Alternative Carmignac Credit Opportunities Credit Dispersion: A fertile ground for high yield alpha

Carmignac Credit Opportunities (CCO) is an unlevered alternative multi asset credit fund investing in CLO’s, distressed and restructuring debt, leveraged loans and high yield credit. Our ICAV strategy is a fundamental all-weather approach, focusing on instruments targeted at capturing the best risk-reward, across the entire global credit spectrum, with a European long bias.

While our first note focused on CLOs, this second note focuses on the attraction of the high yield bucket given the current dispersion in the market. Our final note, will be dedicated to the fund managers approach to Distressed/Restructuring debt.

European high-yield markets are currently displaying a paradoxical configuration; headline spreads remain close to historical tights, while credit dispersion across issuers is unusually elevated, particularly within the single-B segment: the selectivity becomes the key to alpha generation.

More specifically, in the current credit markets:

• High-yield spreads are near historical tights, yet dispersion is unusually elevated, especially in single-B rated credit, creating selective opportunities, not broad-based beta trades.
• Compared to 2021, spreads now show “fatter tails” — more bonds below 200 basis points and above 500 basis points.
• About 35% of bonds trade at their tightest 5-year levels, but 20% remain above median — highlighting idiosyncratic mispricing.

High yield index spreads today resemble an iceberg; on the surface, they appear tight with little room for opportunities, but headline levels mask the underlying dispersion across ratings, sectors, and individual names in the market. In such a market environment, it is crucial to rely on a flexible and opportunistic fund—one that can invest across the full credit spectrum with deep expertise and without constraints related to benchmark, average rating, or geography, to capture the best risk-reward opportunities.
We are now operating in an alpha-driven market rather than a beta market - in contrast to the 2010–2020 period. This environment creates fertile ground for our active management approach and is well aligned with our wide mandate.

As an example, oil services has been a fertile area for the fund since its launch in December 2022. Our focus has been on companies owning offshore equipment such as drill ships, jackups, FPSOs (floating production storage & offloading units), streamer vessels, multi-purpose support and pipe vehicle layering vehicles, etc. We strive to maintain a diversified exposure in terms of issuers, type of equipment and geographical exposure and to back companies where the LTV is below 50% based on conservative broker estimates (broker estimates involve guesswork as transactions can be infrequent for some categories of equipment but they tend to incorporate large discounts versus replacement costs, giving us a margin of safety). We also focus on secured paper, often with built-in amortization over the life of the security, limiting refinancing risks.

Despite this solid asset backing, the cost of capital for our portfolio companies tends to be wide. This reflects the fact that offshore has lost share to shale oil production over the past ten years and that the sector is cyclical in nature, with usually limited visibility beyond the next 18 months. The current oil price environment, reflecting a market believed to be oversupplied and weighing on E&P players’ capex plans, is an added headwind.

We believe the industry fundamentals are stronger than what is discounted by this cost of capital. Even a successful energy transition will keep oil in demand for a long time and the annual oil production decline rate, estimated to be at least in the mid-single digits globally, will require continued investment for the foreseeable future. Offshore production has seen many improvements over the past ten years, on both security and the unit economics fronts. On the latter, improving seismic data technology and the growing use of FPSOs rather than undersea pipelines have lowered offshore breakeven to c. $50/boe, believed to be meaningfully lower than the breakeven generally needed in shale oil production. FPSOs have also improved the leverage of private operators versus oil producing countries (it is more difficult to renegotiate agreed terms when the key producing equipment can sail away).

We also believe the asset backing across the sector is underestimated. Indeed, capital has largely fled the industry during the past ten years. A good deal of the floating equipment fleet has been scrapped (with, for example, some estimates of the benign environment floating fleet having shrunk by 60%, if one excludes the oldest and increasingly irrelevant units from the count) and there has been almost no new orders. Estimated newbuild costs for modern drill ships and jackups are 2 to 3 times the broker values typically used for in-service premium equipment. A rational operator would thus need a 10-year contract with day rates at least 2x higher than the current relevant day rate for premium equipment to order a new unit. As a result, none are built and as the current fleet continues to age the supply/demand equilibrium continues inexorably to move in favour of asset owners.

This has been recently illustrated by the announced acquisition by ADES of Shelf Drilling, a listed driller whose bonds currently represent a large position of CCO. The company owns 13 premium rigs and 19 older ones and has been under pressure for the past 12 months as its largest client, Aramco, cut on its rig spending. This, combined with a soft market environment, has put the earnings under pressure and tightened liquidity at the 2027 horizon, due to the planned amortizations of our senior secured bonds. This led the 2029 9.625% bonds to trade in the mid70s to low 80s during the past months. At the beginning of August 2025, ADES, a well-capitalized competitor, offered to buy Shelf Drilling at a 62% equity premium (an offer supported by the board of Shelf Drilling) and announced it would call the bonds we own at c. 104.8 at the expected closing of the transaction during Q4,25. We estimate the valuation of Shelf’s premium jackups implied by the deal price is c. $90M per unit. This is at the lower range of the $90-100m per unit estimated broker values, making it a good deal for ADES, but it highlights how asset backing bolsters credit quality in the industry and we think this will only improve with time as consolidation progresses and the stock of equipment continues to age.

At the beginning of September 2025, CCO held 12.99% of its NAV invested in the oil services sector, across 12 issuers. The average yield to maturity of this sub-portfolio was c.8.9%. This has been a positive contribution, despite a rough environment for the industry, and we still see a lot of potential.

Current & historical portfolio exposure: