Fischer Francis Trees & Watts is looking to shift up to $300-500 million out of selected banking names in the first quarter in a bid to add yield. Sai Choy, portfolio manager at the $37 billion fixed-income investor, says the firm will look at the new issue market as well as the integrated utility sector, where there may be fresh buying opportunities in the event of further credit erosion.
Fischer Francis is looking to unload Wells Fargo and Mellon Financial Corporation. While he likes both credits, Choy notes they are trading close to their tightest levels over the last 12 months versus Treasuries, and also look good relative to swaps spreads. The Wells 5.125% notes of '12 were quoted at 85 basis points over 10-year Treasuries last Tuesday, while the Mellon 6.40% notes of '11 were 80 over the 10-year bond.
The timing for the sale depends largely on finding an attractive alternative, Choy says. He believes Comcast Corp. may issue bonds to fund its acquisition of AT&T's cable business, though the company has said publicly that it will use bank debt for the deal. Cable is one of the few industries Fischer Francis has identified that looks to have pricing power in the near term, says Choy. The Comcast 6.875% notes of '12 were bid at 225 over Treasuries last Tuesday. AOL Time Warner is another name the firm may look at. "We haven't liked it due to integration issues and the ad slowdown, but behind that is a real company with strong content and cash flow," Choy argues.
In utilities, Choy expects further negative headlines and downgrades as the industry struggles with new regulatory and capital burdens and supply and demand issues. However, he argues that integrated utilities, such as Progress Energy, Southern Company and DTE Energy, are viable businesses because there is a built in market for the power they provide. For example 80% of the electricity that Progress Energy generates is consumed in the Carolinas and Florida, Choy notes. By contrast, he sees merchant energy companies as much more subject to the vagaries of the marketplace. The Progress 7.1% notes of '11 were quoted at 170 basis points over 10-year Treasuries last Tuesday. Assuming the rest of the market is unchanged, Choy says he would add to his Progress holdings if they cheapen by 30 basis points.
The New York-based firm maintains a neutral position to its bogey, the 4.0-year Lehman Brothers aggregate index. In the corporate portfolio that Choy oversees, the firm is overweight banking and finance, neutral the utility sector, and underweight industrials on a dollar duration basis. It is also underweight the Lehman index with regard to its non-corporate holdings, such as sovereigns and supernationals.
