Assessing credit risk for bonds

Does the scheme have direct investment in debt instruments that are not purchased through a pooled investment fund? *

‘Debt instrument’ refers to a financial instrument which allows the issuer to raise funds by agreeing to repay the lender at a later date. Examples include government bonds and bills, corporate bonds, high yield bonds, emerging market bonds, convertible bonds (before conversion), asset-backed securities, certificates of deposit, commercial paper. Cash on deposit, e.g. with the scheme’s custodian, is excluded from the definition.

‘Direct investment’ refers to investments made by the scheme which are not made through a pooled or collective investment fund.

‘Pooled investment funds’ refers to collective investment vehicles where the capital of multiple individual investors is pooled together and aggregated for the purpose of investment, e.g. an Undertaking for Collective Investment in Transferable Securities (UCITS) or Alternative Investment Fund.

‘Collective investment fund’ refers to a fund combining grouped assets of multiple individuals or organisations to create a larger investment portfolio.

What factors do the person(s) who decide on the sale, retention or purchase of these debt instruments take into account when assessing the likelihood that their issuer will not make the capital or interest payments due on them in full or on time? *

This question is about the techniques used to assess creditworthiness, i.e. the likelihood that an issuer of individual debt instruments will default on their debt obligations. It is not intended to relate to the many other factors considered when constructing a portfolio that includes debt instruments. Nor is it intended to relate to additional factors considered when assessing the suitability of investment in debt instruments generally.

‘Credit ratings’ refers to an assessment of the creditworthiness of a borrower by a ratings agency, e.g. Fitch, Moody’s or Standard & Poor’s.

In most instances, we expect the answers to relate to how the scheme’s investment manager(s) assess the creditworthiness of individual debt instruments.