Over the latest four quarters, Merrill Lynch’s deals exhibited the largest tightening versus the index in the first week following issuance. Merrill Lynch also posted the best record over the first four weeks following issuance, while Citigroup led the pack in number of deals for the latest four quarters. The most recent quarter was characterized by an extreme scarcity of deals as the U.S. high yield market was reeling from the effect of this summer’s global credit crunch.

Atlantic City ponders what to do with Bader Field, a decommissioned airfield that offers 150 acres of open land to the space-constrained gaming mecca. Promoters say Bader Field can move Atlantic City to the next level, but existing casino operators including Pinnacle Entertainment dig in their heels against the threat of new gaming sites. We survey the political landscape and report on which side has the advantage.

Blockbuster delineates strategies to breathe life into its bricks-and-mortar stores. Can the initiatives stanch revenue declines and lift Blockbuster debt from the cusp of distress? Our field research checks for evidence of progress in the stores, and a marketing expert outlines the limitations of what the company may be able to accomplish.

Leverage World introduces a new monthly feature highlighting individual-security-level relative value opportunities based on issuers’ credit outlooks. We previously set up a test of the methodology in a 2006 report. The analysis generated 13 BUY and 14 SELL candidates within the BB category. Over the next year, the BUYs collectively outperformed the BB index by 53 basis points. The BUYs beat the SELLs by 381 basis points, a difference that was statistically significant with 99.9% confidence. Currently, the Outlook/Spread Disparity methodology identifies 16 BUY candidates and 26 SELL candidates.

LEVERAGED LOAN COMMENTARY: HUNG BRIDGES, VOLATILITY,
AND DERIVATIVES

How will the problem of hung bridges get resolved? This discussion also includes a volatility comparison of LCDX and the cash market.

Leverage World’s industry selection method has proven effective both in the past year and in the full period since inception in late 2003. The technique does not depend on industry subindexes or spreads, thereby avoiding misleading signals that frequently arise from outlier effects. Furthermore, the method does not rely on predicting the future.

As in the natural world, forecasting is easier for certain financial series than for others. Econometric modeling does not work equally well for speculative grade default rates, spreads, and total returns. The smooth progression of the default rate from peak to trough facilitates a cyclically based analysis of returns that we consider preferable to forecasting on the basis of a pseudo-model.

High yield practitioners often dwell on the imperfect correspondence between agency ratings and market spreads. They rarely take into account the additional opinion-offering representing by Moody's and Standard & Poor's rating outlooks. Incorporation of the outlook eliminates much of the market's apparent edge in understanding credits. The remaining anomalies identified by our analysis are, we believe, worth considering as potential investment opportunities.

A plunge into the mysteries of high yield indexes reveals that in some circumstances, higher risk brings lower rewards. Making a performance benchmark conform to the concentration limits under which a manager operates is sound in principle, but does not completely eliminate measurement error. And by the way, peer comparisons have pitfalls, as well.

Today's sophisticated investors are willing to pursue opportunity wherever it lies in a company's capital structure. In principle, fluctuations in the relative value of stocks and high yield bonds should be exploitable not only at the issuer level, but at the asset class level as well. A practical obstacle is the absence of a simple metric for comparing stocks and high yield bonds, comparable to the metric for comparing high yield bonds and government bonds, i.e., the spread-versus-Treasuries. We find that a surprisingly simple model of the relationship between stocks and high yield bonds identifies the better-performing asset class, one year in advance, with 83% accuracy. A market-timing strategy based on this approach produces higher returns, with less variance, than the passive equity alternative.

Description of a multiple-regression model that identifies bonds on which it is logical for total return investors to concentrate their analytical time and energy.

Money managers report that some dealers are aggressively pushing swaps that entail pickups in yield-to-worst. Investors should not automatically assume that all of the proposed trades represent choice opportunities to exploit market imperfections. We show how trades that appear attractive based on yield-to-worst, which considers only one possible retirement scenario, can be unattractive when all retirement scenarios are considered by calculating the option-adjusted spread.