Top ranked high-yield paper and forest products analysts are divided over whether falling commodity prices will drive down the price of bonds and create an opportunity for investors to swap into lower-rated names for additional yield. Bill Hoffmann, an analyst at UBS Warburg and a second-teamer on Institutional Investor's 2001 All-America Fixed-Income Research Team, says weak commodity prices could eventually drive down high-priced credits such as Riverwood International senior subordinated notes (Caa1/CCC+) and Caraustar Industries (Ba1/BB-). This will create an opportunity for investors to swap out of higher-rated names, such as Tembec (Ba1/BB+), Norampac (Ba2/BB) and Smurfit-Stone Container (B2/B).
As of last week, Hoffmann said the prices were still too high, however. The Riverwood 10.88% senior subordinated notes of '08 traded at 99, while the Caraustar 9.88% of '11 traded at 101.50. Hoffman says investors should buy these credits if they fall to the mid- to high-90's.
Joseph Stivaletti, an analyst at Goldman Sachs and the top-ranked analyst in the II poll, says that while trading into weaker names has proved to be an effective strategy in past commodity pricing cycles, it is unlikely that the current pricing weakness will negatively effect most names in the sector. He says industry consolidation has lowered price volatility, and management has become more effective at maintaining liquidity and a healthy balance sheet. One notable exception is Doman Industries (Caa1/B senior unsecured rating). After trading at 70 in late May and early June, the senior unsecured 8.75% notes of '04 were bid at 43 last week. Stivaletti attributes this decline to the fact that Doman is highly leveraged and has suffered from uncertainty surrounding a trade dispute leading to a preliminary 19.3% U.S. tariff on Canadian lumber imports. Stivaletti believes Doman and other Canadian lumber producers should be able to convince the U.S. and Canada to reach an agreement that would be less onerous, in which case he predicts that the bonds would trade up sharply, possibly back to the 70s.