"Triple-C issuance is becoming more interesting--more and more of it is being used for refinancing, which is a positive," observed Sullivan. Along with the strength of the economy, this makes certain of the triple-C names considerably less risky than others, and Sullivan noted there can be a considerable lag between improvements in a company's debt structure and performance on the one hand, and ratings upgrades from the rating agencies on the other.
This emphasis is expressed in DWS's sector overweights, which are concentrated in the basic industry and chemical sectors (4% overweight), along with media (3% overweight) in Europe. Sullivan is keen on Celanese, for example, as it is 60 to 80 basis points cheap in euros versus dollars, making it attractive on a relative basis; Nalco is de-leveraging and has good free cash flow; and Cognis recently spun off the remainder of its underperforming business into a joint venture, making it easier for the company to do an initial public offering or a trade sale. In media, Sullivan is cautious on the more levered German cable names such as iesy, but likes lower risk names like Cablecom and Telenet.
Away from triple-Cs, DWS is overweight in single-Bs and significantly underweight in double-Bs. This underweight is reflected in the firm's sector underweight in telecoms and technology names. "Most of the double-Bs are too expensive--a number are rising angels and are already pricing like investment grade," Sullivan commented.