Default rates of tech, media and telecoms oriented European high yield bonds are rising and there is...
Default rates of tech, media and telecoms oriented European high yield bonds are rising and there is a lack of new issuance on the market, according to Barrie Whitman, head of European High Yield Bonds at Zurich Scudder Investments.
He says: 'We are seeing the death throes of the lesser quality tech, media and telecom issues, which are being mostly downgraded or defaulting. Most of the damage has been done and the defaults we are seeing have been expected for some time.'
Jim Leaviss, head of retail and institutional fixed income at M&G, agrees the rash of defaults is not a surprise and has been priced into the market.
Leaviss says Moodys estimates that the level of defaults in 2001 has risen by around 9% for sub-investment grade bonds, by number of bonds rather than by market capitalisation. This is a global figure and the US has seen more defaults than Europe has in recent months, he says, although UK shipbuilder Cammel Laird has recently defaulted.
'It is important that investors understand it is not the end of the world when a company defaults,' he says. 'It is followed by a bankruptcy procedure, which means bond investors have a higher claim on assets than an equity holder. In fact, bond holders have to get all their money back before an equity holder sees anything. High risk is not always the case as high yields are offered in addition to priority if the company defaults.'
New issues have been slow all year on the back of the technology binge, according to Whitman. 'It may pick up soon but it takes time to generate alternative product and develop new papers,' he says. 'Currently, there is a vacuum as the transfer takes place between tech, media and telecom issuance and general issuance. We expect a pick up around second quarter and into 2002.'
At the moment, there is a tale of two markets as industrial bonds perform well but are expensive and telecom prices have been destroyed but are offering yields around 20%.
Leaviss says: 'Industrials are too expensive and are overpriced in the long term, so we are gathering telecom bonds at lower prices. It is important to be careful about defaults and to look for fully funded companies. Those that have cash to build up their networks have a better chance of success.'
He cites Colt as a good quality company that is not offering as high a yield, at just under 10%. He says: 'It still needs a little bit of money but the combination of all factors makes it a good buy.'
Whitman takes a much more negative view on telecoms and is underweight the sector as it is a fairly friendless environment. He adds: 'We do have some exposure but these would veer towards telecom media.'
He is overweight industrials, which he classifies as anything that is not growth. 'Some sectors are underdeveloped and may only have two or three companies,' he says. 'We are starting to split this out as the market matures but as a result it is difficult to have any strong themes.'
Whitman takes a bottom-up approach and looks at company management and strategy to decipher whether leveraging will work. He says: 'We do not differentiate between UK and Europe and are pretty much currency ambivalent. '
Industrial bonds perform well.
Telecom yields are high.
Colt a good quality company.
Despite improved risk appetite
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