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Finding value within the e-commerce bond space
Althea Spinozzi
Head of Fixed Income Strategy
Summary: We hear a lot about e-commerce stocks and their extraordinary rise amid the Covid pandemic; however, does it make sense to have a look at their bonds? This article will look at Peter Garnry's e-commerce basket to determine which bonds out of the listed issuers offer the best opportunities within both the investment-grade and junk space.
The technology sector is one of the healthiest when looking at credits. It is characterized by low net-debt-to-Ebitda and high interest coverage. These features are vital in an environment where corporate leverage is at a 20-year high, and inflation expectations continue to rise. Tech bonds might offer the necessary tools to recalibrate one portfolio’s risk-reward ratio in an effort to prepare to navigate adverse waters if any correction in the stock market is to happen. Yet, as yields fall by the day, cherry-picking remains crucial. Recent market trends have pushed investors towards riskier securities and longer durations, which can be detrimental in a rising interest rates environment.
Investment-grade e-commerce bond basket
It will not come to a surprise to learn that the average yield offered by investment-grade e-commerce corporates is around 1.6%. Such yield will not protect against inflation as the 10-year Breakeven rate is 60bps higher quoting at 2.2%. It is necessary to extend the maturity beyond 2030 to be able to secure a yield above 2%. JD.com (US47215PAF36) offers a yield of 3.6%, the highest of the list, for a thirty-year maturity. In comparison, eBay (US278642AU75) offers the lowest yield, just 1.2%, for a 2027 maturity. Therefore, IG e-commerce bonds don't offer a yield high enough to create a buffer against rising interest rates and inflation. Actually, investors are pushed to take on more duration, exposing them further to interest rate risk.
Yet, compared to their peers, JD.com and Meituan offer good pick up over US Treasuries for quite a short durations. Meituan 2025 (USG59669AB07) provides 120bps pick-up over the US benchmark for only 3-year maturity while JD.com 2026 (US47215PAC05) offer around 110bps over the Treasuries. Although the pick up looks juicy, it won’t be enough to protect even against short term inflation expectations which at the time being are around higher than the 10-year Breakeven rate quoting 2.4%.
High-yield e-commerce bond basket
When looking at the return of junk e-commerce credits, it's possible to understand why high yield bonds are investors' favourite. They are currently the only instruments that provide enough buffer to hedge against inflation expectations without extending duration. The average yield that e-commerce junk bonds provide is around 4.2% for an average duration of 6 years. Yet, to secure a yield higher than 2.5%, it is necessary to look beyond seven years or accepting to dig within the CCC. QVC bonds appear to provide the best risk-reward ratio within junk e-commerce bonds. Its net-debt-to-Ebitda ratio is in line with its peers, but benefits from higher interest coverage. QVC bonds with 2027 maturity (US747262AY90) offers a yield of 3.2%.
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