Pressprich's Ruggiero sees more junk issuance, limited macro impact, likes short durations

By Paul Deckelman

New York, Sept. 17 - The new head of research for R.W. Pressprich & Co., Steve Ruggiero, sees the recently revived high-yield new-issue market continuing to churn out deals as issuers take advantage of relatively favorable conditions - and he does not see much of a looming threat to junk in macroeconomic storm clouds gathering on the horizon over such pending problems as the inevitable Federal Reserve tapering off of its up-till-now stimulative monetary policies or the political battle over the debt ceiling.

And he told Prospect News on Tuesday that the kind of institutional investors served by Pressprich - a New York-based broker-dealer founded more than a century ago - are "very interested in short-duration product right now. It continues to be popular, and you can see that with the inflows into the loan market, for example."

Ruggiero added that "we would expect that the short-duration market will be less volatile, just by virtue of shorter durations, but [we] also expect a Fed policy that will be stable in the short term, for the foreseeable future."

Macro impact limited

Uncertainty about what course the central bank would take on the third round of its quantitative easing monetary stimulus program roiled the financial markets generally, including the junk bond market, earlier this year after Fed chairman Ben Bernanke said that his game plan was to begin winding down the Fed's $85 billion-per-month purchases of Treasury and agency mortgage-backed securities later in the year, with a goal of having gradually ended it completely by mid-2014.

On top of that, other external factors, including the political fights over taxes and the debt ceiling and even geopolitical events such as the recent storm over Syria, could move markets.

But Ruggiero does not see such macro events having a larger impact in the junk world going forward. He allowed that such things could create "small waves in the market" because "it has in the past and could in the future." However, he continued, "there are bigger flows of cash - whether it be institutions or retail, with the emphasis on institutions - [from investors] that are looking to the high-yield market for incremental value and yield."

Asked for his assessment of junk market conditions, he said that "recent inflows should help with the upcoming calendar and higher-beta names."

New issuance seemed to temporarily slacken off starting in June from the red-hot pace that had been seen through May as concerns began to surface about whether any Fed tapering-off of its stimulus program would push interest rates up - concerns reflected by a big back-up in Treasury bond yields and a concomitant rise in rates in both the corporate and high-yield markets - but issuance came roaring back last week, which was one of the busiest so far this year in the primary arena.

Conditions right for issuance

Even for the more volatile higher-beta names, he said, "refinancing opportunities remain open, notwithstanding all the issues we hear about, QE, and notwithstanding the federal government issues."

The revival in new issuance is not so much a case of issuers doing their deals now, rushing to get those borrowings done before conditions worsen and the perceived window of opportunity closes, as some have suggested, as it is a case of deals getting done just because "the market is open," Ruggiero indicated. "It is one of those things where the market is open, [and you] take advantage of the liquidity.

"Hence, we see big deals like we've just seen with Verizon," which came to market last week with a multi-tranche, record-huge $49 billion behemoth of a bond deal that even attracted attention from some junk players despite its nominally investment-grade status.

Ruggiero said that even if new-issuance conditions turn less favorable somewhere down the road, "that doesn't mean that the market doesn't continue to stay open. It very well could stay open." But with the market open now and conditions favorable, the path is clear for companies wishing to refinance or do deals for other purposes to sell their bonds now. "Catch as catch can, as they say," the Pressprich research chief said.

The importance of research

During the market turmoil of several years back, when many accounts were looking to sell bonds at a loss - even fairly good credits - just to cut their exposure amid extreme market volatility, traders would sometimes say that in that kind of troubled environment, "research doesn't matter" - everything was up for sale. And it seemed like that was also the case at times during the frothy new-issuance boom of the past few years, including earlier this year, with investors seemingly giddily jumping into all kinds of deals, even for riskier credits or those with unusual structures that might have given pause in less-hectic times.

Ruggiero acknowledged that "liquidity often drives the market both up and down, and that's the primary driver at times, with research being a secondary consideration." That having been said, however, he added that "there are niches within the market, and Pressprich is one of those firms who fit that niche, who focus on research-driven ideas that can provide investors with alpha. And now that the market has been driven higher with liquidity [versus the illiquidity of several years ago], you need to be able to differentiate yourself and create alpha, and research helps to do just that."

He added that "inevitably, the default rate will go up again at some point because of market cycles and economic cycles. At those inflection points, research becomes very critical to avoid any blow-ups."

During times of market froth, a common complaint among some observers is that some investors are so eager to get into new deals that they don't do their proper due diligence and end up buying the bond market equivalent of a lemon. While Ruggiero allowed that this does sometimes happen, he added that "I don't think we're there right now, but it has happened in the past and it could very well happen again if the market becomes over extended. I don't think we're in that position just now."

Focus on existing bonds

Ruggiero said that R.W. Pressprich's focus is entirely institutional, rather than retail, across a series of asset classes including junk bonds and distressed debt, investment-grade bonds, convertibles, Treasuries and other forms of fixed-income investment, as well as equity products. In the bond realm, the research department he takes over has traditionally focused on existing bonds rather than new issues, but he said that they will now be watching both, though with "no set formula" regarding how much of each.

Among the existing issues, he declared, "we are looking at special situations. We're looking at arbitrage situations. We are looking at credits with stories" rather than the more traditional, mundane buy-and-hold bonds that just roll along year in and year out, paying their coupon but rarely if ever showing up in the news.

Ruggiero, who holds the title of managing director, has previously held senior positions as head of high-yield research at Donaldson, Lufkin & Jenrette, JPMorgan Chase and UBS - all giant investment banks with thousands of employees. Pressprich, in contrast, is a considerably smaller shop. It is structured as a private partnership employing over 100 people, with a considerably smaller research department.

But while acknowledging that "every institution is different," Ruggiero noted that he was also research chief at CRT Capital Group, which he described as similar to Pressprich in size, and so is familiar with the kind of different focus that might be present at a smaller shop.

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