Overcoming Credit Downgrades: Four Ways to Improve Your Liability Hedge

Executive Summary
近年来，许多美国计划赞助商采取了负债驱动的投资（LDI），以应对会计准则（FASB 87）和资金要求（养恤金保护法）。在过去10年内，在经历毁灭性的效果后，其他人已经接受了LDI。无论动机如何，这种战略的变化都应大大减轻当前的养老金计划波动，这是对公司资产负债表，收入陈述和现金流量产生负面影响。

Pension liabilities are typically discounted by a statutory long corporate rate. Therefore, many pension plans now have a strategic vision to increase their allocation to fixed income assets—specifically long-duration corporate bonds—in an effort to match assets and liabilities. The move to long-duration corporate bonds mitigates the vast majority of liability risk.

转向长期公司债券是减少资产责任风险的巨大第一步，但它不会完全消除风险。存在残余风险，因为公司债券具有信用风险，并且来自同一公司债券的养老金责任价值不受信贷风险。

When a corporate bond is downgraded out of a specified index, the liability discount rate assumes that this bond never existed—it is excluded from the discount rate calculation. Meanwhile, the matched assets experience the full underperformance of the downgraded bond through capital losses. This mismatch makes it impossible for a pension plan to create an asset portfolio that is perfectly aligned with its liabilities. The resulting discrepancy creates a credit downgrade headwind for liability-driven investors.

While it may seem counterintuitive, investing the assets precisely in the liability index (the bonds of the exact duration and capitalization weights of the bonds used to construct the liability discount rate) has not historically been the most risk-reducing strategy. In fact, it would have led to a 14% decline in the funded ratio over the last two decades. Instead, investors should consider the following four approaches to improve their asset-liability tracking:

•投资credit-screenedbond portfolios,
• Expand the credit universe beyond the liability index,
• Adopt issuer-capped indices, and
• Tolerate downgraded issues.

在个人的基础上，每个选项都可以帮助养老金计划实现他们的最终目标：消除未推拉的风险，支持预期改善养老金计划资助地位的风险。携带这四项策略的养老金计划可以克服，从过去20年的信贷降级逆风中克服了14％的资金比率下降。

信用下降逆风
US plan sponsors are all too aware of their funded ratio volatility. Over the past decade, pension plans have experienced at least two “perfect storm” events in which equities plummeted while pension liability values rose (Hunt 2009). Liability-driven investors aim to weather the funding volatility storms by more closely matching plans assets with plan liabilities.

然而，责任指数在指数重量和持续时间内构成了困境的债券可能会使投资者成为假的精确感。对于会计和资助责任估值，折扣率来自公司债券。这些债券将投资者通过降级和违约使投资者威胁到信用风险。然而，对于责任指数，不存在这种信贷风险;当债券降级时，它只是退出责任指数。匹配资产表现不足负债，因此将投资者公开给信贷降级逆风。

展示1图表养老金资金比率plan invested completely in corporate bonds that exactly matched their pension liabilities. While this hypothetical pension plan’s performance is significantly better at matching plan liabilities than a typical US pension plan, the graph clearly illustrates the credit downgrade headwind. In all but two periods, the asset performance is very similar to the liability performance, and the funding ratio remains stable. However, even corporate bonds that perfectly match the liability index fail to keep pace with the liability value during times of market stress, as shown in the shaded regions of the graph. The funded ratio of this fully immunized portfolio would have dropped 14% over the past 20 years as a result of credit downgrades alone.

Downgraded bonds cause the funded ratio to fall. These bonds experience price deterioration in the time leading up to their downgrade and are eventually sold, having underperformed peer bonds. At the same time, after a bond is downgraded, the liability calculation assumes the bonds never existed, as the downgraded bond is excluded from the revised liability index. The liability value seems to take on a life of its own, often rising when bonds are downgraded, causing the funded ratio to fall.

从前瞻性的角度来看，信贷降级逆风的风险非常真实。降级的债券通常在信用事件之前的几个月内恶化，这意味着信贷相对于同龄人扩大扩大。债券降级后，该指数具有较低的平均信贷传播，意味着更高的责任价值。

Exhibit 2 illustrates the potential impact of a credit downgrade. General Electric’s bonds, highlighted in the chart, represent more than 20% of the Barclays Capital US Long Credit AA Index. Because the bonds’ option-adjusted spreads are on the upper cusp of the index, a hypothetical GE downgrade would cause the average index spread to fall by nearly 20 basis points. A 20 bp decline in the discount rate translates to a 2.4% increase in the liability value for a typical pension plan with 12 years in duration (change in yield × duration = 0.2% × 12 = 2.4%). A pension plan holding the matching bonds in its asset portfolio would not experience an offsetting increase in its investments if GE were downgraded. The assets intended to match the liability, therefore, would have underperformed, exposing the funded ratio to the credit downgrade headwind.

四种克服逆风的方法
责任驱动的投资者可能会从采用四种投资解决方案中受益，以减轻信贷降级逆风。

1.投资信用筛选的投资组合
积极管理的债券投资组合可以帮助避免在降级之前避免恶化积分，并减轻信用降级逆风（见第6页的信用筛选中的案例研究）。为了回避逆风，管理人员必须在降级前从他们的投资组合来消除风险信用。成功避免进步降级的策略是奖励，基本上不失败。

While this insight may seem obvious, performance analysis suggests it is often underestimated. Exhibit 3 highlights how downgraded bonds perform relative to their peers in the months preceding the downgrade. For example, A-rated bonds underperformed their peers by 4.9% in the month of downgrade and the 11 preceding months; the vast majority of this underperformance (over 3.4%) occurred in the month of downgrade and the two months preceding downgrade.

在降级前成功筛选债券为克服信贷较低的逆风提供了最直接的机会。具有证明避免降级的技能的主动债券管理人员可以帮助责任驱动的投资者更好地将资产绩效与责任性能进行符合。

2.扩大信用宇宙
理论上，匹配资产投资组合应仅包括用于构建责任贴现率的债券。实际上，该资产组合往往没有充分多样化，并且可以从单一发行人员暴露于显着的逆风。

The investable corporate bond universe is fairly concentrated at maturities of 10 years or greater and exposes investors to unnecessary individual company risk. For example, at year-end 2010, an index of long corporate 6A bonds (those rated A, AA or AAA) held only 160 issuers.6 Although the PPA funding valuation rules specify a 6A index, LDI strategies benefit from expanding the fixed income benchmark. The full, long, investment-grade corporate bond universe has more than twice the number of issuers (350 issuers and 75% more market capitalization than the long 6A corporate bond universe). Additionally, the sector diversification is better in the full, long, investment-grade corporate bond universe. Financials composed 30% of the long 6A index compared with 22% of the long investment-grade index; industrials make up a much greater share of the BBB rated bonds. The investment-grade index improves diversification and decreases concentration risk in issuers and industries.

扩大基准到完整，长期，投资级宇宙还可以提高养老金计划的盈余/退货概况：

•历史月度收益全面，较长，投资级公司债券指数与养恤金责任密切匹配（与长企业6A指数的相关性99％）。
• The full, long, investment-grade corporate bond index has historically outperformed the long corporate 6A index over long time horizons.8 Exhibit 6 shows the improved returns, which are primarily attributable to the fact that the full index has less concentration risk and lower average quality than the narrower long 6A index. The introduction of BBBs produces negative returns during the headwind periods, but rallies stronger than the 6A index during the recoveries. Over long periods of time, the additional volatility has proved beneficial.

计划保荐人更愿意保留与责任指数匹配的债券组合的加权平均质量或产量可以将完整的投资级债券指数与国债组合结合起来。这些国债在强势逆风期间的责任方面具有额外的好处。

In addition to credit screening, broadening credit exposure beyond the bonds used to construct the discount rate is a useful approach to mitigating the headwind.

3.采用加盖指数
Even though the liability indices weight the investable universe by market value, investors can cap exposures to large issuers to further reduce the effect of a credit downgrade headwind.

Large issuers typically compose a significant percentage of market-weighted indices, exposing pension plans to unnecessary idiosyncratic risk. Just as issuer-capped indices are a common risk-mitigating technique for high-yield and emerging market investing, they can also be a helpful tool for liability-driven investors.

For example, despite its diversified issuer base, a full investment-grade long corporate index held seven issuers that each consisted of more than 1% of the index at year-end 2010, compared with a long corporate 6A index with 24 issuers that each consisted of more than 1% at year-end 2010, for a total of almost 40% of the index market capitalization. By capping issuer weights, liability-driven investors can limit the impact of downgraded bonds.

Exhibit 7 illustrates how, across most time periods, capped index returns have been nearly identical to uncapped index returns. In 2002 and 2003, when the credit downgrade headwind was very strong, the 1% capped index significantly outperformed the uncapped version of the index.10 The capped index would have gone a long way in mitigating the credit downgrade risk during this period when a few large issues significantly impacted bond index returns. During 2008–2009, the capped index experienced some return volatility, compared with the uncapped index, but still modestly outperformed over the period.

Bond returns are asymmetric. While the upside is limited, the possibility exists for full capital loss during extreme events. Capping issuer weights helps investors reduce their exposure to bond downgrades and defaults, which is a useful approach to mitigate the credit downgrade headwind.

4.Tolerate downgraded issues
Credit screening is the first line of defense against the credit downgrade headwind. However, even the most meticulous screening should be supported by a back-up plan.

For downgraded bonds that were not screened, an active manager should be given discretion to hold downgraded issues for a period of time subsequent to the downgrade. Because the universe of investment-grade managers dwarfs that of junk bond managers, a forced sale of a fallen angel can cause significant price pressure on the bond.

Holding fallen angels after a downgrade can provide meaningful long-term outperformance. A recent study suggests that benchmark rules constrain an investor’s ability to capture the excess returns of credit bonds over Treasury bonds (Ng and Phelps 2010).

The study focused on the credit spread premium, the annual difference between the credit spread and the default costs. From 1990 to 2009, a downgrade-tolerant benchmark—which permits the continued holding of fallen angels—captured 32 bp more of this credit spread premium than the typical investment-grade index, an improvement of 79%. This outperformance was primarily derived from loosening the benchmark constraints and avoiding a forced sale. Giving portfolio managers the flexibility to use their discretion in managing around the investment-grade mandate can add returns that further offset the credit downgrade headwind.

A complete defense against downgrades
责任驱动的投资使得计划提案国通过降低剩余波动性来保护资助的地位。但是，养老金负债的公司折扣率介绍了资产责任风险，即使对于完美免疫的指数债券组合。为了进一步完善其资产投资组合，投资者应考虑四种可以提高责任对冲的技术：

•投资credit-screened难觅踪迹tfolios,
• Expand exposure to the full investment-grade credit universe,
•盖子暴露于大型发行人，
• Tolerate downgraded issues.

Each option can independently improve a plan’s funded status over time, compared with the liability index bond portfolio (Exhibit 8).11 Taken together, they present a strong defense against the potential impact of credit downgrades.

Due to the mechanics of the liability discount rate index, the headwind periods are unhedgeable and unavoidable events. Yet, pension plans can prepare for them by reducing exposure to future downgrades and adding small incremental returns. A pension plan employing all four suggested techniques could have fully overcome the 14% decline in funded ratios from the credit downgrade headwind experienced over the past 20 years.

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