J.P. Morgan Fleming Asset Management is considering adding crossover names, former investment-grade credits that have been downgraded to junk, to its E125 million European high-yield bond fund. Mark Flack, London-based fund manager, says the fund has not been active in crossover names, but he is beginning to do his homework to determine which ones to buy. One reason for the move is that recently downgraded credits such as Alcatel and Tyco now comprise a sizeable portion of the Merrill Lynch European high-yield index, the fund's benchmark. Tyco is about 8% of the Merrill benchmark, and once Alcatel is assimilated it will comprise 15-16%.
Flack says he has not determined how much of the fund will be allocated to the names. "We're looking at crossover credits on a name-by-name basis. They have attractive yields, but are difficult to analyze. Trying to pinpoint when the credit is stabilizing is difficult, because many of them have big liquidity problems which if they aren't solved, the company can go bankrupt," he says.
Most recently, Flack has been looking at the new issue market, and rotating out of bonds that have been getting expensive, because of the limited issuance in the industrial sectors. He declined to say which names he has sold, but said he has participated in new issues from Antargaz and Kronos. Anatargaz is a French gas distribution company, which Flack bought, because it is a mature, stable business, which is well into its life as a leveraged company, and the issue was reasonably priced. As for Kronos, a titanium oxide company, Flack likes the company's fundamentals.