Unchanged On the Week, Outperforms for the Year


The secondary market was relatively unchanged last week, with paging being the only sector to see much activity at all. Some investors said the upswing stemmed mostly from the fact that paging had been so beaten up over recent months. In fact, it was the only subsector of telecom that has not been booming as of late.

Paging company Arch Communications' 12.875% issue rose about a point and a half on the week to 86; Paging Network rose an impressive two points on the week to trade at 77 on Thursday, traders said.

For the month through Friday, June 25, the market returned a negative .43%, according to KDP Investment Advisors, but for the year through June 25, the return was 1.60%, one of the best performing asset classes in fixed income, said Kingman Penniman, president of the research firm.

"High yield has performed well in a negative interest rate environment," he said.

For the month, energy was one of the big winners, rewarding investors with a 1.17% return. Healthcare has had a tough go of it in the year with a loss of nearly 11%, but for the month it saw an uptick of 1.41%.

And steel names have seen an increase of 7.15% on the year, Penniman said.

The Fed's rate hike of a quarter percentage point had little effect on the secondary, traders said, because a 25 basis point change had already been factored into most people's expectations.

The high yield mutual funds were able to stem the outflows last week with a cash inflow of $195 million, for the week ending June 23, the latest time frame available, according to AMG Data Services.

CLECs Again Come Under Scrutiny

One thing that may have an effect on outstanding high yield issues is the Federal Communications Commission's ruling on the SBC/Ameritech merger. Even though those are two investment-grade names, the FCC said they must enter 30 new markets to increase competition before they can proceed with their merger.

And one way to enter a market is to simply buy market share. So some investors are already looking at the CLECs, an area that was the market's darling last year but has not garnered as much attention in the past few months, to be taken out.

Three names that were mentioned as possibilities are Hyperion, which operates on the East Coast; GST, which operates on the West Coast; and Intermedia, which has a geographically diversified footprint, traders said.

However, others said that SBC and Ameritech may opt to enter new markets and build their own network, even on a very minimal scale, and consider that to be increased competition.

Another thing that led to some speculation in the telecom sector was the resignation of the Gary Forsee, head of Global One, a consortium of Sprint, France Telecom and Deutsche Telekom. The joint venture, which had been Sprint's launching pad for service into Europe, had been troubled since it began three years ago, sources said. And the resignation last week led to speculation that the venture could dissolve, which made some think that Sprint's future is in question.

One of the other two partners, the largest telecom companies in Europe, are expected to back out of the partnership, analysts said. The relationship between those two companies was hurt by Deuteche Telecom's unsuccessful bid to buy Telecom Italia SpA because it did not alert the French company first.

The turmoil led to a host of possible impacts on high yield. One was the possible future of Sprint PCS. If it is put on the block, some in the market wondered who would buy it and how that may affect other names in the market.