pioneer investments european high-yield...

Pioneer InvestmentsEuropean High-Yield StrategyInvestment Conference, Boston, March 2010

Gregorio Saichin | Head of Emerging Markets & High Yield

For Broker/Dealer Use Only and Not to be Distributed to the Public

For Broker/Dealer Use Only and Not to be Distributed to the Public | March 2010 |

Agenda

Investment Capabilities

European High-Yield Market

Pioneer Funds – Euro High Yield


EUROPEAN FIXED INCOME Raffaele Bertoni

GOVT. BONDSTanguy Le SaoutDerek ArnoldMarco CecchiAndreas KonigCosimo MarasciuloAlberto FontanaSemin SoherMarco MeijerAdam LauxINVESTMENT GRADERaffaele Bertoni•Pierre Andre Klein

GLOBAL EMERGING & HIGH YIELDGregorio Saichin

Hakan AksoyZeke DiwanColm D’RosarioYerlan Syzdykov

CREDIT RESEARCH GLOBAL ex USGarrett Walsh

Andriy BoychukSilvia ClarksonBrian FarrellMajella HealyGavin McKeown

Alison HarveyVirna Valenti

US FIXED INCOMEKen Taubes

QUANTITATIVE FIXED INCOMEDiego Franzin

INVESTMENT GRADECharles MelchreitSeth RomanRichard Schlanger

HIGH YIELD DEBT & LOANSAndrew FeltusJonathan SharkeyTracy Wright

TAX EXEMPTTim Pynchon

MORTGAGES /ABSBernhardt, SteveHaghighat, AliPauwels, Nicholas

Zeno, Larry

US CREDIT RESEARCHMichael Temple

David BrechtJoanne FisherJessica FratturaDaniel GilbertKeith HoganRichard StevensWill Taylor

Brad Komenda

CREDIT Tugrul KoladVladimir Popov

Akvile Janeliunaite

INTEREST RATES &RELATIVE VALUE

Grainne DooleyMark ScrowstonAndrey Demidov

Source: Pioneer Investments data as at 29 January 2010

USRobert UrieChin Liu

GLOBAL ASSET ALLOCATION RESEARCH

Monica Defend

GLOBAL ECONOMICSBerardi, AlessiaOrecchia, EmilioSoggiu, Riccardo

Fixed Income OverviewMulti-Disciplinary Fixed-Income Team Dedicated to Alpha Generation


Strong CapabilitiesHighly-Experienced Team of Investment Professionals

Name Title Industry Experience

Gregorio Saichin Head of Emerging Markets & High Yield 18 years

13 years

6 years

Zeke Diwan High Yield Bond Analyst 14 years

Hakan Aksoy Emerging Markets and High Yield Analyst 12 years

Average of 13 Years’ Industry Experience

Yerlan Syzdykov Senior Portfolio Manager

Colm D’Rosario Junior Portfolio Manager

Global Fixed Income Team managing approximately €85 billion in assets*

Emerging Markets and High Yield Team - three Emerging Markets Debt Portfolio Managers and two dedicated Emerging Market Research Analysts

Credit Analyst Team including three Emerging Markets and High Yield Specialists with an average of 10 years’ experience

Global Emerging Markets Equity Team work in tandem to assess key macro and micro trends

*Source: Pioneer Investments as at 29 January 2010


Source: Pioneer Investments

Business ManagementA Wide Range of Credit Strategies Across the Risk/Return Spectrum

Short-Term IG Corporate

+ A

vera

ge C

redi

t Rat

ing

-

Euro Cash Plus

Euro Corporate

Short-Term

Euro Recovery

Euro Corporate

Bond

Euro Corporate

Etico

IG Corporate/Government Bond

Euro Aggregate

Bond

Global Aggregate

Bond

Euro Strategic

Bond

IG Corporate Bond

High Yield

IG and sub-IG Corporate and Sovereign Bond

Emerging Market Bond

Emerging Market Bond

Euro High Yield Bond

Sub-IG Bond


EMERGING MARKETS DEBT

Pioneer ObbligazionarioPaesi Emergenti a distribuzioneItalian UCITS (inception 2000)

Pioneer Funds –Emerging Markets BondLuxembourg UCITS (inception 07/2000)

Pioneer Funds – Emerging Markets Bond Local CurrenciesSovereign DebtLuxembourg UCITS (inception 11/2009)

EUROPEAN CREDIT

Pioneer Funds –Euro Strategic Bond Multi-Strategy fund, Euro core, several alpha sourcesLuxembourg UCITS (inception 06/2004).

Pioneer Funds –Euro High Yield Bond FundEuro denominated high yield credit BBB- and belowLuxembourg UCITS (inception 12/2005).

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: Pioneer Investments as at 29 January 2010

Emerging Markets Debt and European Credit at Pioneer Investments


Agenda



Overview

Update

Outlook



European High-Yield Market Overview Spreads have Normalised

0

500

1000

1500

2000

2500

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Bas

is p

oint

spr

ead

0

5

10

15

20

25

% T

reas

ury

Yiel

d

Global Emerging Market Credit Euro HY IndexGlobal Emerging Market Sovereign Plus US 2 Year Treasury

Source: Bloomberg as at 8 December 2009


European High-Yield Market OverviewThe Story so Far…

The European High-Yield Market began in earnest in the late 90’s fed by TMT project finance credit stories.

Following the bursting of the TMT bubble in early 2000 the High-Yield market effectively shut down and did not restart again until 2003.

The loose monetary conditions created in early 2000 drove the market up and was instrumental in funding the LBO wave Europe saw much of over the decade. The demand for yield in a low-rate environment significantly outstripped supply (LBO new issuance, fallen angels, etc).

In mid-2007, the market once again stalled as the global financial bubble began to burst, leading to a lengthy closure ofthe EHY new issue market, which both preceded and followed the Lehman Brothers default. The primary market finally reopened in mid-2009.

The financial crisis triggered a wave of rating downgrades in financial institutions, many of which subsequently entered the EHY indices over the last 18 months.

Following the unprecedented global stimuli enacted by Governments around the world in late 2008, monetary conditions were loose enough to ignite the strongest mean reversion bond markets have ever experienced.

Source: Credit Suisse Euro High Yield Index All Currencies Unhedged as at 17 December 2009

Year Annual Returns1999 7.02%2000 -9.76%2001 -5.48%2002 -3.64%2003 30.89%2004 13.82%2005 5.86%2006 9.02%2007 0.49%2008 -32.58%2009 69.46%


CHEMICALS11.84%TRANSPORTATION

10.80%

MEDIA / TELECOM22.81%

OTHERS38.59%

SERVICE7.33%

FORESTPROD/CONTAINER

S 8.63%

European High-Yield Market OverviewThe Issuer Universe has Evolved Favourably Since the Market Began…

1999 2009

The European High-Yield universe has matured since 1999 when over 60% of the universe was media/ telecom companies, most of which had poor business plans with too much debt and little cash flow.Fast forward to 2009, the EHY universe is more balanced and with fewer cyclical sectors (homebuilders, retail, etc.) than USHY.

OTHERS20.67%

CHEMICALS 7.84%

TRANSPORTATION 5.65%

MEDIA/TELECOM 61.52%

SERVICE 1.18%

FOREST PROD/CONTAINER

3.15%

Source: ML High yield Constrained Index 29 January 2010


European High-Yield Market Overview…and this is Also the Case for the High-Yield Investor Base

50 Accounts 250 Accounts

Crossovers15%

High YieldAccounts

50%

Hedge Funds25%

Broker/DealerProp Desk 10%

High YieldAccounts

60%

Broker/DealerProp Desk 40%

1999 2009

The European High-Yield investor constituency has also evolved since 1999.

The current investor base, although more balanced that the original one, is still substantially skewed towards investors with tactical goals such as hedge funds and dealers.

We expect that as the market continues to grow, the number of cross over and dedicated accounts will grow faster than the speculative type, leading to a more balanced investor base.

Source: Pioneer Investments, Deutsche Bank and Goldman Sachs as at 31 December 1999 and 31 December 2009


The Case for European High YieldThe Banks’ Losing Game

The banks’ traditional lending business has been impaired as a consequence of the credit crisis.

With weakened balance sheets in the near to medium term, European banks will be unwilling and/or unable to refinance all of the upcoming corporate maturities that begin accumulating materially from 2011 onwards.

The CLO/CDO business model has also collapsed and will not be viable for the foreseeable future. In addition to this, the regulatory environment in Europe (i.e. UCITS) prohibits investment schemes from investing in loans.

Global Senior Secured Bond Issuance as % Total

This leaves the Euro High-Yield market as the only viable market where the mostly senior bank debt will find readily available funds for the upcoming take out. This trend is clearly illustrated by the growth in the amount of senior secured note issuance as a percentage of overall high-yield bond issuance – on both sides of the Atlantic.

The current profile of the EHY market will provide technical support in the form of coupons and redemptions over the next three years, which will provide capital for the loan take outs.

Source : JP. Morgan, S&PLCD 29 January 2010


The Case for European High Yield Diversification will Lead to Growth

Over the last 10 years, the European high-yield market has grown as a percentage of the global high-yield universe, rising from 4.6% to 17.7%.

Global high-yield investors have traditionally allocated only 10% to the European high-yield space but we expect investors to materially reduce their underweight over the next few years as they seek diversification by currency, country (i.e. economy) and sector.

We also expect large fixed income institutional investors (pension funds, insurance companies, SWFs) to diversify away from purely USD-denominated assets and we believe EHY will be one of the beneficiaries.

Source: Bloomberg, ML Indices HW00 Index as at 31 December 2010

Weight of European High Yield within Global High Yield

4.6%

12.0%

17.7%

0.0%

5.0%

10.0%

15.0%

20.0%

1999 2004 2009


Agenda



Overview

Update

Outlook



European High-Yield Market UpdateFebruary 2010

European High-Yield spreads have moved in line with other asset classes as sovereign risks (Greece, PIIGS, Dubai) have come to the fore, although the EHY class has continued to perform relatively well.

Technicals remain fairly resilient given the new issuance since the beginning of the year (€7bn+). Fund flows into EHY have been positive year-to-date in stark comparison to the negative flows that have been seen in the US over the last few weeks.

Fundamentals also remain positive across the EHY universe as 4Q results have been better than expected as well as the operational trends in Jan/Feb.

Default rates have peaked at ~10% in January and will decline in 2010. Rating agency expectations range from 4% to 8%, with most broker forecasts towards the lower end of this range.


European High-Yield Market UpdateEuro High-Yield Spreads

European High-Yield spreads started the year strongly, tightening from 787 bps to 690 bps mid-January. Since then, as global capital market volatility increased, spreads widened to 771 bps by mid-February before tightening to 745 bps.

Source: Bloomberg, Merrill Lynch Indices as at 22 February 2010

European High-Yield Spreads

0250500750

1000125015001750200022502500

01/0

2/20

07

03/0

9/20

07

05/1

6/20

07

07/2

3/20

07

09/2

7/20

07

12/0

3/20

07

02/1

1/20

08

04/1

8/20

08

06/2

4/20

08

08/2

9/20

08

11/0

4/20

08

01/1

2/20

09

03/1

7/20

09

05/2

5/20

09

07/2

9/20

09

10/0

5/20

09

12/0

9/20

09

02/1

5/20

10

Spre

ad (b

ps)


European High-Yield Market Update Technicals Remain Balanced

January was a very busy month for European High Yield with over €6bn+ of new issuance, which was well absorbed by the market.65% of the year-to-date issuance has been senior secured.Fund flows into EHY has been positive year-to-date in stark contrast to the negative flows seen in the US overthe last few weeks. This has been a factor in the recent sell-off.

Source: Barclays as at 18 February 2010 Source: JP Morgan, AMG Data Services as at 17 February 2010


European High-Yield Market UpdateFundamentals Remain Strong

4Q09 earnings season continues to show better-than-expected performance. 77% and 56% of the companies in S&P 500 and Euro STOXX 600 Indices have beaten expectations.

In Euro High Yield, approximately 75% of the companies have reported better-than-expected earnings.

FCF/ Debt at ~5% remains very healthy for the EHY universe. Corporate balance sheets are in much better shape than they have been coming out of past recessions.

The European ratings Upgrade/Downgrade ratio has turned positive. LTM FCF to Debt

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

Mar-03 Dec-03 Sep-04 Jun-05 Mar-06 Dec-06 Sep-07 Jun-08 Mar-09

UnadjustedAdjusted for Ratings Chg

Source: Morgan Stanley Research, Bloomberg


HY Corporates are Hoarding Cash at a Frantic PaceCash is at the highest level in the last thirteen years.

The number of companies hoarding cash is also at the highest level in that same period.

Management teams across the universe are getting the message: Refinancing is not a risk free event.

Because refinancing is not assured, cash levels and Capex needs to come down in order to force an improvement in the corporate risk profile, even though yields on cash balances are now zero.

Capex has dropped to the lowest level on record as corporates have deferred Capex plans and closed plants.

Repairing balance sheets and increasing liquidity to remain flexible has become a mantra with Management Teams especially in this cycle.

Source: Morgan Stanley and Bloomberg as at 30 September 2009

Source: Morgan Stanley and Bloomberg as at 30 September 2009

Source: Morgan Stanley and Bloomberg as at 31 December 2009


European High-Yield Market Update Default Rates Trending Downwards

Default rates rose throughout the year, and through November 2009 the annual default rate was 10.1%. This figure is lower than the US High-Yield default rate of 13.7% because Euro High Yield did not have nearly as much exposure to risky sectors (Retail, Gaming, Autos, Homebuilders, etc), which experienced higher rates of default. The US market also had a higher number of “covenant light” problem loans used to finance LBO’s.

Cumulative default rates in Europe since June 2007 have reached 12.5%.

EHY default predictions from brokers/rating agencies ranged from 4% to 8%.

The High-Yield market, both in the US and Europe, continues to price in implied default rates, which are significantly higher than the historical average and worst on record. As the markets stabilise, we believe we will continue to see further mean reversion and associated spread compression.

Our expectation of almost average five year cumulative default rates makes the current spread implied default rate of 43.07% at 30 cents recovery and 32.5% at zero cents recovery look overly conservative, and signal substantial value still left in the class.

Source: Moody’s as at 29 January 2010


Agenda



Overview

Update

Outlook



European High-Yield Market OutlookHistorically Good Post-Recession Performance…

After each recessionary phase, High-Yield returns have been impressive in the first year of recovery.

The latest cycle was no exception with 54% total return in US High Yield, and 70% in Europe for 2009.

We expect, similar to previous cycles, that returns will remain healthy for the next few years.

Source: Credit Suisse as at 31 December 2009


European High-Yield Market Outlook…Even During Periods of Monetary Policy Tightening

High yield continued to outperform Treasuries following the start of interest rate hikes in both 1994 and 2004.

While the knee-jerk market reaction to a Fed rate increase is often negative, it usually reflects policy makers’belief that the economy is strong enough to withstand higher interest rates. A stronger economy will also be reflected in corporate bond issuers’ improved profitability and greater cash flow to service debt payments –both positives for high yield.

Investment grade and high yield corporate bonds in the aftermath of Fed rate hikes in 1994


Top-Down Credit AnalysisA First Diagnostic Based on Four Fundamental Corporate Strategic Perspectives

LOW BUSINESS RISK/LOW

FINANCIAL RISK

LOW BUSINESS RISK/HIGH

FINANCIAL RISK

HIGH BUSINESS RISK/LOW

FINANCIAL RISK

HIGH BUSINESS RISK/HIGH

FINANCIAL RISK

Low Business Risk (“LBR”)

Stable earnings over cycle

Defensible margins

Market leadership

Bargaining power

Low operating leverage

High Business Risk (“HBR”)

Volatility of earnings over cycle

Volatility of margins

Fragmented market, follower

Poor bargaining position

High operating leverage

Low Financial Risk (“LFR”)

Below industry average leverage

Flexible liquidity

Adequate maturity profile

Low refinancing risk

Multiple funding sources

Ability to quickly divest assets

Low Financial Risk (“LFR”)

Above industry average leverage

Less flexible liquidity

Unbalanced maturity profile

High refinancing risk

Inability to secure funding sources

Inability to quickly divest assets


Top-Down Analysis: Sector AllocationAllocation and Seniority Decisions Based on Sector & Cycle Stage

- Shorter interest rate duration- Longer spread duration- More credit exposure

More Aggressive

More Conservative

- Longer interest rate duration- Shorter spread duration- More sovereign exposure- More strategic sectors- Sectors with inelastic demand

Consumer Packaging

RetailIndustrials

Real EstateBanks

Econ

omic

cycle

Time

Aggre

ssive

Defensive

Defensive

CableUtilities

Export IndustriesFood

GamingBanks

Agencies/Quasi sovereign

UtilitiesUtilitiesExport IndustriesExport Industries

FoodFoodGamingGaming

AgenciesAgenciesQuasi SovereignQuasi Sovereign

BanksBanks

Neutral

MORE CONSERVATIVEDEBT

MORE AGGRESSIVEQUASI-EQUITY

SeniorSecured

SeniorSubordinated*

Unsecured

High Business Risk/Low Financial Risk

Low Business Risk/High Financial Risk

Low Low Business Business Risk/Low Risk/Low Financial Financial RiskRisk

Expansion Deceleration Contraction


Agenda





Pioneer Funds – Euro High Yield Portfolio Overview & Philosophy

Focus on European high-yield bonds

Average duration: 4 years

Average rating: B

Diversification of issuer, industry and credit quality

Flexibility to invest in government bonds or cash for defensive purposes

Active, team-based approach to identify above-average returns across portfolios

Proprietary fundamental and quantitative research conducted by specialist teams

Top-down economic and market research provides a strategic direction for our portfolios, while bottom-up research enables us to uncover unique investment opportunities in the credit universe

We actively manage portfolios within the context of a strict risk control framework


First Nav Date (A Class) 31 May 2006

Benchmark ML Euro High Yield Constrained

Total AUM (Mil) €201

Total Number of Holdings 77

Fund Inception 5 December 2005

Key FactsPioneer Funds – Euro High Yield

Source: Pioneer Investments as at 31 January 2010. Data refers to Class A EUR Non-Distributing.


Pioneer Funds – Euro High Yield Class A EUR Non-Distributing

ML Euro High Yield Constrained

Calendar Year Returns 2007 - 2 010

Relative


Source: Pioneer Investments as at 29 January 2010. Performance data provided refers to Class A units only, and is based upon NAV net of fees. For details of other unit Classes available, please refer to the prospectus.


Risk Analysis

R-Squared 0.8157

Relative Information Ratio 0.11

Tracking Error 8.38 %

Beta 0.8518

Standard Deviation (3 Years) 23.09 %

Sharpe Ratio (3 Years) 0.05

Alpha 0.75 %


Source: Pioneer Investments as at 29 January 2010. Risk Measures, except Standard Deviation and Sharpe Ratio, are based on Class E Units, which are only offered for public sale in Italy. Standard Deviation and Sharpe Ratio: Lipper.


Pioneer Funds – Euro High YieldWhat Makes us Different ?

Experienced team in all High-Yield specialities in the US and Europe.Long track record in High-Yield specialities.2009, 2007 and 2006 were years where the Portfolio beat its Europe Open Ended High Yield Bond Morningstar peer group average. This is one of the reasons why in spite of a disappointing 2008, the Portfolio exhibits very strong 1 and 3 year performance versus peers. A large degree of flexibility by tracking error and cash levels differentiate us from peers, making both Pioneer Funds – Euro High Yield and Pioneer Funds – Euro Strategic Bond very flexible strategies.Despite a disappointing performance in 2008, the management team recognised early on the extreme bearish views attached to valuations that did not correspond with companies EV’s in the aftermath of the crisis. As a result of this, active management was applied to extract value from junior pieces that were mispriced by the market.Pioneer Funds – Euro High Yield and Pioneer Funds – Euro Strategic Bond (with a 40% weight in High Yield) ended up 2009 as top and second of peer class.Portfolio exhibits flexibility in its investment strategy and is currently one of the few funds amongst direct competitors to have a significant allocation in cash. This allocation is also something that enables the portfolio to adapt to markets.Although duration and credit quality were largely in line with peers, the outperformance over the year 2009 of Pioneer Funds – Euro High Yield is related to asset allocation and name selection.The strategies were correctly positioned for spread normalisation in 2009. Of 35 peers that outperformed in 2008 ranking in the 1st quartile, 25 ranked in the 4th quartile in 2009.

Peers refers to Europe Open Ended Euro High Yield Bond Morningstar peer group


Unless otherwise stated all information contained in this document is from Pioneer Investments and is as at 29/01/2010

Pioneer Funds – Euro High Yield and Pioneer Funds – Euro Strategic Bond are sub-funds (the “Sub-Funds”) of Pioneer Funds (the “Fund”), a fonds commun de placement with several separate sub-funds established under the laws of the Grand Duchy of Luxembourg.

Past performance does not guarantee and is not indicative of future results. Unless otherwise stated, all views expressed are those of Pioneer Investments. These views are subject to change at any time based on market and other conditions and there can be no assurances that countries, markets or sectors will perform as expected. Investments involve certain risks, including political and currency risks. Investment return and principal value may go down as well as up and could result in the loss of all capital invested. More recent returns may be different than those shown. Please contact your local sales representative for more current performance results.

This material is not a prospectus and does not constitute an offer to buy or a solicitation to sell any units of the Fund or any services, by or to anyone in any jurisdiction in which such offer or solicitation would be unlawful or in which the person making such offer or solicitation is not qualified to do so or to anyone to whom it is unlawful to make such offer or solicitation. For additional information on the Fund, a free prospectus should be requested from Pioneer Global Investments Limited (“PGIL”), 1 George’s Quay Plaza, George’s Quay, Dublin 2, Ireland. Call +353 1 480 2000 Fax +353 1 449 5000.

This information is not for distribution and does not constitute an offer to sell or the solicitation of any offer to buy any securities or services in the United States or in any of its territories or possessions subject to its jurisdiction to or for the benefit of any United States person (being residents and citizens of the United States or partnerships or corporations organized under United States laws). The Fund has not been registered in the United States under the Investment Company Act of 1940 and units of the Fund are not registered in the United States under the Securities Act of 1933.

This document is not intended for and no reliance can be placed on this document by retail clients, to whom the document should not be provided.

The content of this document is approved by PGIL. In the UK, it is directed at professional clients and not at retail clients and it is approved for distribution by Pioneer Global Investments Limited (London Branch), 123 Buckingham Palace Road, London SW1W 9SL, authorised by the Financial Regulator in Ireland and regulated by the Financial Services Authority for the conduct of UK business. The Fund is an unregulated collective investment scheme under the UK Financial Services and Markets Act 2000 and therefore does not carry the protection provided by the UK regulatory system.

Pioneer Funds Distributor, Inc., 60 State Street, Boston, MA 02109 (“PFD”), a U.S.-registered broker-dealer, provides marketing services in connection with the distribution of Pioneer Investments’ products. PFD markets these products to financial intermediaries, both within and outside of the U.S. (in jurisdictions where permitted to do so) for sale to clients who are not United States persons.

Pioneer Investments is a trading name of the Pioneer Global Asset Management S.p.A. group of companies.

For Broker/Dealer use only and not for distribution to the public

Date of First Use: 10 March 2010

Important Information

pioneer investments european high-yield...

Documents