High-yield portfolio managers and a sell-side analyst say the high-yield auto parts sector has only a small number of credits worth betting on, in spite of two recent successful deals. Given issuers' propensity to grow largely through acquisitions, the potential for off-balance sheet financing is considerable, says a New York-based portfolio manager. Eric Green, high-yield portfolio manager at Penn Capital Management in Cherry Hills, N.J., says that while it is necessary to be particularly careful in this sector, he says there are still opportunities to pick up yield. He cites vehicle transport company Allied Holdings' 8.625% notes of '07 (Caa1/CCC+), which were trading at 82 last Monday, as one example of an issue he expects to appreciate further. Green would not say at what price he would sell the issue.
Nate Hudson, analyst at Banc of America Securities, says that dealership operators are among the safer plays in the sector because they are less capital intensive, produce lots of free cash flow, and rely on foreign auto makers, whose market share is improving versus the Big Three. Hudson recommends Sonic Automotive's 11% senior subordinated notes of '08 (B2/B+), and Group 1 Auto's 10.875% senior subordinated notes of '09 (B2/B+). Both issues were trading at 107 last Monday, however, and Hudson concedes that there is only modest capital appreciation available in these names.