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Fund managers take a conservative stance in junk bonds

- Alan Lavine and Gail Liberman

James Keegan, manager of the American Century High Yield Fund, joins those who are cautious about the high-yield bond market.

He sold many of his CCC-rated bonds. The bulk of the portfolio is now invested in BB-rated and B-rated bonds with plenty of cash. He believes a number of bonds issued three years ago could come under pressure.

Keegan also is avoiding many leveraged buy-out deals, except for some top borrowers in the high yield sector, such as HCA Inc.

The problem: In the past, junk bonds were issued to finance leveraged buyouts. But today, borrowers are tapping the collateralized loan market for lower rates. So bank lenders have priority over high yield bondholders if there is a default.

"Leveraged buyouts have accelerated dramatically over the past year," Keegan said. "Private equity firms have leveraged some credits to the highest levels. They have put so much leverage on cash flow that if there is a hiccup in the economy, there is not enough room for error. You have to be selective."

Keegan began increasing the fund's weightings in BB-rated and B-rated credits in the third quarter of last year. He primarily is sticking with companies that have strong credit profiles relative to similar issuers. The companies must have had stable cash flows and debt coverage ratios over the long term. He has significant weight in auto finance, particularly GMAC Credit, which was sold to a hedge fund. GMAC was one of General Motors' most profitable divisions. He also likes the gaming sector because of stable cash flows and high asset values. But he is underweight in home builders due to the decline in the real estate markets.

As we wrote this, the fund's top 10 holdings made up only 10 percent of the funds assets.


Spouses Gail Liberman and Alan Lavine are syndicated columnists. You can purchase Alan Lavine & Gail Liberman's latest book Quick Steps to Financial Stability (QUE Publishing 2006) online at www.moneycouple.com or at your local bookstore. E-mail them at MWliblav@aol.com.

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