High-yield portfolio managers and at least one strategist remain wary of adding risk despite a continued rally at the lowest rungs of the credit ladder, as money managers look for someplace to invest the cash that had been sitting on the sidelines before year-end. Through the five-week period that ended Nov. 14, distressed credits have returned a whopping 13.48%, versus 6.27% for all of high-yield, according to data provided by Bear Stearns. Wireline telecom, one of the most beaten up sectors over the last two years, returned 22% over that period, following large gains in WorldCom and Qwest Communications.
Michael Taylor, high-yield strategist at Bear Stearns, sees no strong evidence of a sustained rally in distressed credits. "For distressed to outperform we need to see a robust outlook for the economy in terms of growth." He says concerns persist in the market that may cause gains to evaporate as they did in August and September.
MW Post Advisory Group recently sold $10-15 million in telecom names, particularly Qwest, to pocket gains. Larry Post, high-yield portfolio manager at the Los Angeles firm, says it is still difficult to make sizeable trades in names that he believes have attractive assets. He attributes the recent rally to relatively light issuance and mutual funds making use of new inflows.
The gains in distressed credits are not due to better feelings about the economy or the situation with Iraq, says Don Morgan, portfolio manager at MacKay Shields. "People have a lot of cash and they're looking at the end of the year wondering how they're going to do next year so they're buying anything with a low dollar price on it." MacKay Shields has overweighted triple-C credits all year and is more focused on reducing than increasing exposure. Morgan would not be specific about when he would sell, however.
Even investors who have been adding exposure to lower-rated credits are doing so cautiously. Eric Green, director of research and senior portfolio manager at Penn Capital, is still not convinced that telecom is ready to turn around. The firm missed the rally in WorldCom, arguing that the overcapacity in the telecom sector makes it extremely difficult to value assets. Distressed names Penn Capital has added recently include Crown Cork, a manufacturing company and Elan, a maker of pharmaceuticals. Penn Capital also has a small position in Charter Communications, and Green says the firm would look to add more if it sees a debt buyback.