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| Kevin Akioka |
Akioka is the high-yield portfolio manager at Payden & Rygel in Los Angeles. The firm has $51 billion under management, primarily in fixed income. Describe your portfolio.
Our current assets in the high-yield sector amount to $2.5 billion, in a mix of mutual funds and separate accounts. It's a good size to be in the high yield market as it gives us a good presence, but we're not too big to make it difficult to move in and out of bonds. We don't invest in distressed bonds. My portfolio has 95-98% invested in high yield, including about 60% in single-Bs, 35% in double-Bs, 2% in triple-Cs and the remainder in cash.
What are you doing with new cash?
It's been an interesting market. We have had such a rally that it is getting more and more difficult to find yield. We are going into the new issue market but the problem has been that new issues have been biased toward lower quality, so you are seeing more triple-Cs and weaker credits. There are a lot of smaller deals that probably wouldn't have gotten done a year ago when the market was disciplined. Because this year is getting off to an okay start you are seeing some of the speculative new issues come out. We are being very choosey in this current crop of new issuance.
Can you name specific new issues you are looking at?
We like some European names such as NTL Cable, which is coming out of bankruptcy. It's a very large liquid issue and they are a big player in Europe. So that is going to be on the radar screen. Warner Music is another large deal. These deals are nice because they are going to be liquid, they have established businesses and they have a track record to follow. The track record is not always that great, but you can look back and see the trends and how the company has done verses some of these smaller deals that are first time issuers where you don't have as long a track record. These are both single-B names which is probably the sweet spot for us because there is less treasury sensitivity with them so volatility is a good thing. And you are getting paid more than double-B names. These large, liquid new issues are probably where most of our cash is going to.
What are you doing to find yield?
That's the question of the day. It is difficult to find good companies with good valuations because there are companies with attractive yields out there, but they aren't good companies. A lot of them had 10-11% yields after this big rally. If something is still that way, there are several reasons. Putting those two pieces together and finding good yield at 7-9% where there is a credit that you like is tough. There is no happy medium. You're seeing 5-6% coupons for a strong double-B company but you're not getting paid what you want to. And the whole other spectrum is with companies you don't want to get involved in. The main focus is looking for a good company on a bottom-up basis where you are getting paid for the risk you are taking on. In this market that is going to take a lot of work. Everything was 9, 10, and 11% in the fall of '02 and from that point to this point, the market has become much more efficient, yield spreads have tightened in and it's harder to find those good opportunities.
Our major changes are going to be at the margin where we are looking to sell out of the bonds that have rallied to 5 1/2-6 1/2% and into bonds with 7-8% kind of yields and that's going to be a bond-by-bond exercise. We're going from rich to cheap over the next six to nine months. It's less of a 'rising tide lifting all the ships' phenomenon that we had last year, and much more of a 'let's find individual bonds that you get paid for the risk.' It's a different dynamic.
How do you feel about dividend deals?
We are pretty skeptical of those. A good deal we would like to see more of is the traditional leveraged buyout-type deal. That may sound strange, but we'd like to see a well-structured LBO that has good sponsor involved, involves a middle-of-the-road company rated a high single-B and is a large deal of $500 million-1 billion where you can get some secondary liquidity. I'd like to see more of that right now. A lot of people going into the year felt like there was a big backlog in these LBOs and we haven't seen as much as we thought we would. Those types of deals would be in the middle of the radar.
On the flip side, you are seeing a lot of refinancing of traditional companies with debt out there for a while. They are refinancing their 9-10% coupons and getting into 6-7% coupons, which is great for them. In some cases if we like the company and we own the bond we will buy those new issues.
What sectors do you favor?
We have pretty healthy weightings in gaming, homebuilding and healthcare, which we feel are three very solid industries. Valuations are not the cheapest they've been in those sectors, but at the same time there are opportunities for ratings upgrades and price appreciation. In some cases there are going to be upgrades to investment grade for those companies. There hasn't been too much in new issues in those industries, but specifically for gaming we've been adding to Station Casinos, which is a solid regional gaming company. In healthcare, we're adding to Triad Hospitals which is single-B. In homebuilding, we are adding to Hovnanian Enterprises. That's a double-B credit but we expect an upgrade sometime this year. From a portfolio perspective, we'll be selling the rich bonds and getting into cheaper attractive securities. We're pretty optimistic on the high-yield market from a firm perspective and so we don't really see any sector falling off the cliff. We will be doing this same type of approach throughout.
What is your macro outlook?
We are expecting moderate to slightly slower-than-consensus growth. Because of that, we see Treasuries hovering in the range they are in right now. Stable rates toward the lower level are good for high-yield companies because of the lower funding costs. In addition to that, lower Treasury rates tend to push demand toward high-yield securities. That's been the technical factor for money flowing into high yield, which explains most of the reason for the rally in the market. The macro environment should continue to be good for high yield because we're having these low rates.
From a sector perspective, there are a few big positives still out there. You have default rates coming down. They are at 4.8% right now, which is off the high of 10.5% in early 2002. That's been a very positive fundamental factor. It's likely that we will get into the low 4%, high 3% range by the end of the year. That's a very powerful signal that the high-yield market has gone through its cleansing process and is fundamentally in much better shape.