Allstate Eyes Distressed I-Grade Telcos

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Allstate Eyes Distressed I-Grade Telcos

The Allstate Corporation is looking to add $20-25 million in bonds of distressed investment-grade telecoms, such as Qwest Capital Funding,Sprint Corp., or WorldCom. Mark Cloghessy, portfolio manager overseeing the firm's $13 billion investment-grade bond portfolio, says he believes investor concerns that these companies will not be able to maintain access to funding are exaggerated, and that spreads will narrow. He would like to add the Qwest Capital Funding 7.25% notes of '11 (Baa3/BBB), which were trading at 490 basis points over 10-year Treasuries on March 22. The issue was trading 130 basis points wide of the Qwest Corp. 8.875% notes of '12 (Baa2/BBB) on March 22. Cloghessy says that while Qwest Corp. produces more cash flow, he does not believe it justifies the spread differential, noting that Standard & Poor's gives the Qwest Capital Funding issue the same rating. Cloghessy would rather add Qwest than Sprint or WorldCom because he does not own any Qwest paper. However, he is concerned about the Securities and Exchange Commission inquiry into the company. Before investing, he would like some assurance that the company will go ahead with a planned convertible bond issue to provide much-needed liquidity.

If Cloghessy's concerns related to Qwest cannot be addressed, he says Allstate will probably add paper from a recent Sprint issue, of which it already owns some

$25-30 million. The 8.375% notes of '12 came at 307 basis points over the curve on March 8, and were bid at 315 basis points over Treasuries on March 22. He says the firm will probably sell mortgage-backed securities to raise cash for the purchase. However, he did not have details, as he oversees only corporate bonds.

Allstate's corporate portfolio is neutral to its benchmark, the 5.56-year Lehman Brothers U.S. credit index. The portfolio varies from the index largely by overweighting U.S. banks and energy, while underweighting sovereigns and foreign agencies.

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