While the high-grade credit market saw spreads gradually widen again this week on ongoing profit-taking, some strategists and analysts once again expressed preferences for companies with ratings around junk levels.
"A sturdy bid remains for higher-beta, lower-quality names within the credit market - in particular those that are on the cusp of achieving full investment-grade status," said analysts at Lehman Brothers in a research report.
The thirst for low-quality debt was certainly evident with Qwest Communications. Even though Qwest has very low junk ratings that one market player likened to "barely having a heartbeat," it was able to hike its three-part bond sale to a whopping $1.775 billion, though at higher yields.
Indeed, Moody's cut Qwest's rating on Friday to Caa2, otherwise known as "substantial risk" territory, and said the company would continue to have a negative outlook until pending government investigations are resolved and it can demonstrate a consistent record of operational improvements.
Lehman said one of its top recommendations remained for increasing exposure to what's known as the crossover market, those companies on the verge of being rated investment-grade.
Such "rising stars" are expected to be plentiful this year. Among those targeted by Lehman Brothers is Lear Corp, which it expects to be upgraded to the Baa3 investment-grade rating by Moody's in the next six to eight weeks.
Lear, the third biggest US auto parts supplier, earlier this week reported a 12 percent rise in quarterly earnings thanks to new business lines and lower interest expenses. Lehman said the company "reported record revenues, a record backlog, and its strongest balance sheet in 10 years."
Lehman said Lear's spreads on its bonds due in 2009 are about 15 basis points cheap to its triple-B rated peers.
In the credit derivatives market, Lear's five-year default swap trades around 80 basis points, or roughly $80,000 a year for $10 million of default protection.
Time Warner is another company Lehman said it preferred, due to its "solid" 2004 outlook and priority on credit strength even with the risk of an acquisition. On an option-adjusted basis, the cash bond spreads of Time Warner offer "favourable spread pick-up versus both its cable and media peers".