When it comes to income investments, most investors such as myself want to invest in securities where I can sleep well at night. I want to feel confident in knowing that my investments are safe. Unfortunately some of the best "sleep well at night" securities have lower yields. This is because the risk is much lower and the market is willing to take a lower income stream for that.
Now there are still some great high yield investments out there that are considered very safe, but it takes in-depth research to find out what is exactly right for you.
A while ago I was working on helping a public company that was looking to issue more debt. The company had short-term debt coming due and the lack of liquidity on its balance sheet created several problems. Several bondholders were getting nervous and the bonds were trading about 25% below par. The implied value meant that the company could have a hard time refinancing its maturing debt.
However, that was far from the case. We were able to help the company accomplish a refinancing of its debt and the short-term bonds were able to mature. The bondholders were happy as the yield at par was nice and locked in with pretty much a guaranty of refinancing the debt.
When I was doing research, I came across Alliance Healthcare Services (NASDAQ:AIQ). Alliance Healthcare provides outpatient services to hospitals and healthcare providers.
Alliance issued a senior note in 2010, which is maturing on 12/1/2016. The current yield at maturity is slightly more than 7%. The bond is trading slightly above par. So there is very little principal risk at maturity.
In 2012, Alliance had a total interest expense of $54 million. In the same period, the company reported total free cash flow of $65.5. Keep in mind that free cash flow factors in interest costs. So the company had an addition $65.5 million, which it could use for various purposes.
While the financials are improving, this is not the reason that makes this bond such a great investment. The reason why Alliance will not have a problem refinancing these bonds is because they have already showed an intent to issue $70 million in senior debt.
Alliance will get $70 million from its new debt issuance and then access its revolver and cash on hand to pay down the bond in 2016. While Moody's has downgraded the overall company, the bondholders can feel better knowing that the company has secured the financing for the refinancing. So investors will be able to lock in a 14% return between now and the time of maturity.
Some investors may not consider this a great investment, but given that the company has pretty much made it clear the bonds will mature safely, there is very little risk. A 14% absolute return for little risk is a good deal. If you have extra cash lying around, I believe this is a good investment.