Corporate Bonds: A Safe Haven?

11/29/2012 7:00 am EST

Focus: BONDS

Marilyn Cohen

President & CEO, Envision Capital Management, Inc.

While corporate bond yields have come down, it's still a great sector for income investors, says Marilyn Cohen.

Well, investors are really looking for income and yield these days. Are corporate bonds a place to find those? My guest today is Marilyn Cohen to talk about that. Marilyn, are there some opportunities, some good ones, in corporate bonds?

There are opportunities, but they’re certainly not as juicy and flavorful as they were a year or two ago. Interest rates have come down a lot in all sectors of the bond markets—Treasuries, agencies, corporates, munis, etc.

The good news about corporations is they still have over $2 trillion of cash on their balance sheets. The good news about corporations is the fact that they have called in all of their expensive debt, their high-coupon debt, and refinanced it with lower-coupon debt.

So they’ve got it made. They are locked and loaded and ready if we go into another recession that they will be able to withstand that recession. Also, they’ve been very uptight about all of the new rules and regulations and not knowing whether it’s going to get worse or not. So they’ve got fortress balance sheets, and that is great news.

What are your recommendations in terms of the sector? Are there certain sectors where the corporations where the bonds are safe, yet a decent yield? What do you recommend?

I think that the financial bonds that got everybody in such deep trouble during the 2008 debacle, I think people should keep maybe a 15% allocation to financials. That means banks, brokers, insurance companies. I don’t know if we’re in for another wave, but people need to stay on top of the capital structure with the senior secured debt and the senior unsecured debt.

I think that most areas of the bond sectors are doing quite OK, even automobiles. I mean Ford (F) now can make money on less production. They know how to do that. I wouldn’t touch GM (GM) bonds.

AutoNation (AN) is another company I like. It’s in the ancillary business. They’re a big dealership down in the Southwest; all kinds of cars, leasing, sales, after-market services. They are on fire, and the company is really doing well.

So those kinds of bonds, when you figure out what sectors and what themes you can utilize, will add value to your portfolio, but still most of them are yielding anywhere between 4% to 5%. There’s no more 7% and 8%—that’s history now.

I was just going to ask what reasonable expectations were. So do you see a point coming forward here where we may see them creep up a little bit?

Not anytime soon. I think the Federal Reserve has been very clear about keeping interest rates low for an extended period of time.

If you take a look at who is the largest owner of US Treasury obligations, it’s the Fed No. 1, China No. 2, Japan No. 3. And as long as the Fed is the big 1,000-pound gorilla in the market, that will keep rates low for a while.

I know the rating agencies have been under fire for maybe being too generous with their ratings. How does it look in the corporate-bond environment? Can we trust those ratings still?

Under fire? They should be shot at dawn. They really should. You know, don’t look at the rating agencies as the end-all, because you can see—in municipals and corporates—structural problems, and yet they're [rated] A. They don’t warrant that.

So just use it as interesting-to-know information. But look at the balance sheets, look at the income statements whether it’s a muni or whether it’s a corporate bond, and look at the interest coverage for the corporate bonds.

Usually, the brokerage reports that you can get tell you it’s got six times interest coverage. Well, that gives you a lot of wiggle room rather than 1:1, where every dollar in goes out to make payments. So look at the credit matrix, as we call it.

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