At least three high-yield portfolio managers say they are considering adding to their cable sector allocations as the woes of Adelphia Communications have created considerable weakness in what had only a short time ago been one of the strongest sectors in all of high-yield. "We've been as conservative as possible to this point, but at some time, and maybe that time is now, there may be opportunity if you take a longer term view," saysPaul Ocenasek of Aid Association for Lutherans/Lutheran Brotherhood. Ocenasek says AALLB has a roughly 6% weighting in the sector, while he estimates other funds have a weighting of 8%. He says that while AALLB may eventually want to allocate as much as 10% to the cable sector, it will only do so once ongoing concerns about accounting issues are resolved.
Mark Durbiano, high-yield portfolio manager at Federated Investors, believes that many of Adelphia's issues are unique to that company, and he says other cable companies are being sold off for no good reason. Federated has roughly 6% of its portfolio in cable names, which Durbiano says is roughly even to Lehman Brothers benchmark indices. He says the firm is thinking about adding to other names in the sector, including Charter Communications, Mediacom, Cablevision, andInsight Communications, but he would not say at what levels the firm would be a buyer.
As of last Friday morning Charter's 8.625% notes of '09 (B2/B+) were bid at 76, roughly 10 points lower than where they had been a week before. Mediacom's 9.5% notes of '13 (B2/B+) were bid at 92, while Insight's 10.5% notes of '10 (B2/B+) were bid at 94. Both Mediacom and Insight were some eight points lower on the week. Cablevision's 7.625% notes of '11 (Ba2/BB+) were three points lower at 89.5. As for Adelphia, the 10.25% notes of '11 (Caa2/C) were down 30 points on the week, to a bid of 50.
Cable is a sector where nearly all public mutual funds and pension funds have been almost unavoidably overweight, because it is so large and liquid, says Tom Parker, high-yield portfolio manager at Barclays Global Investors. "We've always been skeptical about asset valuations in the sector. It was way over-levered in our minds, but now it certainly has cheapened. It deserves a fresh look." He says BGI has not yet determined whether or when to add exposure.
Bidding has been better for off-the-run cable issues, suggesting shorting activity by hedge funds, says Ray Kennedy, high-yield portfolio manager at PIMCO. He says that the sector is too volatile at present for PIMCO to consider going overweight. Kennedy wants to see signs of progress in second and third quarter earnings, or a strong bid for Adelphia's assets before he would overweight the sector. PIMCO currently has a neutral position in the sector, he says.