Despite a slew of issues surrounding European utilities, Merrill Lynch Investment Managers sees value in a few names. Stephan Bassas, v.p. and fund manager of the corporate bond fund, says that, in general, utilities are coping with a number of costly processes such as deregulation and decommissioning of nuclear plants as well as having to address pension liabilities. He also thinks rating agencies have not re-rated them properly.
Bassas has found a few names with attractive valuations, for example Suez and Veolia (formerly Vivendi Environnement). Both are in deleveraging mode. Veolia issued E750 million of 55/8% bonds due in '18 at 107 versus swaps in May. Those bonds were being offered at 90 versus swaps early last week. Suez issued a E1 billion benchmark offering in June, with a 53/4% coupon maturing in '23. The reoffered swap spread was set at 130, and is now reoffered at 125. Bassas thinks there is room for further performance.
Bassas also likes some of the whole business securitizations in the U.K. water sector such as Anglian Water. He says he likes the deal's ring fence structure, which protects Anglian Water's assets in the event of a bankruptcy of its parent company. He is also looking at the upcoming Southern Water deal, another U.K. whole business securitization.
In general, Bassas says he favors names that are slightly cyclical and lower-rated--single-As and triple-Bs. He looks at corporates' cash flow situations and is following the theme of balance sheet repair. Accordingly, he likes France Telecom. He was overweight the 30-year part of the France Telecom curve and is now thinking of switching out of longer to middle end because it is flattening out.
Merrill Lynch's corporate bond fund, which was launched in May, currently has E16 million under management. It uses the Merrill Lynch Euro Corporate index as its benchmark. Merrill Lynch Investment Managers has E1.5 billion in euro-denominated corporate bonds under management and manages more than £5 billion in sterling-denominated corporates.
