Subordinated debt plays a pivotal role in modern portfolios, offering a blend of stability and growth. Offering attractive yields, lower volatility than equities, and sustainability alignment, it thrives amid evolving markets. With 37+ years of experience and $20 billion in assets under management, Spectrum Asset Management has redefined the potential of subordinated debt. Through the insights of Mark Lieb, Founder, and Isabel Faragalli, Managing Director, Spectrum Investments, we explore how Spectrum’s innovative strategies are shaping this essential asset class.
The role of subordinated debt in corporate finance: a strategic balance of risk and reward
Subordinated debt is a valuable tool in capital structures, offering companies cost-effective financing and investors higher yields with manageable risk.
Mark Lieb, Founder of Spectrum Asset Management, highlights its appeal: “It enables investors to earn 100–200 basis points more than senior bonds while avoiding equity-like volatility—ideal for those seeking a balance of stability and returns.” Spectrum’s approach includes diversification across sectors like utilities, insurance, and telecom to reduce risk and strengthen portfolio resilience. Investment Specialist Isabel Faragalli adds, “Subordinated debt delivers equity-like returns with significantly lower risk, making it a strong option for conservative portfolios seeking dependable income.” Combining attractive yields and diversification, subordinated debt has become essential for fixed-income investors aiming to reduce equity exposure while achieving steady returns.
How innovations like CoCo Bonds are transforming the market
Contingent Convertible (CoCo) bonds bring complexity and opportunity to the subordinated debt market, offering higher yields in exchange for higher risk. These bonds can convert to equity or absorb losses during financial stress, requiring meticulous credit analysis. Spectrum Asset Management’s founder explains, “CoCos have broadened the market by attracting yield-seeking investors, but their contingent features make them inherently riskier. To prioritize stability, we exclude CoCos from our high-grade fund, ensuring predictable returns for our conservative clients.”
Recent regulatory scrutiny has shifted investor preferences toward traditional subordinated debt. Isabel notes, “As the market seeks clarity and stability, traditional subordinated debt is gaining traction, offering comparable yields without the complexities of CoCos.” This trend underscores the appeal of simpler, more stable instruments for investors prioritizing dependable income.
What the 2023 banking crisis revealed about subordinated debt’s resilience?
The collapse of Credit Suisse in March 2023 marked a critical test for subordinated debt, highlighting its resilience when expertly managed. Spectrum Asset Management’s proactive risk management and rigorous credit analysis not only safeguarded portfolios but also demonstrated the asset class’s robustness. Mark Lieb, Spectrum's Founder, recalls, "We sold our Credit Suisse holdings well before the crisis, recognizing early signs of deteriorating credit quality. During the market turmoil, we seized the opportunity to purchase $125 million in discounted securities, which performed exceptionally well, reaffirming the strength of subordinated debt when managed with care."
European regulators played a pivotal role in restoring confidence, clarifying the priority of subordinated debt holders over equity holders. Isabel Faragalli notes, "The European Central Bank and Bank of England provided clear guidance on the loss hierarchy, stabilizing market sentiment and reinforcing subordinated debt as a viable investment." Spectrum’s diversified strategy across sectors such as utilities, telecommunications, and insurance further minimized risks, proving the value of disciplined portfolio management. The 2023 crisis underscored subordinated debt’s reliability, even in the most volatile conditions.
Spectrum’s Euro-denominated UCITS funds: tailored solutions for evolving investor needs
To meet the growing demand for subordinated debt in Europe, Spectrum Asset Management launched two Euro-denominated UCITS funds in early 2024. These funds mark a key milestone, showcasing the maturation of the European market and Spectrum’s commitment to tailored strategies.
Mark Lieb explains: "Europe's subordinated debt market has evolved, gaining liquidity and depth. Our Euro-denominated funds address investor demand for stability and yield in this growing market."
The first fund replicates Spectrum’s proven dollar strategy, offering diversified exposure to high-quality issuers. The second, catering to risk-averse investors, focuses on high-grade issuers and excludes CoCo bonds for added safety.
Isabel adds: "Many European funds concentrate on banking issuers in high-risk regions. Our high-grade fund diversifies across utilities, insurance, and telecoms, with an average rating of BBB+, ensuring a safer, balanced portfolio."
Spectrum’s USD-denominated funds also stand out with global diversification, incorporating issuers from Europe, the U.S., Canada, and Asia. This reduces regional risks and aligns with Spectrum’s philosophy of combining quality, breadth, and foresight to deliver investor value.
Aligning subordinated debt with ESG Goals
As ESG considerations reshape investment strategies, subordinated debt is emerging as a key tool for sustainable finance. Utilities are leveraging subordinated green bonds to fund renewable energy and infrastructure projects. Isabel highlights notable examples: “Across Europe, utilities like Terna in Italy and Iberdrola in Spain are issuing green bonds tied to subordinated debt, delivering financial returns alongside measurable environmental impact.”
Spectrum integrates ESG principles into its credit analysis, avoiding controversial sectors while emphasizing sustainability. Mark explains, “ESG doesn’t replace financial goals; it enhances them. Our approach balances ethical investments with strong returns, enabling clients to achieve both financial and societal objectives.” This alignment of sustainability and performance underscores subordinated debt’s growing role in responsible investing.
What’s next for subordinated debt?
The future of subordinated debt looks promising, driven by the global focus on sustainable finance, technological innovation, and demand for yield. Utilities, key players in the market, are expected to double their share in subordinated debt portfolios within the next decade.
Isabel notes: "Utilities will play a critical role as they expand investments in renewable energy and infrastructure. Subordinated debt will fund these transformative projects, balancing growth and sustainability." Mark adds: "Subordinated debt has evolved from a niche product to a vital component of diversified portfolios, offering yield, resilience, and alignment with sustainability goals."
As the market evolves, subordinated debt will remain central to modern investment strategies, combining income with impact.
Subordinated debt – a key driver of resilient portfolios
Spectrum Asset Management has established itself as a global leader in subordinated debt, leveraging decades of expertise to navigate this complex and rewarding asset class. Under the visionary leadership of Mark Lieb, the firm continues to redefine the potential of subordinated debt, aligning it with evolving market demands and investor priorities. From pioneering strategies to innovative Euro-denominated funds, Spectrum exemplifies what it means to deliver value through discipline, diversification, and forward-thinking investment solutions.
"Subordinated debt isn’t just another fixed-income product," states Mark. "It’s a strategic tool for building resilient, forward-looking portfolios that meet the challenges of today’s complex financial landscape. With the right expertise, subordinated debt provides exceptional opportunities for yield, stability, and long-term growth."
For insights on Spectrum’s Euro-denominated funds and subordinated debt, contact Isabel Faragalli for expert guidance and tailored solutions:
Email: faragalli.isabel@principal.com
Phone: +41 79 441 2561