Qualcomm Buys $273 Mln of Junk Bonds to Boost Returns (Update1)
By Miles Weiss
Washington, April 29 (Bloomberg) -- Qualcomm Inc., a mobile- phone chipmaker whose stock has fallen more than 50 percent since last May, is seeking to boost returns on $2.9 billion of cash and securities by investing in junk bonds.
The San Diego-based company purchased $273 million worth of high-yield bonds during the first three months of this year, according to a quarterly report filed with the Securities and Exchange Commission.
In betting on the future prospects of junk bonds, Qualcomm is diverging from the standard corporate investment formula of placing excess cash in low-risk securities, such as Treasury bills that mature in one or two years. Qualcomm officials said they can make the high-yield investments because the bonds of the lowest- rated companies are only about 10 percent of overall holdings.
``We think it is reasonable and prudent'' to acquire non- investment grade debt, said Richard Grannis, Qualcomm's treasurer. ``With the economy showing signs of recovery and many of these bonds at historical lows, it seems like a good time to diversify.''
As of March 31, Qualcomm had $1.27 billion of cash and cash equivalents, along with $943.9 million of short-term securities and $692.9 million of longer-term securities. The company said in the quarterly report that the cash equivalents and securities range from certificates of deposit and commercial paper to mortgage-backed securities and stocks.
Idle Money
Grannis compared Qualcomm to companies such as Intel Corp. and Microsoft Corp. that generate cash and have little or no debt on their balance sheet. These companies often end up with idle money that they invest in securities to maximize profits.
American Express Co. announced losses on junk bonds last year after its money-management unit bought the debt in 1997 as prices were soaring. Qualcomm bought its non-investment grade debt when many of the bonds were trading at lower prices.
`` Their timing would be a lot better than American Express,'' said Sean Egan, managing director at Egan-Jones Ratings Co. ``The bonds have already seen quite a bit of deterioration'' and ``there is less risk in buying them now.''
Investors have been bidding more for junk bonds in recent months, cutting the yields to 18-month lows. A bond's yield falls when its price rises. Junk bonds on average yield about 8.64 percentage points more than U.S. Treasuries, down from 12.5 percentage points in October, a Standard & Poor's Index showed.
Money Managers
Junk bonds gained 2.2 percent on average in the first quarter including price changes and interest, according to Bear Stearns Cos. data. The asset class was up 1.8 percent for the 12 months ending March 31.
During the second quarter, Qualcomm allocated $300 million to two outside money managers for investment in high-yield bonds. As of March 31, the managers had invested $273 million of that total in corporate bonds with ratings of B2 and Ba2 by Moody's Investors Service and B and BB by Standard & Poor's.
Grannis didn't identify the outside managers handling the junk-bond investments or the companies in which they invested. He said Qualcomm didn't concentrate its junk-bond investments in any one business sector, such as telecommunications.
``We have reduced the risk substantially by diversifying the investments among all industry sectors,'' Grannis said.
Qualcomm shares rose $1.43 today to $29.22, after earlier hitting a 52-week low of $28.56. Qualcomm shares reached a 52-week high on May 21, 2001, at $71.04. |
