High grade credit attractive: Credit Suisse

By Natalie Harrison

LONDON (Reuters) - Credit Suisse is increasing its investment in high-grade corporate bonds, because balance sheets remain healthy while credit markets are pricing in overly pessimistic expectations for defaults, a senior banker said.

"We have seen an indiscriminate sell-off in credit because of illiquidity," said Robert Parker, vice chairman of Credit Suisse's (CSGN.VX: Quote, Profile, Research, Stock Buzz) asset management arm, at the Reuters Investment Outlook Summit in London on Thursday.

After the credit crisis blew up last summer, demand dried up and markets froze for riskier high-yield and structured credit, which forced many investment funds to sell higher-quality, more liquid bonds to cover redemptions.

Meanwhile, "balance sheets for investment grade corporate bonds are in good shape," Parker said, especially in contrast to the high leverage that many companies had at the time of the last big spike in default rates in 2000 and 2001.

"The leverage on corporate balance sheets is very low indeed. Investment grade credit is one of the cheapest asset classes," he said, describing the risk/reward ratio on short-dated bonds in particular as "extremely attractive".

Credit Suisse's asset management arm began increasing its exposure in mid-March to double-A and single-A-rated bonds after the rescue of investment bank Bear Stearns BSC.N by JP Morgan (JPM.N: Quote, Profile, Research, Stock Buzz) led to a partial recovery in the credit markets. It has tapped both the primary and secondary markets.

"There has been an incorrect increase in default rates across the curve. Assumptions are probably fair for high yield but not for investment grade," said Parker.

Liquidity in cash markets still remains weak, he said, with only a slow improvement in the market at the higher end of investment grade. For triple-B and double-B bonds, "it may take another nine to 12 months to get further improvement", he said.

Parker was cautious about financials, preferring short-dated floating rate notes (FRNs) issued by commercial and retail banks rather than investment bank debt.

Even so, a number of financial firms could write-up their valuations of distressed assets in second-quarter results, thanks to the tightening in credit spreads since mid-March, he said, adding that it may inject some confidence into markets.

BLOW-UPS

At the lower end of the ratings scale, casualties are likely.

"The blow-ups are going to come at the weaker end of the high-yield market in the triple-C and double-C space," Parker said. "The default numbers there have been trending up in the past four to five months."

Moody's Investors Service expects the global "junk" bond default rate to rise to 5 percent by the end of 2008 and to 6.3 percent a year from now from 2 percent in May.

The vulnerabilities in the credit space lie in companies with high leverage and in sectors such as retailers that are exposed to the slowdown in consumer spending and builders and other companies linked to the housing market, he said.  Continued...