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Friday, May 27, 2022

Wall Street West—High-Yield Bonds Return to Favor with Telecom Tumble

Suddenly, a few of L.A.’s vulture investors those who land when most money mavens take flight are again buzzing about convertible and high-yield debt. Ever since junk bond wizard Michael Milken brought Drexel Burnham Lambert to Los Angeles in 1979, with its storied strength in non-investment grade debt, Southern California has been a stronghold of profit-hunters who like to stalk returns in the face of corporate death.

Though never a part of the Drexel crowd, Pasadena bond manager Jeff Rollert, co-founder of the firm ALM Advisers, likes the look of some telecom corporate IOUs these days, especially convertible bonds. Each week seems to bring bad news to the overbuilt telecom sector, driving stocks and bond values down.

“You see telecom convertibles (bonds) trading from 25 to 50 cents on the dollar (of face value),” said Rollert. “I buy and sell ’em like hand grenades. I bought a bunch of different issues.” Rollert is banking on diversification and a few home runs to counteract the bombs. Some ailing telecom outfits will be bought by stronger entities, restoring bond values, reasoned Rollert.

He also noted’s AOL Time Warner’s announcement last week it will roll out an “on demand” video service. The nation has an abundance of “unlit” broadband cable, its use pinched by what analysts call “the last mile.” Getting homes and small businesses hooked up to the Internet superhighway, at broadband speeds, has proven expensive and slow. “But what we see is that AOL is betting that the problems of the last mile are going away,” said Rollert.

If true, that means a lot more video traversing the Internet and thus a lot more traffic for the big telecom houses, translating into survival.

For now, though, Wall Street is spooked on the telecoms, and even the steadier communication giants have been rocked. Global Crossing Ltd., the outfit with nearly 100,000 miles of laid cable spanning the globe, saw its stock sink to below $5 a share in trading last week, off from an all-time high of $79 in March 1999.

Global Crossing stock may never reward investors, especially those who bought a couple of years back. But its senior bonds due 2008, paying 9.65 percent, are trading at 67 cents per $1 face value, and thus offer an effective yield to maturity of more than 18.3 percent, noted Larry Post, president and chief investment officer for Metropolitan West Financial Group in West Los Angeles.

Global Crossing doesn’t have to prosper it only has to survive and honor its debts, for bond investors to do well. Even so, Post is steering clear of Global Crossing bonds for now. “We have avoided almost all of the telecom,” said Post. “We are being somewhat conservative, and investing in bonds of late-stage workout solutions.”

Recently Post bought Scottsdale, Ariz.-based financial house Finova Inc. bonds at around 70 cents on the dollar, and they’ve since recovered to nearly par. Finova submitted a Chapter 11 reorganization plan to bankruptcy court in May, the details of which are being haggled over now. Most players in the distressed debt sector feel they are in one of the few games on Wall Street that will make money.

Stocks, noted both Rollert and Post, still are trading at historically high multiples, near 30 times earnings, even as the nation apparently sinks into a recession. But with so much capital seeking safety, yields on government bonds, or corporate blue-chip IOUs, are in the low single-digits.

But a well-selected portfolio of high-yield corporate bonds can offer investors handsome double-digit returns while waiting for the equity market bottom.

Kiddie Retailing

Behind the scenes of the recent acquisition of children’s retailer Zany Brainy Inc. by Calabasas-based The Right Start Inc. were Alex Cappello and Rob Deutschman of the Santa Monica-based Cappello Group.

Cappello advised the Los Angeles-based finance house Waterton Management LLC, which helped finance Right Start’s acquisition, and which will take a 48 percent stake in the ongoing enterprise. Waterton is an investment vehicle for Ken Abdallah and grocery store magnate Ron Burkle.

The pair plan to do more with Right Start, said Cappello. “Right Start will be a platform to grow the company and make acquisition worldwide,” he said. Bankrupt Zany Brainy operates 187 stores targeting children aged four to 12. Right Start sells to the under 5 years old crowd, and has 68 stores.

Quick Takes

Back on Global Crossing, the Yahoo message boards on any public company are usually an interesting read, often a must for investors doing their own research. But one of the zanier boards has to be Global Crossing’s.

As mentioned, the telecom stock has taken a swan dive, and in such situations, one usually reads nasty barbs between shorts (investors who bet a stock will decrease in value) and the stock’s true believers. But the Global Crossing message board, with an astounding 224,700 (and counting) posts, seems to have evolved into a war zone between investors who either hate former President Bill Clinton while loving current President Bush or vice versa.

One messenger even headlines his posts with the title, “Clinton=GX=$61, Bush=GX=$4.95,” an indication of the better luck Global Crossing investors had in the Clinton Administration than now

Chip Hanlon, president of the Unfunds Inc. money management outfit in Huntington Beach, is telling clients to just sit tight, and maybe look for yield until a market bottom is reached. “I am one of those who says you need capitulation. You need to see some real sell-offs before we hit the bottom,” Hanlon said last week. The traditionally foul months of September and October may reprise their roles on Wall Street once again, said Hanlon. “Historically, you make all your money investing in between October and April…”

Eight cities from Guangdong Province in China will be hosting a technology fair on September 11 at the Universal Hilton Hotel. In total, the participants will be ready to invest $221 million on technology products such as computer chips, circuit boards and other equipment as well as form joint ventures with American companies.

In addition, the cities are seeking purchasing opportunities in chemicals, electric components, machinery and parts and metals such as galvanized metal sheets.

Contributing columnist Benjamin Mark Cole writes about the local investment community for the Los Angeles Business Journal. His new book is “The Pied Pipers of Wall Street: How Analysts Sell You Down the River,” published by Bloomberg Press. He can be reached at sevencontinents@mindspring.com.

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