High yield environment hostile, but investment grade more hospitable, SCM Advisors says

By Andrea Heisinger

Omaha, July 10 - Bonds rated BB and B offer the best overall opportunities for junk investors in the current difficult conditions, according to Al Alaimo, high yield portfolio manager at SCM Advisors LLC.

It's been a hostile environment for high yield bonds and loans recently, with bank financing drying up and several high yield deals being pulled, noted Robert Bishop, high grade strategist for SCM, speaking on the firm's mid-year fixed income markets outlook conference call.

This has put pressure on the high yield market, he said.

Several recent deals never happened because of adverse market conditions, including a $1.15 billion offering from Servicemaster Co. and $1.1 billion from U.S. Foodservice Inc. Smaller deals from Magnum Coal Co. and Catalyst Paper Corp. also never materialized, along with one from High Arctic Energy Services Trust that instead went to the bank loan market.

There is concern about the sub-prime mortgage market and worries that hedge funds have pulled back from the high-yield market, Alaimo said.

That caused junk to suffer significantly in June, he continued.

"Underwriters couldn't place CCC rated bonds in the market," Alaimo said. "After an exceptionally strong 2006, the CCC market is underperforming. It's rapidly approaching 20% [of the market] and could get to 25% by the end of the year."

But even while SCM described June as one of the worst so far in 2007, Bishop said: "One area that stood out is the investment-grade structured market. It's stable and people feel comfortable and don't think it's going to be downgraded."

Despite that bright spot, there was no less gloom in the analysis from SCM chief strategist Max Bublitz.

The bond market was hit with massive amounts of issuance in the early part of the year, which, combined with other factors, triggered further sell offs, he said.

He expects to see rates move slightly higher and the yield curve steepen.

Over the last three months, the slope has stayed within a range of negative 20 basis points to plus 20 basis points.

"I see it going as wide as 30 by the end of the year," Bublitz said.

San-Francisco-based SCM manages corporate, public and multi-employer pension plans, as well as those for endowments, foundations and private clients.

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