Gundlach on Corporates

Interesting article on Bloomberg:

Gundlach Has No Europe Bets, Likes Corporates

Excerpts:

Jeffrey Gundlach’s DoubleLine Capital LP is invested only in U.S. dollar-denominated assets in a bid to avoid losses stemming from Europe’s debt crisis.

“All of our international exposure is in dollars,” Gundlach, the founder and head of Los Angeles-based DoubleLine, said at a panel sponsored by the firm in New York today. “There’s a big loss in Europe and all we want to do as investors is make sure as best we can that we’re not the ones taking the loss. How do you do it? No investments in Europe.”

DoubleLine is also avoiding U.S. banks because of possible exposure to the crisis and favors investment-grade corporate debt because defaults may rise in lower-rated bonds next year. Gundlach, who managed the top-rated intermediate-term U.S. bond mutual fund for 15 years, began cutting exposure to junk bonds in the fourth quarter of 2010, even as Bank of America Corp. and Goldman Sachs Group Inc. strategists forecast the riskiest debt to return as much as 10 percent this year.

“Investment-grade corporate bonds have done very well,” said Gundlach, who has attracted $17 billion in assets since founding DoubleLine in December 2009. “The investment-grade bonds DoubleLine holds had a bad August with all risk assets, but prices are nearing their highs. It’s a totally different story in below investment-grade, where we see the market really has collapsed.”

“I like junk bonds a lot better than I did six months ago, but I am not ready to buy them yet,” he said. “The high yield bond market is going to have a default problem in late 2012 or 2013.”

Moody’s Investors Service forecast the speculative-grade default rate will “remain low” at 2.2 percent a year from now, compared with 2.1 percent in August, according to a Sept. 22 statement. That compares with a peak of 14.5 percent amid the credit crisis in November 2009.

“We’re not going to be ready to jump back in to high yield basically until Greece is solved,” said Bonnie Baha, head of DoubleLine’s global developed credit group.

Full article can be found here: Gundlach - Bonds

While I believe that the economy isn't as rosy as statistics might show, I do not expect defaults (ex-sovereign) to increase significantly and corporate balance sheets are in decent shape (although they could begin to erode should equity prices remain at current levels or go lower as the WACC will be reduced be the issuance of debt) which should help protect against a spike in defaults.

I also believe that the European issues (no, not just Greece which is the tip of the iceberg) present investors with some opportunities as the babies are going out with the bathwater.

In my opinion, 6B and 5B corporate debt is still attractive at these levels (relative spreads as they are the indication of a risk premium relative to the risk-free rate) and continues to warrant an overweight position.  There has also been some interesting preferred stock and "baby bond" issues lately that offer attractive yields.

Happy Wednesday.

Mike