BondSavvy just 'green-lighted' four new corporate bond investment recommendations to our bond newsletter subscribers during The Bondcast. We preview these bond recommendations in this fixed income blog post, which includes a summary of each recommendation at the end of the article.
Click to see the investment returns achieved by our September 23,
2020 bond recommendations, as well as all prior and current corporate bond recommendations.
BondSavvy makes bond recommendations after quarterly earnings releases and when we see opportunities present themselves during the year. One
of the many benefits of investing throughout the year – as opposed to building a bond ladder and investing a substantial sum all at once – is that investors can take advantage of situations
that arise over time.
Given market conditions, the financial performance of companies, and the shape of the overall economy, our investment themes change. Based on
these and other investment considerations, we may favor particular industries, corporate bonds of varying maturity dates, and corporate bonds across
a range of credit quality.
To begin each edition of The Bondcast, we review the overarching investment themes informing our recommendations. For our September 23, 2020
recommendations, these investment themes included the following:
- Investment Theme 1: COVID-19 and declines in many commodity prices forced companies to re-tool their businesses
We believe, in many cases, this has positioned companies better for future success, as they had to adapt to a new environment and become more efficient and nimble organizations. While two of the issuers of our recommended bonds were negatively impacted by COVID-19, their balance sheets remain strong and, given the strength of their underlying businesses, we believe the COVID-19 pandemic will make them better companies for the long term.
The issuer of one of our recommended bonds is a large natural gas producer. As a result of low natural gas prices, this company's main drilling area has 75% fewer rigs than it had in 2014, but the area now produces twice the amount of gas it did in 2014. These efficiency improvements were occurring long before 2020; however, we believe COVID-19 has further accelerated the efficiency of this and many other companies.
- Investment Theme 2: We have increased our industry diversification
We added a new recommendation in the pharmaceutical industry and two new recommendations in the natural resources industry. Across our existing buy and hold recommendations, we have bond issuers in 12 different industry groups.
- Investment Theme 3: The issuers of each recommended corporate bond have leverage ratios not exceeding 2.7x
The US and global economies are far from being out of the woods. We see this in the recent quarterly results released by companies across myriad industries. While some companies have been buoyed by COVID-19, many more have struggled and have a long road to recovery. Our bond issuers reported leverage ratios for the periods ending June 30, 2020 of 2.7x and less. These low leverage ratios enable our bond issuers to successfully absorb further shocks to their businesses should the economy take a long time to recover.
BondSavvy Subscriber Benefit
BondSavvy provides recommendations across a variety of industries, credit quality, and maturity dates. Our subscribers make the final investment decision based on their risk tolerance and returns objectives. Get Started- Investment Theme 4: None of our recommended corporate bonds are callable prior to the maturity date
Certain of our previous corporate bond recommendations are subject to call schedules, which have the effect of limiting the upside of a corporate bond. Bonds rated below investment grade (often known as 'high-yield corporate bonds') generally have call schedules, whereas investment-grade corporate bonds do not. Selecting corporate bonds that are not callable at the issuer's discretion helps maximize the potential returns of our recommended corporate bonds.
- Investment Theme 5: None of the issuing companies of our recommended bonds have any material debt that is senior to our recommended
corporate bonds
While corporate bonds are senior to stockholders, they are junior claims vs. senior bank debt. This means that, in the case of a restructuring or Chapter 11 filing, the senior bank debt has priority to claims, which can result in less-than-full recoveries for unsecured bondholders. All of the recommended bond issuers have access to senior bank facilities; however, with one minor exception, these credit facilities were undrawn at the end of the second quarter 2020.
- Investment Theme 6: We have added new investment-grade corporate bonds, Fallen Angels, and split-rated corporate bonds
Our goal is to maximize the total return of each corporate bond we recommend. Given the rally in US Treasurys and the shrinking of certain corporate bond credit spreads, many of our previously recommended investment-grade corporate bonds increased significantly in value. We maximized returns from these investments by selling bonds prior to maturity. As a result, prior to our September 23, 2020 bond recommendations, we only had a select number of recommended bonds rated investment grade.
Since prices of investment-grade corporate bonds and high-yield corporate bonds behave differently, it's generally a good idea to have bonds of both bond ratings in an investor's portfolio. This has become more difficult in recent months due to the run-up in Treasury bonds and, as a result, in many investment-grade corporate bonds. In the September 23, 2020 edition of The Bondcast, however, we were able to find corporate bonds rated investment-grade, as well as bonds that are split rated that are trading at compelling relative values.
BondSavvy Subscriber Benefit
Our investment analysis shows subscribers where our recommended bonds stand in the issuer's capital structure to assess the downside risk of our corporate bond investments. Get Started
Click to see the the investment returns of these corporate bonds since our September 23, 2020 recommendation date. You can also see the names of all bonds we have previously recommended and
later sold.
Summary of BondSavvy's Corporate Bond Recommendations - September 23, 2020
|
|
Industry |
Offer Price |
YTM |
Leverage Ratio |
|
|||
| Bond Recommendation 1
|
Manufacturing |
110.76 |
4.62% |
2.3x |
|
|||
| Bond Recommendation 2
|
Natural Resources |
94.24 |
5.20% |
2.3x |
|
|||
| Bond Recommendation 3
|
Pharmaceuticals |
95.94 |
3.01% |
0.4x |
|
|||
| Bond Recommendation 4
|
Natural Resources |
91.60 |
5.35% |
2.7x |
|
