Heinz replies to the following article on corporate bond outlook 2005
Heinz:
it is important to realize that the world is drowning in investment grade rated paper that is in reality junk. this is the case across the entire spectrum of private sector fixed income, and especially in all sorts of 'bundled' securities. they get their high ratings via the credit insurers or big banks giving their 'insured by us' imprimatur. i still remember an AA rated foreign issuer bundle going belly-up overnight in '00 because it contained lots of paper from an obscure Turkish bank that went bankrupt. this would have gotten a C minus rating at best normally, but with Citibank standing guarantor it became investment grade. the problem here is the sheer volume of such paper and the fact that invesors remain totally oblivious to the games being played. i.e. risks that would normally never ever be taken on by e.g. money market funds and other investors endowed with similar fiduciary responsibilities and limitations as to what they can invest in are routinely placed with such institutions. in many respects this is reminiscent of the financial insanity of the 1920's.
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corporate bond market faces a number of challenges going into 2005
After a strong running this year, the U.S. corporate bond market faces a number of challenges going into 2005 - challenges that may fundamentally alter the face of the investment landscape. The biggest concern looming ahead is the prospect of two market heavyweights - General Motors Corp. (GM) and Ford Motor Co. (F) - being stripped off their investment-grade ratings. With over $105 billion in corporate bonds outstanding in the Lehman Brothers U.S. Credit Index, a widely tracked performance gauge, these two issuers account for over 5% of this investment-grade index. Their fall to junk would mark a significant change for bond investors.
And that's just the event most likely to grab the headlines in the investment- grade market. Bondholders also worry that shareholder-friendly transactions - from stock buybacks to increased dividend payouts - will continue to gather pace in the new year as companies turn away from two years of rebuilding their balance sheets and improving their credit ratings. This year, for example, stock buybacks rose to $224 billion, the highest level since 1998, according to data from Thomson Financial in New York.
"Credit quality is transitioning to deteriorating from improving because of a conscious balance-sheet adjustment by companies," said Tim Doubek, corporate bond portfolio manager at American Express Asset Management, with around $100 billion in fixed income assets. "Investors have to be careful to not put too much risk in their portfolios - there's greater potential of a downside when you're paid very little to take on risk." GM and Ford are perhaps the best examples of deteriorating credit quality in the investment-grade arena, though not because of conscious shifts in balance sheet management. The two U.S. auto giants both carry triple-B-minus credit ratings with steady outlooks, teetering dangerously close to speculative-grade ratings.
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