Rampant Returns Not Enough:A Return To Pickiness In Junk
By SIMONA COVEL
Of DOW JONES NEWSWIRES .
NEW YORK -- Selectivity has returned to the high-yield market.
After months of torrential buying sprees, when fund managers were so desperate to empty their bulging coffers of cash that they seemed to buy any credit they could get their hands on, investors have begun to select only the bonds that they believe are fundamentally sound.
The shift, though swift, wasn't unexpected. As the market peaked in January 2004, many investors began to protest the historically low yields being provided by the most speculative credits. Since then, as the calendar of new issues has grown, many investors have stepped back from the frenzy and re-evaluated their positions. In the week ended Feb. 26, the most liquid portion of the high-yield market declined 0.40%, according to the Banc of America Securities High-Yield Large Cap Index.
"There are a few names I got out of in the last couple weeks that had nice big coupons, but I wasn't sold on the business plans," said Sean Slein, a portfolio manager at Dwight Asset Management, which has $1.75 billion in high-yield assets under management. "I invested in them because the market was firm and sensing weakness, I got out."
Though those credits are only "off a tad" now, he added, they will only suffer further if the market remains listless.
Though conditions are still in place for longer-term market strength - including low interest rates and a solid economic outlook - high-yield may mirror the sideways movement predicted for the stock market until the economy provides some impetus for direction.
"An improvement or any clearer direction in equities would prompt high-yield to move out of its range," said Chris Garman, head of high-yield strategy at Merrill Lynch. Until then, he added, the market is probably stuck.
Taking It Issue by Issue
Last week's market activity showed the increased scrutiny in the high-yield market. In the secondary market, traders noted the unusually light flows as participants abstained from shifting positions without a nudge from other investors.
"Nobody knows how to go about trading their books," said a veteran trader. "They're all rushing to exit at the same time and coming back in at the same time."
In the primary market, too, investors have turned increasingly selective. Calpine Corp. (CPN) canceled its $2.35 billion bond offering and term loan because investors weren't willing to accept the deal at its offered terms. Investors were unsatisified with the security of the bonds and were concerned about the company's ability to sell its assets and use the proceeds.
But just a couple of days later, beleagured tiremaker Goodyear Tire & Rubber Co. (GT) was able to sell a very limited $650 million private placement offering, despite an ongoing Securities and Exchange Commission investigation into the company's accounting practices and myriad operational hurdles. Investors eagerly snapped up the single-B-rated debt, partly because of the 11% coupon offered on the fixed rate tranche and a coupon of 800 basis points over the London interbank offered rate for the floating rate tranche.
"At 11%," said one investor who asked not to be named, "you get compensated" for the company's woes.
Still, Calpine's expected yield around 11.25% on the fixed-rate tranche of its single-B-minus rated bond offering wasn't enough to entice those potential investors, further demonstrating that investors are shopping for certain fundamental criteria, not just fat yields.
"This year's going to be more of a credit-picker's market," said Tom Haag, a portfolio manager at Seneca Capital Management, which has $1.7 billion in high-yield assets under management. "Credit selection is going to have increased importance |
