OPPORTUNITIES: Don't Call Them Junk
Stambovsky, Jeff
Don't Call Them Junk A second look at high-tech high-yield bonds. BY JEFF STAMBOVSKY f you're comfortable owning a tech company's stock, you should at least be taking a closer look at its...
...10-7/8 10/1/09 54 23.77% B+ Level Three 9-1/8 5/1/08 65 8.2% B 64 THE AMERICAN SPECTATOR E Summer Reading Issue 2001 Junk bonds can be downright exciting...
...96.5 10.34% BB Williams Comm...
...With GE, you just clip your coupons and wait...
...r Recent S&P ISUE ouo Mtriy rce Yel atn...
...They have a Standard & Poor's rating of B+ (anything below BBB is considered junk...
...So instead of trading at par value, the bonds may begin to trade at a discount, sometimes a significant one...
...posed to pay back the principal creates both risk and opportunity...
...High-yield bond trading takes place not on an organized exchange, but rather in a shadowy over-the-counter environment controlled largely by nine or ten dealers...
...The widespread use of junk bonds (sometimes euphemistically called high-yield bonds) as financing alternatives in the Eighties, especially by technology companies, changed all that...
...Before you buy high-yield bonds, you should talk it over with your broker or financial adviser...
...Mark-ups can be quite large, and are generally not disclosed...
...Companies planning to build large, capital-intensive projects, like an international fiber-optic network, canwhen the markets are right-quickly raise the funding they need by issuing junk bonds...
...If Metromedia is at some point unable to make its interest or principal payments, they would have to work out a deal with the creditors (bondholders) of the company that would involve a restructuring of the debt...
...That's when bonds can offer an interesting alternative to stocks...
...Maybe you can sell at a slight premium if interest rates drop...
...Junk bonds can be downright exciting...
...With GE, you just clip your coupons and wait...
...Let's look at the Metromedia Fiber Networks' (MFNX) 10 percent Senior Notes, due 10/15/08.These bonds were issued in November 1998 at a price of 100, yielding 10 percent...
...if those dealers are less willing (or unwilling) to commit their capital, bid prices can fall dramatically from one trade to the next, sometimes even disappearing completely, often for no fundamental reason...
...In short: You'd get less than you bargained for, but more than the stockholders...
...Caveat: Buying and selling bonds is not as easy as buying and selling stocks...
...The risk...
...Spectator readers who use this information for investment decisions do so at their own risk...
...BY JEFF STAMBOVSKY f you're comfortable owning a tech company's stock, you should at least be taking a closer look at its bonds...
...Typically the upside of a bond is limited: If you buy a bond at par at the time it's issued, usually the best you can hope for is to receive your interest payments when they're due (every six months), and to get your principal back at maturity...
...Today, for industry-specific reasons (rather than because of the general level of interest rates) these bonds are offered at a price of 66.The mechanics: you pay $660 (rather than $1,000) and MFNX Global Crossing 9-5/8 5/15/08 sends you $50 every six months, plus you get back $1,000 at maturity in October 2008.The math:Your yield-tomaturity is 18.6 percent, significantly higher than the original yield...
...The same kinds of corporate events-missed earnings targets, delayed service rollouts, management shakeups-that can depress the price of a company's stock can also depress the price of its bonds, even if interest rates are stable...
...For junk bonds, what happens between the time the bond is issued and the date the issuer is supThe author may hold positions in investments discussed in this column...
...Bonds of some companies previously mentioned in this column are listed in the chart below...
...MCI and McCaw Cellular (later sold to AT&T) are two examples of visionary companies that were financed in the junk bond market...
...r Recent S&P ISUE ouo Mtriy rce Yel atn uer is supposed to pay back the principal creates both risk and opportunity...
...For junk bonds, what happens between the time the bond is issued and the date the issuer is supposed to pay back the principal creates both risk and opportunity...
Vol. 34 • July 2001 • No. 6
