Lord Abbett ramps up team for debt war

By Walden Siew

NEW YORK (Reuters) - Lord Abbett & Co. plans to double its credit team in the next decade to prepare for massive growth in the derivatives, high-yield and municipal bond markets, its chief investment officer said on Wednesday.

"The next war is going to be waged on the fields of credit," Robert Morris told the Reuters Investment Outlook 2007 Summit in New York. "How are you going to win the game going forward if you're not going to be able to make the macro call on valuations?"

Lord Abbett, an investment firm based in Jersey City, New Jersey, long known primarily as an equities shop, has about 20 credit analysts currently, spokesman Jason Farago said.

The company recently hired Elizabeth MacLean from Nomura Corporate and Asset Management as its portfolio manager of leverage loan investments. She will oversee the development of a collateralized loan obligation product -- securities backed by a pool of high-yield loans.

Credit derivatives issuance has tripled since 2004, when issuance was about $8 trillion, according to the British Bankers' Association. The market is expected to grow to $33 trillion by 2008, according to Fitch Ratings.

Lord Abbett's move comes amid concerns that investors and companies need to be better prepared as default rates at historic lows may begin to climb, said Morris, who oversees about $110 billion in assets at Lord Abbett.

About $75 billion of that is in equities and $35 billion is in debt, including high-grade, high-yield and convertible bonds and U.S. Treasuries.

"If you're a lender, you're going to have to be excruciatingly sharp on your credit analysis because defaults are going to kill you," Morris said. "With the meter running at a low rate, defaults are going to hurt worse than they've ever hurt historically."

Standard & Poor's on Tuesday said speculative-grade default rates will end the year at a near-record low of 1.2 percent. The rate should climb as high as 3 percent by the end of 2007, S&P said.

"Distress and defaults continue to be suppressed by abundant liquidity and generous financing provisions," Diane Vazza, head of S&P's global fixed-income research group, said in a December 12 report.

Lord Abbett also said a buyout spree this year that has resulted in record leveraged buyouts and junk bond sales to fund those acquisitions may spark a financial crisis.

Freescale Semiconductor Inc. FSL.N sold $5.95 billion of debt in November, the biggest for a buyout since 1989, to help finance its $17.6 billion takeover by a Blackstone Group-led consortium. That came on the heels of HCA Inc.'s $5.7 billion bond HCA.N a week earlier.

HCA, the No. 1 hospital operator, also sold debt to finance its leveraged buyout by a private equity group.

"If I were going to be in the career counseling business today, I'd say it is too late to get on the private equity train," Morris said. "You want to be a distressed debt specialist; there is going to be a blowout."

"I don't know if it is going to be a 60-mile-an-hour or a 90-mile-an-hour one, but there is going to be a blowout here somewhere down the road."