Banc of America analyst: amid high demand, corporates resilient to news

By Ronda Fears

Nashville, Feb. 4 - In what he described as a "Teflon" credit market, Banc of America Securities high grade credit analyst Tim Patrick noted strong demand for new supply and rather muted reactions to negative news so far this year.

But waiting to buy on weakness, whether due to a war or other events, may not be wise, he said, as the trough may have already passed.

"BAS' syndicate desk describes the demand for new issue supply as 'insatiable', which reflects the strong technicals that exist in the high-grade market," said Patrick, who is head of global high-grade credit research at Banc of America Securities, in a report.

"A good indicator to the markets health this year has been the fact individual credit weakness has generally been digested quite well by the markets, with spread widening appropriate for the negative announcement. Also, we've seen little or no impact on sector peer groups. This contrasts sharply with many credit announcements in the emotional 2002 market environment."

He specifically noted that reaction to Duke Energy Corp.'s downgrade by Standard & Poor's Corp. to A- from A and continued negative rating outlook got very little reaction. S&P cited concerns that Duke will not be able to deleverage fast enough to offset current and expected earnings deterioration, he noted.

Yet, Duke's 5.375% notes due 2012 were only 3 basis points wider on the news to a 178-173 bps market, Patrick said.

Similar market responses were seen with the revision of Dow Chemical's outlook to negative by Moody's and in regard to Boeing following the shuttle disaster, he said.

"Certainly, the direction of the markets over the short term will be influenced by the timing, magnitude and outcome of any potential conflict with Iraq. However, it feels like the fixed income credit markets will be more resilient to the impact of war this go around, given the solid technicals and improving underlying fundamental trends," Patrick said.

"Waiting for a 'buy-on-weakness' war strategy may fizzle. We may already be trading at the wide end of corporate spreads for 2003."

With new issue supply expected to be more moderate this year, forecast down 15% from 2002 by Banc of America analysts, and corporate earnings recovering with balance sheet mending in place, Patrick said 2002 should be the low point for corporate credit quality in this economic cycle.

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