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Daniel Arbess, head of special situations investing at Triton Partners, says the worst may not yet be over in terms of corporate defaults. He argues that more companies may face a refinancing crunch when senior secured bank debt negotiated in the late 1990s comes up for renewal in the next few years. Martin Fridson, high-yield strategist at Merrill Lynch, disagrees. He says that while leading indicators show that there may be a slight uptick in the default rate for the next few months, he expects a sharp drop in the default rate in 2004 and 2005.

The market value of defaulted bank loans hit an all-time low of 44 for the month of September, setting the table for a feast of upside potential. Edward Altman, Max L. Heine Professor of Finance at New York University, said a look at where distressed debt is now compared to where it usually ends up in terms of recovery bodes well for investors. "Historically, most studies have shown that recovery values for bank debt are roughly 70-80%," said Altman, one of the keynote speakers at the 7th annual Loan Syndications and Trading Association (LSTA) conference in New York. But these historical averages could be misleading in today's environment, and recovery rates may not be as high as they have been in the past, he cautioned.

Encompass Services' bank debt remained stable, albeit in the 31-32 context, after the company announced that it would pursue a pre-packaged bankruptcy plan. The restructuring plan stipulates that $200 million of the company's outstanding $600 million of bank debt will be rolled into a new term loan and the remaining amount will be converted into an 80% equity stake in the reorganized company. One trader estimated that the recovery value of the bank debt could be as low as 35 under this scenario. No trades could be confirmed last week, but one dealer noted that two weeks ago market players were interested in the paper for the value of the equity alone.

An independent analyst and a portfolio manager say last week's spread widening in the bonds of Household International has created an opportunity to add exposure to the credit. J.P. Weaver, portfolio manager of $1 billion in taxable fixed income at McGlinn Capital Management in Wyomissing, Pa., says he will add to the firm's holdings of Household five-year notes if they continue to widen a bit more, though he declined to give the specific level he was looking for. Last Wednesday morning, the 5.75% notes of '07 (A2/A-) widened some 70 basis points to 520 over Treasuries. McGlinn says Household's proposed $484 million settlement of predatory lending issues and stated commitments to increase its capital reserves give him confidence that the finance company will turn things around.

A $50 million piece of Federal-Mogul's bank debt changed hands almost two weeks ago in the 47-49 context, and small pieces of the paper continued to trade in the 48-52 context last week. Comerica is believed to have sold the large piece, while Bank of Tokyo-Mitsubishi was rumored to be unloading some exposure. The recent activity was prompted not only by regulatory pressures but by fears that issues affecting Ford Motor and General Motors could trickle down to car-part producers such as Federal-Mogul, according to sources.

Investment banks with long positions in collateralized debt obligations on their balance sheets are repackaging them and will sell them privately in an effort to minimize exposure to underlying corporate risk. "Every active credit derivatives house is looking to [repackage CDOs for the private market]," says Chris Carman, head of synthetic securitization at Citigroup in London. He says Citigroup has successfully completed a private CDO repackaging.

MONY Capital Management, a subsidiary of the MONY Group, is looking for an asset-backed securities analyst. Bill Sidford, senior managing director and chief ABS portfolio manager, says the new hire will replace an analyst who recently left and will bring the number of ABS analysts to four. The analyst would report to Sidford. He or she would cover various asset classes such as credit card or autos, without any particular specialization. Sidford says he is "hopeful" of filling the position before year-end.

The bank debt of Nextel Communications bounced back up to the 88 level, with a trade taking place last Tuesday. Dealers said the name was stronger because of the rally in the equity markets early last week. Later, however, the paper lost momentum and trades were quoted at 87 5/8 and 87 1/2 by week's end.

The bank debt of Crown Cork & Seal received a boost from its latest positive earnings last week, as well as the confirmation that the company would go ahead with its spin-off of Constar International. The company posted net income of $0.34 per diluted share last quarter, compared to a loss of $0.10 per diluted share during the third quarter last year. The bank debt rallied from the 85 level and was trading in the 87 1/2 - 88 1/2 range following the news. Calls to Timothy Donahue, senior v.p. of finance, were not returned by press time.

Credit Agricole Indosuez plans to set up a global structured products desk in New York and will hire a team of eight to 10 staffers, including traders and structurers, as well as a head for the business. Industry officials familiar with the firm's plans noted the French manager has been planning the launch for some time, but has experienced delays in getting board approval. Credit Agricole is now waiting on licensing approval by regulators, which is likely next month.

Standard Chartered on Tuesday confirmed plans to proceed with its share offering and dual primary listing in Hong Kong. Goldman Sachs will start the deal on October 21, with pricing on October 26 and listing on October 31. The new share issue will total no more than 5% of the existing issued share capital and will be at a discount of up to 5% to the London close before pricing. The bank derives two-thirds of its profits from Asia and wants to raise its profile in the region. The issue has been on the back burner since last year, but the share price is now close to £7.00, the same as when the deal was pulled after the September 11 terrorist attacks.