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by Rom Badilla

Attempting to find yield in the current environment can be a difficult proposition. While yields are low, there are some strong relative value opportunities in the High Yield market. Below are details of a High Yield bond issued by Oshkosh Corporation (OSK). As part of our High Yield Portfolio released last week, this bond offers investors an opportunity to capture high income.

Oshkosh Corporation Senior Notes (CUSIP 688225AD3)

  • 8.5% Fixed Semi-Annual Coupon
  • March 1, 2020 Maturity Date
  • March 1, 2015 Next Call Date at 104.25 Dollar Price
  • Current Market: Offered at $111.56, Yield to Worst of 4.75%
  • +442 basis points Yield Advantage over comparable maturity U.S. Treasury (On the run 5-Year)
  • $111.13 Dollar Price, 4.97% Yield to Maturity at time of Inclusion of Bondsquawk's High Yield Portfolio
  • 'BB' Rating by Standard & Poor's which falls on the High Yield spectrum

Company Profile

Founded in 1917, Oshkosh Corporation designs, manufactures, and markets through its various segments fire and emergency apparatuses and specialty commercial and military trucks. The Company provides products such as pumpers, aerial and ladder trucks, tankers, rescue vehicles, snow removal vehicles, refuse truck bodies, and concrete mixers. The company employs over 12 thousand people around the world and is headquartered in Oshkosh, Wisconsin.

Key Drivers

Trend of Debt Reduction: Oshkosh Corporation has a strong history of deleveraging. Over the past two years, the company has reduced its total debt load by more than 33%. In the past year, OSK total debt has fallen by $156.7 million to $955.0 million as of the Third Quarter 2012. Total Debt to Equity stands at 54.6 from 82.9 in the Third Quarter of 2010.

Improving Interest Coverage Ratio: The company has improved its ability to service its debt and interest payments. The Interest Coverage Ratio which is EBITDA divided by Interest Expenese has increased from 7.6x from a year ago to 8.4x. Using data from the past twelve months, the Interest Coverage Ratio stands at 6.2x.

A higher Interest Coverage Ratio implies better credit health since it is making enough money to stay current with its debt interest obligations. Conversely, a red flag is raised when this ratio approaches 1.5 or lower, since its ability to pay the interest on the company's debt is questionable.

High Cash Balance: OSK has $390.7 million in Cash. In addition, the company has a Revolver line of credit of $517.3 million available. With no short term liabilities, the company has just over $900 million in liquidity. Furthermore, the company produced $122 million in Free Cash Flow in the past 12 months. Compared to its debt totals of $955.0 with a Market Capitalization of $2.6 billion, the company has ample cash.

Yield Advantage Over Peers: The bond is callable on and anytime after the following dates and at the following prices:

  • March 1, 2015 $104.250 Dollar Price 4.75% Yield to Call
  • March 1, 2016 $102.833 Dollar Price 5.34% Yield to Call
  • March 1, 2017 $101.417 Dollar Price 5.67% Yield to Call
  • March 1, 2018 $100.000 Dollar Price 5.88% Yield to Call

At a current price of $111.56, the bond has a Yield to Worst of 4.75%. Yield to Worst takes the lowest of the Yields (including Yield to Maturity of 6.46%) for a "worst-case" scenario.

This bond has a better Yield to Worst than some of its Aerospace & Defense sector peers with the same rating and call date. B/E Aerospace Inc (BEAV) 6.875% Coupon Maturing 10-1-2020 with a Call Date in 2015 is yielding just 3.56%. BEAV is rated 'BB'. Similarly, Esterline Technology Corp (ESL) 7.000% Coupon, Maturing 8-1-2020 with a Call Date in 2015 has a Yield to Worst of 3.96%. S&P has ESL rated 'BB.' So, this bond by OSK has a yield advantage of 119 and 79 basis points, respectively.

Source: Yield Advantage With Oshkosh Corporation High Yield Bond