Banc of America credit strategists suggest overweight media, telecom

By Ronda Fears

Nashville, Tenn., Nov. 5 - With risk trending lower and significant balance sheet repair in the telecom and media sectors, Banc of America credit strategists recommended an overweight position in those credits.

In a new publication launched Tuesday, the team of strategists plan to update recommendations every two weeks on the global credit markets, including both high grade and high yield issues as well as international credits.

Jeffrey Rosenberg is head of the credit strategy team.

"No news is good news. Risk continues to trend lower on no negative news. Overall, the costs of hedging investment grade issuers' equity have fallen nearly 15 points from their peak two weeks ago," the analysts said in the report Tuesday.

"Our outlook for credit improves as credit OAS risk measures have fallen and credit OAS continues to rise. We move our sector allocations more in line with this positive view."

Media joined telecom as an overweight, brokerages were upgraded to market weight, and healthcare and food and beverages moved down to market weight.

Given the recent efforts undertaken by electric utilities companies to shore up balance sheets and the dramatic sell-off in those bonds in October, the analysts said, the November sector recommendation was upped to market weight from underweight.

"Telecom remains the poster child for balance sheet repair," analysts said in the report.

During 2002, capital expenditures in the telecom sector have fallen 30%, eliminating over $20 billion in spending. The cuts have bolstered industry free cash-flow, providing cash for debt reduction.

"We see continued room for improvement relative to the market," the analysts said, and thus they moved their telecom sector recommendation for November to overweight from market weight.

Debt restructuring in the basic industries sector has been more difficult, the analysts noted, as asset buyers remain few and far between. With an anemic recovery and plenty of headline risk related to asbestos litigation and pension cost issues, but wide spreads, they continue to recommend a market weight in the sector.

Pipeline issuers were some of the first to issue equity to shore up their balance sheets, the analysts said, but low equity prices now preclude further issuance. Due to negative sentiment on the sector, offsetting otherwise solid earnings, the analysts continue to recommend market weighting this sector.

Constrained profitability from continued incentive plans and further erosion in auto sales underscore the negative sentiment toward the auto sector, the analysts said. They downgraded the recommendation to underweight from market weight earlier this month and maintain that for November.

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