Prescrott Crocker, high-yield portfolio manager at Boston-based Evergreen Investments, says he will increase the firm's defensive bond allocation by $250 million, or 10%, on the view that he does not expect a traditional cyclical recovery ahead but rather, a period of very slow growth. He says that in such an environment, his strategy will be "cautious" and centered on picks from the consumer non-durable, retail and service sectors. He will finance the bonds through the sale of cyclical names for the same amount. There is no trigger for this move.
Crocker is eyeing the Sealy Mattress 9.87 % notes of '07 (B3/B-) which yielded 1,190 basis points over the curve last Monday. In the service sector, he is looking at the United Rentals 10.75% notes of '08 (B1/BB), which traded at 633 basis points over Treasuries last Monday. In the retail sector, he is considering buying the CSK Auto Inc. 12% notes of '06 (B2/B), which traded at 785 basis points over the curve last Monday. Crocker says that those names share the characteristic of having a positive cash flow and good credit story. He adds that he will stay away from equity-type issues from companies that have insufficient cash flow in their books.
Crocker says he will sell "cushion coupon" bonds, or ones that trade at substantial high premiums, because he does not see them tightening up further relative to Treasuries. Among potential sales, he cites the Weight Watchers International 13% notes of '09 (Ba3/B), which traded at 949 basis points over Treasuries last Monday. He will also sell the Triad Hospitals Holdings 11% notes of '09 (B2/B-), which traded at 631 basis points over the curve, last Monday. Another potential sale are the Tembec Inc. 8.5% notes of '11 (Ba1/BB+), which had a 549 basis points spread over Treasuries, last Monday.
Crocker manages a $2.5 billion high-yield portfolio. He allocates 60% to cyclical names, 30% to defensive bonds, 9% to energy and 1% to cash. With a 4.12-year duration, the fund is slightly long its index, the 3.99-year J.P. Morgan global high-yield index.
