bloomberg on junk yield spreads,gx mentioned
Junk Bond Yields Widen to 10-Yr High Over High Grade (Update2)
By Jennifer Ryan
New York, Oct. 1 (Bloomberg) -- Global Crossing Ltd. and AES Corp. bonds may be among the high-yield securities that stand to gain as some investors bet the biggest yield gap in a decade between junk-rated debt and investment-grade bonds will narrow.
Corporate bonds that carry a junk rating of ``Ba1'' or lower from Moody's Investors Service yield on average 8.1 percentage points more than higher-rated securities, according to Merrill Lynch & Co. data. That's the largest spread since 1991, when the yield difference was 8.94 percentage points.
The wider spread, which was 6.5 percentage points the day before the terrorist attacks, was caused by a surge in demand for less risky assets and is unlikely to last, investors said. They argue junk bonds will gain as investors push the spread toward its 11-year average of 3.97 percentage points. Investors say telecommunications bonds may offer the biggest opportunities.
``They're all trading as if they're going bankrupt,'' said Mark Denkinger, who helps manage $2.3 billion of high-yield assets at Principal Capital Income Investors, which has $40 billion of total assets under management. ``If you pick the right one, it's a home run.''
For example, Global Crossing's 9.125 percent bonds due in 2006 were offered Friday at about 40 cents on the dollar, down from 55 cents on Sept. 11. That means the yield has risen to 35.2 percent. The company's bonds are rated ``Ba2'' by Moody's and ``BB'' by S&P, the second-highest junk ratings at both rating companies.
Denkinger said Global Crossing may be poised to rebound because it doesn't face the same need to raise capital soon, unlike many of its peers. Telecommunication bonds are among the riskiest securities, said Denkinger.
Safer
The last time junk bonds paid so much more than investment grade debt came when Congress voted to give former President Bush the authority to go to war against Iraq, and junk bond trader Michael Milken was about to prison after being convicted of securities law violations. Junk bond yields, which move inversely to prices, have risen to 14.2 percent.
``It's a time to look for the gems, the ones that have been penalized with their weaker peers,'' said Edward Mally, head of global high-yield research at CIBC World Markets in New York. ``This is where you can get equity-like returns.''
The cable, health care and electrical power industries may offer safer bets for those willing to shoulder the risk of high- yield debt because their products are in demand even during a recession, investors say.
Bond prices for Charter Communications Inc., the cable- television operator controlled by billionaire Paul Allen, fell after the attack, and were hurt further by the resignation of Chief Executive Jerald Kent on Sept. 24. The 8.625 percent notes due in 2009 now trade at about 88 cents on the dollar, to yield 11 percent, and could rise about 10 cents, Denkinger said. The debt is rated ``B2'' by Moody's and ``B+'' by S&P.
Independent power producers such as AES Corp. and Calpine Corp., which both fell after the attack, are attractive buys, said Mike Buchanan, who helps manage $4.5 billion of high-yield fixed income assets at Blackrock Inc. in New York.
Prices for these power companies were all also hurt after AES, a power producer with operations in the U.S. and 26 other countries, cut expectations for 2001 results on Sept. 26 because profits from Brazilian and U.K. operations will be less than expected, Buchanan said.
AES's 9.375 percent notes due in 2010 fell about 15 cents since the attack to 87 cents on the dollar, to yield 11.8 percent. Principal Capital's Denkinger estimates prices could climb back up to about 95 cents. The debt is rated ``Ba1'' by Moody's and ``BB'' by S&P.
Teetering
Still, some investors are skeptical all junk bonds will rebound because of the threat of a slower economy, that was already weakening before terrorists hijacked and crashed four airplanes, destroying the World Trade Center, damaging the Pentagon and killing thousands.
``We're not comfortable saying we're close to the bottom,'' Blackrock's Buchanan said. ``We have an economy that's teetering on recession, and default rates approaching 10 percent. We're not trying to hit a home run right now.''
In September, junk bond returns plunged to hand investors a 6.91 percent loss, their worst performance in more than 15 years, according to Merrill's index of 1,332 junk bonds rated ``Ba1'' and below by Moody's Investors Service or ``BB+'' and below by Standard & Poor's.
Investors fled risky assets for U.S. Treasury bonds and other safe securities in after the Sept. 11 terrorist attacks.
With investors still demanding quality, new product will be scarce. ``It's going to be very difficult to get new high-yield transactions done within the next few months,'' said Edward Atamian, who helps manage $40 billion of fixed income assets at John Hancock Funds in Boston. No company with junk ratings from both Moody's and S&P has sold bonds since the attack.
Bond investors aren't necessarily preparing to make broad changes in their high-yield holdings either.
``We're now looking hard and opportunistically at new credits, but we don't have our buying boots on,'' said Ray Kennedy, who helps manage $10 billion of high-yield fixed income assets at Pacific Investment Management Co. in Newport Beach, California.
He said the time to start buying may be ``when you see people giving up on the asset class,'' with ``broad-based selling of all names.'' The market hasn't reached that point yet, he said. ``We have a little ways to go.'' |
