Christian Noyes, a high-yield portfolio manager with Penn Capital Management, is repositioning the firms high-yield portfolio by moving down the credit curve. The move is designed to take advantage of what Noyes sees as a prolonged period of spread tightening for select high-yield credits, as well as the anticipation that an economic recovery is impending. Noyes predicts an upswing for the high-yield sector for two reasons. First, the normalization of the yield curve brings a positive carry on holding inventory, which leads to more liquidity and less risk perception in the market. Secondly, there have been consistent cash flows into the high yield sector since the year began.
Noyes says that the firm recently sold the 11% Unilab Corp. of '06 (unrated) notes at $116 with a yield-to-call of 8.73%. With the proceeds, he says the firm purchased the 12% Venture Holding (B3/B-) of '09 junior subordinated notes at $59 with a 23.68% yield. Since the beginning of the year, the firm has swapped $66 million, or approximately 11% of the portfolio, out of single- and double-B rated bonds, into the split-B and triple-C rated bonds. The average credit rating of the portfolio--entirely high-yield--is now B3/B-. Noyes says that the portfolio is overweight in the energy and gaming sectors. In the energy field, he likes oil or natural gas drilling names because he believes prices in those sectors will continue to remain firm, offering tremendous cash-flow potential and profitability. His largest positions in energy are the 10.25% Ocean Rig (B3/CCC) '08, the 9.75% Parker Drilling (B1/B+) '06 and 10.25% Plains Resources (B2/B-) '06. In the gaming sectors, Noyes owns the 13% Hollywood Casino (B3/B-) '06, as well as the 11.75% Trump Castle (Caa1/CCC) '03s.
The Cherry Hills, N.J.-based firm has $600 million dedicated to its high-yield portfolio. With a 4.60-year duration, the portfolio is right in line with its benchmark, the Credit Suisse First Boston global high yield index, whose duration is 4.60-years.