Lower-quality US junk bonds attractive-Morgan Stanley

NEW YORK, Nov 2 (Reuters) - The lower quality rungs of the U.S. junk bond market may offer the best buying opportunities, thanks to companies' improved access to financing, Morgan Stanley said on Monday.

Some low-rated companies such as casino operator Harrah's, chip maker Advanced Micro Devices (AMD.N) and Continental Airlines (CAL.N) have high levels of liquidity and time to improve their operations as the economy picks up, Riz Hussain, a credit market analyst, said on a conference call.

"The evidence suggests the ability of companies to fix their capital structures is quite alive and well," Hussain said.

Companies with CCC ratings, one of the lowest categories above default, have about four years of headroom on average before they run short of cash to pay debt, Morgan Stanley analyst Jocelyn Chu said in a related report last week.

That may give companies time to downsize their businesses and fix their balance sheets, Chu said.

The riskiest bonds have already enjoyed a massive rally this year as a healing of a global credit crisis lowered default risks. Bonds with CCC ratings have posted total returns of 83 percent year to date, versus a 51 percent return for U.S. high-yield bonds overall, according to Merrill Lynch indexes.

Despite the appetite for riskier junk, analysts have remained concerned that many companies would have trouble refinancing debt taken on in a leveraged buyout boom before the global credit crisis. According to earlier research by Chu, about half a trillion dollars of high-yield bank and bond debt comes due over the next three and a half years.

Managers are taking every opportunity to address the debt and shift to leaner capital structures, Chu said. Many have refinanced debt with longer-term securities or issued equity to pay down debt. About $68 billion of equity has been issued since the beginning of 2008, with about 60 percent of the proceeds used for debt repayment, according to Morgan Stanley data.

Placing bets on CCC bonds is "not for the faint of heart," as not all companies will emerge unscathed, Chu said. However, lenders have been more willing to amend loan terms and give companies more time to pay off debt, forestalling defaults, Chu said.

(Reporting by Dena Aubin; Editing by Kenneth Barry)