Opportunities have recently emerged in several key industries within the leveraged loan market, according to Fidelity Portfolio Manager Eric Mollenhauer, noting particular interest in deals across software and technology services, power generation and AI-related infrastructure.
“In particular, we see sizable potential in companies that are facilitating the growth of artificial intelligence,” says Mollenhauer, who co-manages Fidelity® Floating Rate High Income Fund (FFRHX) with Kevin Nielsen and Chandler Perine.
The fund is a diversified loan strategy that primarily holds secured loans made to non-investment-grade companies, with Mollenhauer and his colleagues favoring issuers they believe have a strong franchise and assets, adequate liquidity, operating flexibility and a solid management team.
The rapid development of AI has created substantial demand for data centers, expansion of the energy grid, and specialized real estate to support the technology’s massive computational needs, according to Mollenhauer, who adds that being part of the High Income and Alternatives Group at Fidelity has created specific opportunities for us to fund the underlying infrastructure in deals that may not be available to our competitors.
“The technology sector has been a key driver of recent leveraged buyouts,” he says. “Demand for financing in this area remains strong, although lenders have become more discerning about the impact of rapid technological changes, including AI, on some business models.”
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Looking into other segments of the loan market, Mollenhauer sees prospects emerging from the consolidation taking place in the building products industry. “There are a lot of heavily indebted distributors of building products in the loan market, and we think it’s likely that some of these companies will merge or agree to be acquired,” he says.
Cash flow for distributors of building products has declined due to falling housing starts, according to Mollenhauer, who believes the industry’s recovery back to trend could be aided by lower mortgage rates. “Any effort by the current administration to boost new home construction could fuel a turnaround in the building products group,” he adds.
Elsewhere, Mollenhauer sees upside potential for some chemical companies that have experienced sluggish growth as of late.
“There are a number of specialty chemical names that have traded down due to weak demand, some of which can be linked to the housing softness described earlier,” he says. “We are actively mining this space for opportunities where we believe prices may have over-corrected in response to this pressure.”
In addition to building products, key growth areas for specialty chemicals include those used in semiconductors, electronics and advanced water-treatment solutions, Mollenhauer notes.
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Eric Mollenhauer is a portfolio manager in the High Income and Alternatives division at Fidelity Investments.
In this role, Mr. Mollenhauer co-manages Fidelity and Fidelity Advisor Floating Rate High Income Funds, Fidelity VIP Floating Rate High Income Portfolio, and Fidelity Series Floating Rate High Income Fund. Additionally, he comanages leveraged loan portfolios for institutional clients and Canadian investors, and Fidelity’s collateralized loan obligation strategies.
Prior to assuming his current responsibilities, Mr. Mollenhauer worked as director of High Yield research, where he oversaw Fidelity’s high-yield research professionals and resources and managed high-yield bond portfolios available to non-U.S. investors. Previously, Mr. Mollenhauer was a high-yield research analyst covering the paper, entertainment and leisure, gaming and lodging, services, homebuilding, and printing and publishing industries. He has been in the financial industry since joining Fidelity in 1993.
Mr. Mollenhauer earned his bachelor of arts degree in business administration from Gordon College. He is also a CFA® charterholder.