Investment grade telecom bonds are presently the best performing area in the sector, with spreads ti...
Investment grade telecom bonds are presently the best performing area in the sector, with spreads tightening by 10 basis points over the past month, says Andrew Crawford, head of investment grade credit research at Threadneedle.
Crawford says that within the sector rating levels are considered to have stabilised, companies with debt positions have because more discrete about capital expenditure, investment spending and merger and acquisition activities, and a lot of the underperformance in the 12 months to April 2001 was down to a reaction to new debt issues.
For the remainder of the year, however, Crawford says there will be limited supply of these new issues into the market.
He says that since April, the Morgan Stanley Euro Sterling Telecom Services Index has come in 30 basis points and predicts there will be more tightening to come from the sector.
David Roberts, investment manager at Britannic Asset Management, says that the high-quality, high-grade telecoms market has been the best-performing sector over the year so far. He says, that according to the Morgan Stanley Sterling Credit Basics report, the telecom sector is 4.66% above gilts over the year to the end of July 2001.
Eran Peleg, senior investment manger at Gartmore, says that over the past two years, investment grade telecom bonds were the worst performers in the sector. He says this was mainly down to globalisation, which meant telecom operators were acquiring companies around the world to become global players, and to the liberalisation of the European telecom market since 1998, which led to more competition in the market.
The high price paid for third generation licences also affected many telecom operators, which were faced with finding the funding from somewhere.
Peleg says that a combination of these factors meant that the credit ratings and credit quality of these bonds fell considerably over the past two years. For example, over two years, BT went from an AA-rating to a borderline A, to BBB.
He says: 'Over the past four months since the end of March people have realised the market was too pessimistic about these companies. Many of these traded at levels of credit spread wider than BBB and were therefore undervalued.'
Peleg says companies such as BT have now seen a turnaround. Over the past two years it acquired £30bn of debt and was downgraded to a BAA1 rating by Moody's and an A-rating by S&P. Over the past four months, however, it has embarked on a debt reduction programme and cut the debt to £17.6bn, which Peleg believes is a significant reduction.
'The positive catalysts and newsflow that has come from BT reducing its debt load has helped the sector to rebound,' he says.
'Going forward we are still positive about the sector. While there will not be the gains of the past four months, there is still room for some telecom paper to do well. The bonds are not yet at the stage where they are expensive and they still demonstrate relative value, so we should expect a modest outperformance over the next few months.'
• Best performers are telecom bonds.
• They have come in 30bp since April.
• Telecom sector is 4.66% above gilts.
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