Spreads have rallied on paper company MeadWestvaco Corp.'s benchmark 6.85% notes of '12, and at least one portfolio manager is looking to reduce exposure. J.P. Weaver, who oversees $1 billion in taxable fixed-income at McGlinn Capital Management in Wyomissing, Pa., sees Mead's bonds as a typical example of a credit that may be overdone in the corporate spread rally that has endured since October.
In late October, the 10-year (Baa2/BBB) Mead bonds were at 210 basis points over Treasuries. Last Tuesday, they were bid at 138 basis points over the curve. Weaver argues that Mead's financials do not justify current levels if the economy continues to struggle. "We're talking about a highly levered paper company that has asbestos issues," he says.
Mark Altherr, analyst at Credit Suisse First Boston, says the sale would make sense, pointing out that Mead's spread levels have actually retraced all of the widening they suffered since the company disclosed exposure to asbestos-related issues in its quarterly report for the second quarter last year. Leverage, he argues, while not low, is less of a concern relative to other companies in the paper and forest products sector. But he also notes technical factors suggesting that Mead's 10-year issue is overpriced. For example, it trades at a tighter spread relative to its 30-year issue than the 10-year bonds of International Paper, Weyerhauser Co. or Sappi Ltd.