Ming Shao, senior portfolio manager of $500 million in high yield at DuPont Capital Management, remains interested in the auto sector but has been putting his new cash to work in treasury inflation index bonds. "With the way that the high-yield sector is performing now with all the distressed debt issues, we are really not putting too much of our new cash to work in the high-yield sector; we are putting it in TIPS," noted Shao.
Shao is being extremely cautious in high yield these days. "This late in the Fed tightening stage, a lot could go wrong," he said. He states that he is being bullish in the short term high-yield market as a result of the Oct. 17 changes in the bankruptcy laws. "All the companies that had the potential to go bankrupt in the next six months filed then, due to those changes," he stated. That should limit the amount of new distressed opportunities that will come up in the next few months, he said.
Shao has dabbled in some of the distressed opportunities that are out there now. "We bought a small amount of Delphi in the 55 range and now it's trading at about 68; that's almost at the pre-filing level," Shao said. He feels that normally, distressed opportunities can be anticipated, but believes that this is no longer the case. "There are no weak hands in regard to Delphi right now and we are feeling the full impact of those [new bankruptcy] laws. You just can't buy as much," he said.
"The new bankruptcy law would be more favorable to bank loans, first lien or second lien paper versus unsecured creditors, we believe. Therefore, we are actually a little bearish on the high-yield market in the long term," Shao explained. He said that although he is able to invest in bank loans, he has very small exposure to them at the moment. But should the market continue to shift that way, Shao would take a closer look.
Shao still feels that the auto sector has value. "General Motors is really doing as well as they possibly can right now; in the big picture it was better for Delphi to file now than to try and hold on," Shao explained. He said he believes GM does not take as big of a hit as a result of the filing. "We still hold positions in General Motors Acceptance Corp and Ford Credit, and they have actually overperformed."
In light of his overall feelings of trepidation on the high-yield sector, and his distressed investments aside, Shao has been moving some of his money out of high yield and into TIPS. "We are trying to build up the portfolio with Treasuries and interest can accumulate fast," he noted. Additionally, Shao is tapping the investment grade market. "We recently bought into PPL Corp." PPL is a United States power company headquartered in Allentown, Pa. Shao did not quantify how much he has invested in PPL.
