Nervous HY Investors Want Yield
January 19, 2009
High yield bond investors are hoping to get back into the market in their search for decent returns, but they are stuck between their desire for yield and their aversion to risk in difficult economic times.
"We're seeing people all of the sudden looking at their accounts and looking where government yields are and getting yield shock," one high yield investor said. "We're starting to see that hunt for yield that you've seen in the past. Right now we're seeing beginning stages of that."
Continued bad economic news, however, is still keeping people cautious. "The buying interest comes in quickly and then it leaves just as quickly," another high yield portfolio manger said. "I'd love to see some sustainability."
Ten-year Treasury notes began last week trading above 2.40%, but they quickly fell. The notes dipped below 2.30% Tuesday then spent most of the trading day Wednesday below 2.20%. Midday Thursday found the 10-year yield at 2.19%.
The Merrill Lynch High Yield Master II Index began last week with a small step up but then moved downward. Coming from the previous week's close of 461.023, the index closed at 462.709 Monday, but declined for closes of 461.078 and 457.659 prior to Thursday's trading.
Copper mining company Asarco was the biggest loser in secondary high yield trading for the week ending last Thursday, according to Advantage Data. The company, which has been in bankruptcy since 2005, recently lost the chance to be acquired for $2.6 billion by Vedata Resources, though it has recently received another offer from GlencoreInternational. The company is also in a legal battle with its former corporate parent company Grupo Mexico, which bought Asarco in 1999 but lost control of it after Asarco's 2005 bankruptcy. The two companies are fighting in court over a $516.2 million tax bill Grupo Mexico says Asarco must pay. Asarco's 8.5% notes due 2025 and its 7.875% bonds due 2013 each lost 49.75 points to reach 27.875 by Thursday's opening.
Concerns over maturing debt made Muzak the second biggest loser last week. The business music provider has $437 million in debt maturing in March, and refinancing may be unlikely. Citing concerns about missing payments, Moody's Investors Service downgraded the company's probability of default rating to Ca from Caa3 and its corporate family rating to Ca from Caa2. Muzak hired financial advisors last month to begin negotiating with debt holders regarding pending maturities. The company's 10% bonds due 2009 lost 17.875 points by early Thursday to trade at 54.625.
Houston-based petroleum exploration company Transmeridian Exploration saw its bonds take losses after its Chairman and CEO stepped down. Transmeridian had also taken losses after a deal for its acquisition fell through. Transmeridian's 12% notes due 2010 dropped 16 points to 8.625 by Thursday.
Poor auto sales in the U.S. and Europe did injury to the bonds of Lear Corp. The Southfield, Mich.-based auto parts maker's earnings are expected to be sharply cut in 2009 because of the depressed auto sales market. Standard & Poor's downgraded the company's corporate credit rating to B- from B, and the company remains on CreditWatch with negative implications. Lear's 8.75% bonds due 2016 lost 14.5 points to reach 27.875 by the start of trading Thursday. Its 8.5% notes due 2013 lost 12 points to reach 32.625.
The Canadian Imperial Bank of Commerce, better known as CIBC, was the top gainer last week. The bank, Canada's fifth largest, made significant restructuring moves last week, saying it would break its investment banking unit into three different groups handling investment banking, corporate credit and merchant banking. It also announced new hires to help in the reorganization effort and lead some of the new groups. CIBC's 3.31% notes due 2085 moved up 19 points to trade at 58.625 by Thursday.
The legacy bonds of Elan Finance, which is now part of U.S. Bancorp, benefited from its parent company's access to TARP funding. Elan's 7.75% bonds due 2011 climbed 15.75 points to reach 78 by Thursday's secondary market opening. Its floating-rate notes due 2013 gained 12 points to reach 63.625.
Elwood Energy, the legacy bonds of a company now part of Japanese energy company J-Power, also made gains in secondary trading. J-Power recently marked a successful trial run burning U.S. coal at one of its plants, and may begin importing U.S. coal in the future. It also made an arrangement with the Japanese government to set up geothermal energy processing in some of the country's national parks. The Elwood Energy 8.159% notes due 2026 surged 14.125 points to reach 80.875 by Thursday.
Rochester, N.Y.-based photo and imaging stalwart Eastman Kodak also posted gains. The company announced it has agreed to acquire the scanner division of Ba-We Bell + Howell, which produces document scanners used by government offices, legal professionals, healthcare and financial services, and others. Eastman Kodak's 9.2% bonds due 2021 gained 12.625 points by early Thursday's trading to reach 69.75.
(c) 2008 High Yield Report and SourceMedia, Inc. All Rights Reserved.