First Eagle Senior Advisor Jean-Marie Eveillard says a lot of the high-yield bond market is truly junk and advises investors to beware.
"Investors must be very careful about the quality of any high-yield debt they consider," because much of the paper issued through leveraged buyout transactions were based on elevated levels of earnings before interest, taxes, depreciation and amortization (EBITDA).
"Those companies will not be able refinance their debt based on current enterprise valuations," Eveillard told gurufocus.com.
Eveillard says he avoids adding to the portfolios he manages any bonds for companies that are undergoing reorganization.
“The bankruptcy courts are clogged, and the time value of these investments is very important,” Eveillard notes. “Interest accrual on most debt instruments stops when a company files for bankruptcy protection.”
Eveillard says he targets yields to maturity of 12 percent to 15 percent, not the higher returns that might be available to investors willing to purchase distressed securities and deal with restructuring. His firm currently holds bonds of Boston Properties.
In the first quarter, 68 junk-rated companies worldwide defaulted on their debts, compared with 19 in the same period of 2008, according to Standard & Poor's.
"The green shoots are pretty small," David MacEwen, chief investment officer for fixed income at American Century funds told The Los Angeles Times, referring to recent comments by politicians concerning signs of economic recovery.
MacEwen prefers debt of high-quality companies like Wal-Mart and McDonald’s.
"We think it's premature to be too aggressive stepping into risk" (in bonds) he says.
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