December 1, 2007

On Borrowed Time - Barron's Online

On Borrowed Time - Barron's Online (Subscription required)

A Barron's article confirms what I talked about earlier this week about leveraged buyouts deals that can go sour. The article lists some of the deals' debt prices that have went way down in price in anticipation of defaults. The yields on these bonds sky rocketed in anticipation of troubles ahead for these issuers. If any of these LBOs need to raise more money they will in a world of trouble.

Table source: Barron's.

Generally these low quality bonds will trade like equities in difficult economic times. Junk bond will sell at huge discounts during recession due to high default rates, as rates can shoot from a benign 1.3% currently to more than 12% (2001 recession), ( Source Moody's).

Most junk bond funds and issues have been sold off in the past few months and currently offer mouth watering yields, 12-15%. I think there is a better time to buy these assets and it is not now.

Invest carefully.

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