition to ANGL, Mr. Rodilosso also oversees Emerging Markets Local Currency Bond ETF (NYSE Arca: EMLC), Emerging Markets High Yield Bond ETF (NYSE Arca: HYEM), Investment Grade Floating Rate ETF (NYSE Arca: FLTR), Treasury-Hedged High Yield Bond ETF (NYSE Arca: THHY), International High Yield Bond ETF (NYSE Arca: IHY), LatAm Aggregate Bond ETF (NYSE Arca: BONO) and Renminbi Bond ETF (NYSE Arca: CHLC). As of June 30, 2013, the total assets for these ETFs amounted to approximately $1.9 billion.
About Market Vectors ETFs
Market Vectors exchange-traded products have been offered since 2006 and span many asset classes, including equities, fixed income (municipal and international bonds) and currency markets. The Market Vectors family totaled $21.8 billion in assets under management, making it the seventh largest ETP family in the U.S. and tenth largest worldwide as of June 30, 2013.
Market Vectors ETFs are sponsored by Van Eck Global. Founded in 1955, Van Eck Global was among the first U.S. money managers helping investors achieve greater diversification through global investing. Today, the firm continues this tradition by offering innovative, actively managed investment choices in hard assets, emerging markets, precious metals including gold, and other alternative asset classes.
There are risks involved with investing in ETFs, including possible loss of money. Shares are not actively managed and are subject to risks similar to those of stocks, including those regarding short selling and margin maintenance requirements. Ordinary brokerage commissions apply. Debt securities carry interest rate and credit risk. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. Credit risk is the risk of loss on an investment due to the deterioration of an issuer's financial health. The Funds' underlying securities may be subject to call risk, which may result in the Funds having to reinvest the proceeds at lower interest rates, resulting in a decline in the Funds' income.
The Funds may be subject to credit risk, interest rate risk and a greater risk of loss of income and principal than those holding higher rated securities. As the Funds may invest in securities denominated in foreign currencies and some of the income received by the Funds may be in foreign currency, changes in currency exchange rates may negatively impact the Funds’ returns. Investments in emerging markets securities are subject to elevated risks which include, among others, expropriation, confiscatory taxation, issues with repatriation of investment income, limitations of foreign ownership, political instability, armed conflict and social instability. Some Funds are subject to risks associated with investing in high-yield securities; which include a greater risk of loss of income and principal than funds holding higher-rated securities, as well as concentration risk; hedging risk; and short sale risk. Investors should be willing to accept a high degree of volatility and the potential of significant loss. The Funds may loan their securities, which may subject them to additional credit and counterparty risk. For a more complete description of these and other risks, please refer to the Funds’ prospectus and summary prospectus.
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Fund shares are not individually redeemable and will be issued and redeemed at their NAV only through certain authorized broker-dealers in large, specified blocks of shares called “creation units” and otherwise can be bought and sold only through exchange trading. Creation units are issued and redeemed principally in kind. Shares may trade at a premium or discount to their NAV in the secondary market.
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