Putnam Investments in London is pursuing a highly credit-specific strategy in European high yield, with new investments concentrated in the single-B and triple-C parts of the credit spectrum. "Now that the credit cycle is maturing it's becoming increasingly important to select the right names within the right category," said Norm Boucher, portfolio manager of the €1 billion Putnam New Flag Euro High Yield Fund. The fund is benchmarked against the Merrill Lynch European High-Yield Constrained Index.
The fund manager looks for deals with good call protection and initial public offering exits for financial sponsors on leveraged buy-outs and is also taking out-of-benchmark bets to increase returns. Two names Boucher highlighted are French electrical fittings and accessories manufacturer Legrand and U.K. food group RHM. Both the Legrand 8.5% of '25s and RHM 8.80% of '17s are non-callable. Furthermore, both companies are likely to do initial public offerings in 2005. "Legrand could go up another 20 points and at the same time it has good downside protection since it is an operating company," observed Boucher.
Recent deals Boucher participated in for their value include the pay-in-kind notes from Dutch publisher VNU, Rotterdam-based chemical company Almatis, and Irish packaging company Jefferson Smurfit. Putnam favors PIK deals where there is a healthy yield offered for low incremental leverage. "The VNU PIK offered 13.75% versus the bond at 8.375% for only about €100 million additional debt on a base of roughly €2 billion," he said.
Out-of-benchmark bets in Putnam's fund include the 5.375% bonds of Irish publisher Independent News and Media maturing in '09 and the 10.375% bonds of U.K. communications satellite company Inmarsat due in '12.
