Fund managers say debt markets still lack buyers

LAS VEGAS, May 14 - Debt fund managers see faint signs of life in the credit and mortgage markets, but a lack of trading and the disappearance of traditional buyers still weigh on prices.

Corporate investment grade and high yield issuance have soared in recent months, yet the trading of these securities remain limited by a lack of liquidity, said investors and traders speaking at SkyBridge Alternatives Conference here.

"There are no financing markets," said Greg Lippman, Deutsche Bank's global head of asset backed securities and CDO trading, widely credited for correctly betting that subprime securities would plunge.

The U.S. government's efforts to revive mortgage backed securities markets with TALF (Term Asset-Backed Securities Loan Facility) have begun to help lenders reduce the cost of issuing these bonds. At the same time, residential mortgage markets remain moribund, Lippman said.

The credit crunch that took hold in 2007 forced banks and investment funds to rein in the amount of leverage, or borrowed money, they use to buy financial assets. Many traditional debt buyers -- collateralized debt obligations, investment banks and structured investment vehicles -- have been driven out of the markets or turned into sellers.

The disappearance of these buyers has depressed the prices of these securities, said Frank Jordan, a partner at Golden Tree Asset Management, a $10 billion debt fund firm.

"The credit markets are evolving," said Jordan.

Yet it also creates investment opportunities. Illiquid markets have depressed prices of debt well below the likelihood of default, he said. Hard-to-trade structured debt securities, meanwhile, can be bought at a discount to the combined value of their underlying assets, he said

Jordan said he was focused on companies that can generate lots of cash even across cycles, such as wireless phone carriers, cable and broadcast television, energy and health care, insurance brokers and reinsurers.

Michael Milken, chairman of the Milken Institute and the famed 1980s king of junk bonds, stressed that the recent thawing of financial markets offered a rare opportunity for companies to retool.

"If companies do not refinance in this market, they have no one to blame but themselves," Milken said at the conference. The market has given them this opportunity to deleverage."