Securitization People and Markets

The large number of defaults this year by investment-grade companies has called attention to the relative limitations of investment-grade indentures, according to Sherri Andrews, head of high-yield research at BNP Paribas. Andrews says that when there are inherent problems with a credit, tighter indentures cannot protect bondholders from heavy losses on their investment. In certain cases, however, such as that of U.K. telecommunications equipment-maker Marconi, bondholders risk having their claims subordinated to the bank lenders as the bank debt matures and credit lines are renegotiated. While high-yield indentures typically contain protections that prevent banks from stepping ahead of bondholders in the capital structure, investment-grade issues, such as Marconi's, rarely do. Andrews argues that investment-grade bonds should contain protections such as negative pledges, which stipulate that if unsecured bank lenders demand security for a loan, bondholders receive similar security, allowing them to remain pari passu to holders of the bank debt.

Jim Salonia, former senior v.p. with Phoenix Investment Counsel, has switched to ING Aeltus Group to head up its marketing, business management, sales support and client service for institutional sales. He will again be a senior v.p. Salonia now reports to Duke Meythaler, head of the distribution platform at ING Aeltus capital management. He used to report to Tom Meyers, senior v.p. and head of institutional sales, at Phoenix Investment Partners in Indianapolis. Phoenix Investment Counsel is a fully owned subsidiary of Phoenix Investment Partners. Salonia says he replaces Arnold West at ING Aeltus, and that West remains with ING as a v.p. in institutional sales.

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.

Some investors are avoiding European utilities, fearing there may be more downgrades in the works as companies are forced to add debt to their balance sheets to finance acquisitions. Nicole Jackman, head of European corporate bond management at State Street Global Advisors in London, says she's underweight utilities, especially highly rated ones, because she is worried about downgrades. For example, last week Electricidade de Portugal (Aa3/AA-) was put on a negative outlook by Standard & Poor's in response to fears its financial profile will erode.

High-yield strategists and investors are split over whether portfolio managers should continue to increase credit risk in their portfolios, as they have done in recent weeks. Spreads between single-B credits and higher-rated double-Bs were at a record 505 basis points on Oct.5, but had narrowed to 335 basis points last Monday. Walter McGuire, global high-yield strategist at Deutsche Banc Securities, expects that gap to narrow another 10 basis points by year-end, but he says investors should move even further down the credit ladder, adding some triple-C rated names to their portfolios. McGuire projects credits yielding 20-30% (which include a number of triple-Cs) will return 5% over the next two months.

Securitizations from Latin America, particularly Brazil, should grow in number next year, according to London asset-backed bankers and analysts. Aside from six bank deals, the region saw only two corporate securitizations this year: Petrobras, Brazil's blue-chip oil company, and PDVSA Finance, a securitization vehicle launched by Venezuela's state-owned oil company PDVSA. Nancy Shue, structured finance analyst at Standard & Poor's in New York, predicts that strong exporting companies will likely seek structured deals featuring political risk insurance in 2002, as the international debt capital markets remain firmly shut to LatAm corporates--at least for plain vanilla bonds. Already, Companhia Brasileira de Bebidas (CBB) has announced its intention to launch a $500 million securitization featuring a guarantee by its parent company Companhia de Bebidas das Americas and carrying political risk insurance. CBB will use some of the proceeds to refinance existing debt and other companies will likely follow suit as the need for more creative financing methods increases.

London-based industrial analysts are concerned that the reaffirmation of Fiat's Baa2 stable rating from Moody's Investors Service last week is not accurate given the amount of work the company has to do to de-leverage. "Given the fact that they're restructuring so heavily and haven't performed well even in good times, I'm surprised with the stable outlook," says Victoria Whitehead, analyst at Bear Stearns in London. "It's not a good company. The rating is deceiving," she adds. Whitehead believes Fiat should be rated Baa3 with a negative outlook. Calls to Eric de Bodard, managing director at Moody's in London, were not returned.

Gaming and travel investors and analysts say they are hard-pressed to find credits they can recommend, as many names are trading at higher prices than they were before Sept. 11. John Maxwell, gaming and lodging analyst at BNP Paribas, says that pricing in the sector reflects investors' willingness to overlook weak operating numbers through at least the first quarter in an attempt to be fully invested by year-end. Given that benchmark credits such as the MGM Mirage 8.375% notes of '11 (Ba1/BB+) were yielding 8.5% last Tuesday, the only two credits in which he sees value are Pinnacle Entertainment and Royal Caribbean Cruises. While Maxwell does not yet have a buy recommendation on Pinnacle, he sees little downside risk in the 9.25% notes of '07 (Caa1/B-), which were trading at 88 last Tuesday. He believes investors have already factored weak operating performance numbers into the price of the bonds. Also, he believes Pinnacle may be looking for a joint partner to fund a property it is struggling to complete in Lake Charles, La. If it were to find such a partner, he says the bonds would trade up five points.

Merrill Lynch's latest spate of personnel cuts has dealt a severe blow to its attempt to remain a formidable high-yield trading and underwriting operation, say senior buy- and sell-side high-yield executives. Many speculate that a lack of familiarity with the junk sector among senior management, coupled with sharp losses in its trading book, have been the basis for its rapid pullback. Indeed, former Merrill high-yield officials are said to be telling competitors that Merrill's high-yield losses will total more than $50 million this year alone.