Independent fixed-income research outfitsCreditSights, based in New York, and Gimme Credit, based in Chicago, are attracting attention for their calls on the credit safety and relative value of high-profile primary and secondary market bond issues. The value of heeding advice provided by firms that have no economic interest in trading or underwriting bonds has been heightened by the $250 million Goldman Sachs-led Cummins Engine convertible preferred (Ba1/BB+) offering and the recently completed offering for Mission Energy Holding (Ba2/BB-), according to portfolio managers and analysts.
One high-yield analyst at a Boston money manager points to the two deals as examples of situations where the opinions of CreditSights and Gimme Credit "probably affected" the pricing of the transactions. In the case of the Cummins deal, several high-yield crossover players (who can invest in high-yield bonds as well as convertibles and/or investment-grade securities), acknowledged being influenced by the CreditSights June 4 report which painted a bleak operating outlook. The deal was done two weeks ago, but at a higher coupon and lower conversion premium, 7% and 20%, than initial price guidance had suggested. Goldman Sachs syndicate officials declined comment.
The Mission Energy deal was completed last Wednesday, but was cut in size by 25% and an extra 200 basis points in spread was offered. "We had our doubts as to the dealer's cash flow projections starting out. When we spoke to CreditSights about it, they put the whole thing into a broader market context. It made sense, so we started demanding a lot more spread before we took the deal down," said the Boston high-yield analyst. An analyst at a large Boston insurer, which was also using CreditSights' research during the marketing process last week, supports this account. On June 15, CreditSights issued a report entitled "An Offer You Can Refuse" highly critical of both the price talk, corporate structure and operating prospects for the company. Lehman Brothers syndicate officials declined comment; Goldman did not return calls seeking comment.
CreditSights and Gimme Credit provide fixed-income research to institutional clients. Gimme Credit has two analysts and does only U.S. corporate bonds, CreditSights has a staff of 11, doing work on individual U.S. corporates and sovereigns, as well as their broader marketplaces. Neither firm manages money or provides corporate finance advice. CreditSights PresidentPaul Ciasullo says the year-old company has 100 paid-subscribers and has received 6,000 hits to date on its Web site. Gimme Credit President Carol Levenson declined comment on the size of her seven year-old firms' subscriber base.
Andy Van Houten, co-head of high-yield research at Deutsche Bank, and a former colleague of Glenn Reynolds and Peter Petas (Deutsche alumni and CreditSights co-founders), agrees that an independent voice would be attractive to the buy-side in certain circumstances. He continues that the value of this voice often boils down to "saying whatever they wish to, whenever they wish to say it." He argues that the sell-side analyst offers the customer "a knowledge of a company or transaction" that is only acquired by being intimately involved with it on a long-term basis. He would not comment on conflict-of-interest issues.
The head of high-yield research at another large dealer put the issue more bluntly: "I cannot just walk out onto a trading floor and tell the traders and salesmen that the company we have been working day and night to raise money for should be sold short." He argued that analysts at dealers who are involved in marketing corporate finance transactions can make their opinions known as to their level of enthusiasm for the offering, even if they can't directly put a "sell" or "swap" on the credit. He did not specify exactly how this would occur.
The high-yield analyst for the Boston insurer says that the way that analyst's communicate their concerns is via off-the-record conversations with their largest clients, where the "true recommendation is then given." He concludes, "unless I'm one of his or her firm's biggest accounts, or I've known them a long time, I don't get the whole story." He says that he will continue to use both independent vendors research given the financial incentive analysts have in selling deals.