IN THIS ISSUE OF LEVERAGE WORLD

BIG PICTURE

TIMING: SPREADS AND DEFAULTS

The recent trend in risk premiums suggests that rightly or wrongly, many investors are concluding that they have seen the worst of the financial crisis. But even if that view is ultimately vindicated, it does not automatically follow that the default tally will go no higher. At a comparable point in the last cycle, the quarterly default count doubled as the high yield spread gradually descended from its peak.

SEMIANNUAL SEASONALITY: SWITCHOVER TIME

June 1 is the demarcation point for a seasonal strategy involving increased or decreased high yield exposure. The relative returns of Double-Bs and Single-Bs follow a similar pattern, albeit with less statistical strength. Portfolio managers who wish to exploit these effects must consider the relevant transaction costs. In addition, semiannual seasonality provides an edge, on average, over many years, not in every single year. Our analysis addresses whether 2008 is a good year to implement a strategy based on semiannual seasonality.

WHOSE DEALS PERFORMED BEST?

Over the last four quarters, Jefferies’s deals exhibited the largest tightening versus the index in the first week following issuance. Banc of America posted the best record over the first four weeks following issuance and led the pack in number of deals for the latest four quarters. “Most Improved” honors went to Banc of America and Morgan Stanley in the one-week statistics (up three slots to #2 and #5, respectively) and to Morgan Stanley in the four-week statistics (up four slots to #5). Only 15 new issues came to market during the first three months of 2008 as the U.S. high yield market suffered one of its worst quarters in recent history.

INDEPENDENT INQUIRY

TENET HEALTHCARE: BAD DEBT TRENDS

Tenet Healthcare shows operating momentum ahead of its first-quarter earnings release next week. One notable figure from 2007’s fourth quarter was a favorable adjustment in the hospital chain’s bad debt reserve, achieved during a period when consumer credit delinquencies reached a 15-year high. Can Tenet continue to buck the trend and whittle down bad debt expense? According to our hospital and credit-counseling sources, conditions are hardly favorable.

SECURITY SELECTION

FOCUS ISSUES

H&E Equipment Services’ 6-1/2s gained 2-1/2 points and tightened for no apparent company-specific reason, exiting the yielding-more-than-estimated list, as the High Yield Other Industrial group performed in line with the High Yield index.

SENIOR VERSUS SUBORDINATED SPREADS

Travelport’s subordinated 11-7/8s of 2016 are potentially attractive relative to the company’s senior 9-7/8s of 2014, based on the two issues’ option-adjusted spreads. A similar relationship existed last week between Mohegan Tribal Gaming’s senior 6-1/8s of 2013 and subordinated 8s of 2012. Since then, the subs gained 1-3/4 points (56 basis points of OAS) on the seniors.

DEBT VERSUS EQUITY

Norbord’s 7.45s of 2017 are potentially attractive after declining by 4.44% despite a 15.97% rise in the related stock. Last week, Smurfit-Stone Container’s 7-1/2s of 2013 were in a similar position after underperforming the related stock by 20.44 percentage points. Since then, the bond outperformed the stock by 19.36 percentage points. In Europe, Waterford Wedgwood’s 9-7/8s of 2010 are potentially attractive after declining by 5.00% despite an 18.18% rise in the related stock.

SECTOR ALLOCATION

INDUSTRY VALUE TRACKER

This week marked the first instance since the inception of Leverage World’s Industry Value Tracker that Gaming entered the cheap zone, after being located in or near the rich zone for much of 2004-2006. This is consistent with recent developments in the gaming industry that have challenged its reputation as a defensive industry on the prevailing theory that fortunes can be created instantaneously.

Consumer Products exited the rich zone, defined as fewer than 25% of an industry’s issues quoted wider than their model-estimated spreads, after performing in line with the high yield index over the past week. On the opposite side, Wirelines exited the cheap zone and Gaming entered the cheap zone.

CREDIT RATINGS VALUE TRACKER

Bonds of companies rated Single-B at the senior level (including subordinated issues rated CCC+ or CCC) offer better value than bonds of companies rated Double-B at the senior level (including subordinated issues rated B+ or B).

MARKET TIMING

DEFAULT RATE PREDICTOR

Leverage World’s one-year default rate forecast for May 1, 2009 is 6.41%. This represents a significant decline from our March 31, 2009 forecast of 8.20%. By comparison, Moody’s trailing-twelve-month U.S. speculative grade baseline default rate forecast for March 2009 is 6.64%.

MACRO TRACKER

The yield curve flattened by 28 basis points. Overall, the latest changes in three of six Macro Tracker variables favor tighter spreads.

ODD LOTS

DEPARTMENT OF CORRECTIONS

A prestigious institution throws the global financial system a curve.