Buy-side analysts and portfolio managers say there are a number of bargains in the energy and utilities sectors, as panic sellers seek to avoid holding the next Enron, while others are forced to sell bonds as soon as they drop below investment-grade.
American Express Financial Advisors in Minneapolis is prepared to add to its holdings of energy company bonds if the selloff continues, according to Tim Doubek, portfolio manager. "We think that in the first half of next year, these types of bonds are going to be at the top of the list in terms of performance," he says. The firm already has "a large position" in the Mirant 8.30% senior notes of '11 (Ba1/BBB-), the Calpine 8.5% senior notes of '11 (Ba1/BB+), and the NRG 7.75% senior notes of '11 (Baa3/BBB-).
In the week after Dynegy's failed takeover of Enron, Mirant paper has widened 180 basis points over 10-year Treasuries, while the Calpine and NRG bonds have widened 150 basis points each. "These are assets that are fairly easy to value, unlike Enron, which is more of a financial company," says Doubek. He also believes that the companies' plans to reduce debt by cutting capital expenditures and issuing equity will benefit them in the long run. "In the end, these will be much stronger companies because we've gone through this," he says.
Austin Ramzy, an energy analyst at Principal Capital Income Investors in Des Moines, also sees value in the sector. "I don't think the demand for electricity and oil and gas has changed significantly; the story is pretty much intact for those companies producing and selling power," he says. Ramzy agrees with the ratings' agencies views that, unlike Enron, El Paso and Williams (both Baa2/BBB) have "plenty of ability to pay their debts with non-trading assets." He also sees some likelihood that Calpine and Mirant, recently downgraded to junk, could delever and return to investment-grade. After being underweight the sector all year, Principal plans to get more aggressive, and will move to a neutral position. Ramzy would not discuss specific energy companies the firm is eyeing.
Too many companies are being tarred with the Enron brush, according to Margo Cook, head of fixed-income at BNY Asset Management in New York. She says her firm already owned Calpine before the spreads ballooned, and is not about to sell now. She says Calpine does not have the off balance sheet financing woes that Enron does, but has been dogged by more traditional problems of overcapacity and a difficult pricing environment. She says she would buy Calpine paper if her firm did not own it already. While she believes that Dynegy may also be oversold, she does not want to take on added risk, given the Calpine investment.
Not all investors are rushing to buy. Portfolio managers at State Street Global Advisors in Boston are maintaining a slight underweight, according to unit head Joe Marvan. Marvan considers it appropriate that Calpine has been downgraded to junk, and is not considering an investment in the credit because he has watched its growth assumptions drop dramatically. Bob Pickett, corporate portfolio manager at State Street, says the firm has focused on companies with less exposure to power generation and trading and marketing. Some of the firm's energy holdings includeDominion Resources, Detroit Edison, MidAmerican Energy Holdings and Progress Energy--companies that focus on energy transmission and distribution.