US junk bond investors look beyond specter of war
Friday February 7, 11:23 am ET
By Jonathan Stempel
NEW YORK, Feb 7 (Reuters) - After a year when no U.S. company raised more than $1 billion in a single junk bond sale, three companies in 2003 have already sold $1 billion or more, and a fourth is preparing to do so.
Yet as war with Iraq looms, why are investors so eager to buy? After all, analysts accept that geopolitical uncertainty might curb business and consumer confidence in the economy. A bad economy is often bad for the prices of riskier assets such as junk bonds, as well as the stocks they often track.
Investors answer that if war happens, perhaps starting before April, it will be fast and the United States will quickly come out on top. Thereafter, the economy might grow strongly, and junk bond prices would post solid gains.
"Upon the conclusion of any war, there is likely to be stronger stocks and higher (U.S.) Treasury rates, so everyone is trying to position more into corporate bonds at the last minute," said Ronald Speaker, who runs the $1.7 billion Janus Flexible Income (Nasdaq:JAFIX - News) fund, which buys investment-grade and junk bonds. "Once the first shot is fired, you won't be able to buy all the corporate bonds you want."
Rising Treasury yields often cause other bond yields to rise, and prices to fall, hurting investors. Junk bonds, though, rarely move in sync with Treasuries. An improving economy that causes Treasury prices to fall might help junk bond prices rise.
Investor optimism is one reason that forest products company Georgia-Pacific Corp. (NYSE:GP - News), which makes Dixie paper cups, could sell $1.5 billion of junk bonds last month, and textbook publisher Houghton Mifflin Co. $1 billion.
On Thursday auto parts maker TRW Automotive Inc. sold $1.58 billion of bonds, the biggest sale in two years. By Tuesday, food and beverage can maker Crown Cork & Seal Co. (NYSE:CCK - News) plans to sell $2.05 billion, the biggest in three years.
None of these issuers hails from a sector, such as energy trading or telecommunications, where corporate implosions are rife, and the four sales all grew in size from when they were first announced. Georgia-Pacific's tripled.
All four issuers, though, telegraphed their plans to sell bonds at least a week in advance, sometimes more.
"As long as people know about these large sales in advance and can make room in their portfolios, there should be cash available," said Brian Hessel, managing partner at Stonegate Capital Management LLC in New York, which invests $300 million in junk bonds.
CASH FLOWS IN
Indeed, cash is flowing into mutual funds that invest in junk bonds, and those bonds are performing well.
U.S. junk bond mutual funds have attracted more than $1.7 billion of cash this year, including $503.5 million this week, according to AMG Data Services of Arcata, California.
The bonds, meanwhile, have gained 2.78 percent on a total return basis this year, beating all other major U.S. bond classes, according to Merrill Lynch & Co.
Brendan White, who runs the $46 million Touchstone High Yield Bond (Nasdaq:THYAX - News) fund, said junk bonds as a class aren't cheap. About one-fourth of the bonds already trade at 5 percent or more above their face value, he said.
"Once war begins we won't be off to the races," he said. "Having said that, we think you can get attractive returns through simply clipping coupons. We do expect that any confrontation would be short and successful, so we attempt to look through that."
That requires a steel stomach. The junk bond market has in the past all but shut down following events far less violent than war, including the 1998 Russian debt default and Long-Term Capital Management hedge fund meltdown, the Sept. 11 attacks, and even WorldCom Inc.'s (Other OTC:WCOEQ.PK - News) collapse last summer.
On the other hand, junk bonds gained 39.18 percent in 1991, Merrill Lynch said. That was a year when the United States emerged from recession and last faced down Saddam Hussein.
No one expects similar gains in 2003. But Speaker doesn't expect junk bond investors to shrink to the sidelines.
"Heading into a war there will be some volatility," he said. "Everyone wants to be a buyer ahead of that." |
