Explain issuer-level (bottom-up) ways of running a credit strategy
The idea
Bottom-up credit investors pick the issuers and issues that best reward the credit risk taken. They first split the universe into sectors so that like is compared with like, then assess each issuer's credit quality (leverage, interest coverage, cash flow, business risk, covenants) against its spread. A useful yardstick is spread per unit of risk: for investment grade, spread duration and duration times spread let bonds be compared, and a bond whose spread is wide for its rating and fundamentals is a candidate. For high yield, estimated default probability and recovery matter more. The trap is buying the widest spread without asking why; a wide spread often signals deterioration the rating has not yet caught.
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