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Corporate Bonds Ripe For Picking

Before buying any bond, check ratings

at rating company websites like www.Moodys.comand www.dbrs.com.You have

to register at each site for some rating

information, but a lot of the data is free.

There is money ready to be taken off the table in investment-grade bonds. That’s because many investors remain skittish and are reluctant to pay for what are really solid prospects of getting interest on time. There are good deals out there, but they won’t last forever.

Take as an example a Bank of Montreal Capital Trust 10.22 per cent bond issue due Dec. 31, 2018. The bond’s payout resets every five years at a breathtaking 10.05 per cent over the Bank of Canada’s five-year rate at the date of the rate reset. If the five-year Canada pays 8.0 per cent, the bond will pay 18.05 per cent. The BMO bond, with a single A rating, has recently traded at a premium to the issue price, and now yields 5.34 per cent.

For comparison’s sake, consider a Government of Canada nine-year bond with a 4.25 per cent coupon due June 1, 2018. It pays just 3.28 per cent to maturity. For taking on some bank default risk, the BMO bonds give you a 2.06 per cent interest boost over the Government of Canada bond. That is still a dramatic gain for a bond with a respectable middle-level investment grade rating. And bond experts say that these bonds are worth a close look.

“We think that investment-grade corporates are the best value now,” says Vivek Verma, vice president at Canso Investment Counsel Ltd., of Richmond Hill, Ontario. There are opportunities like a 7.0 per cent yield to maturity on a Bell Canada 7.85 per cent bond due April 2, 2031, which has recently been priced to yield 6.69 per cent to maturity. The bond has an investment grade rating and provides 2.66 per cent more than the Government of Canada 5.75 per cent bond of June 1, 2033, which has recently offered a yield to maturity of 4.03 per cent on the same term. “These yield premiums won’t last forever,” Verma warns. “When investor anxieties subside, the spreads will close.”

WHEN TO ACT

The problem in this kind of cherry picking is that you have to know which ones are ripe and which one are — we are stretching this metaphor — going rotten. What’s good are the most senior chartered bank debt issues called Deposit Notes. They are like GICs except that they trade like bonds, rising in price when interest rates fall, falling in price when interest rates rise. They are issued in $1,000 pieces, but investment dealers usually like to sell them with a $25,000 minimum order.

A CIBC deposit note with a double A rating has recently yielded 2.90 per cent for four years compared to a Government of Canada 5.25 per cent issue due June 1, 2013 that has recently priced to yield 2.20 per cent. The yield pickup is 0.70 per cent — not a lot, but it’s a very senior credit.

There are also a lot of not so good bonds out there. On September 4, Royal Bank of Scotland failed to redeem four outstanding bond issues. That left the holders of these bonds without the cash they had anticipated. Instead, they got to keep their money in bonds they may not want. Moreover, U. S. bank failures continue. Before buying any bond, check ratings at rating company websites like www.Moodys.comand www.dbrs.com.You have to register at each site for some rating information, but a lot of the data is free.

UTILITY BONDS

For the investor who wants to sleep well at night, regulated utilities and diversified energy companies provide what amounts to guaranteed cash flow. Thus there’s an EnCana 5.8 per cent issue due Jan. 18, 2018 priced at $107.80 to yield 4.68 per cent to maturity. Its rating is A low — not a bargain but a solid credit.

Other opportunities:Real estate companies such as RioCan Real Estate Investment Trust are seen as vulnerable to hard times in the commercial property market. Thus a RioCan five-year issue with a BBB rating at the low end of investment grade pays 3.5 per cent more than a Government of Canada of similar term. The whole real estate sector is hurting, but some companies like RioCan within the sector have strong balance sheets. Even so, there is more risk here than in a AA bank bond.

Rather than take single company risk and buy bonds that are subordinate to first mortgages, one can buy a senior bond in a pool of first mortgages. The Commercial Mortgage Backed Security (CMBS) market has good deals, says Chris Kresic,

senior vice president at Mackenzie Financial Corporation in Toronto.

He notes that a 4.872 per cent CMBS from Real Estate Asset Liquidity Trust (REALT) due March 12, 2015 has recently paid 3.5 per cent more than a Government of Canada bond of similar terms. The issue has triple A rating compared to the RioCan that has a lower rating. “The REALT issue is the better deal because you get a AAA rating rather than the triple B on the RioCan issue,” Kresic says.

Moreover, in investment grade bonds, the best deals are at the long end of the corporate bond yield curve where many investors fear to trade, Verma adds. “We don’t think there is a lot of inflation risk ahead and the boost on a AA high issue like a GE Capital Canada 5.73 per cent due Oct. 22, 2037 and guaranteed in full by GE Finance in the U. S. to yield 6.6 per cent, locks in a 2.7 per cent yield premium over the Canada bond of the same term.”

Take nothing for granted, Kresic warns. “In this market, you have to look at the assets and the

business behind debt issues,” he explains. “You want the balance sheet and the business of every bond issuer. With banks and other financials, you have to go on the credit standing of the issue.”

In the end, there are no free rides. Every corporate bond comes with some default risk, but major issuers like Bell Canada and the banks, big utilities and major infrastructure companies are now seen as reasonable risks. But take care. Don’t put all your eggs in one basket and check out every bond at the rating agency websites. Research is the best way of all to manage risk.

Andrew Allentuck’s latest book, When Can I Retire? Planning Your Financial Life After Work, was published earlier this year by Viking Canada.

About the author

Columnist

Andrew Allentuck’s book, “Cherished Fortune: Build Your Portfolio Like Your Own Business,” written with co-author Benoit Poliquin, was recently published by Dundurn Press.

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