The high-yield auto parts sector will remain under pressure for the foreseeable future as car companies continue to squeeze parts manufacturers on pricing, according to one buy-side analyst and one sell-sider. The buy-side analyst says the firm where he works, a Midwestern money manager, recently sold its Dana Corp. 9% notes of '11 (Ba3/BB) at 96, on the view that risks remain weighted to the downside because the industry is very competitive. He says the firm might buy the bonds back if they dip a few points, but would not sell more unless it finds a decent replacement that trades at a lower price.
Ed Mally, head of high-yield research at CIBC World Markets, is advising clients to buy Dana's bonds. He believes that management has done a good job of explaining the company's asbestos-related risks to investors. He argues that the bonds, which trade 150 basis points behind lower-rated issues such as the American Axle 9.75% notes of '09 (Ba3/B+), will eventually close that gap by some 50-70 basis points while providing more yield.
Mally also suggests that investors lighten up on the bonds of Collins & Aikman. The 11.5% notes of '06 (B2/B) were trading at 92 last Tuesday, and he argues that the bonds could trade into the mid-80s if a rumored acquisition of a German manufacturer takes place and the company issues new debt which structurally subordinates the outstanding paper. The buy-side analyst says the move makes sense, though his firm does not own Collins & Aikman's bonds.