Beware the Credit Bubble by Jacqueline Doherty
Summary: Barron's interviews Carol Levinson, an investment-grade bond analyst who helped found research firm Gimme Credit in 1994. She says risk premium on junk bonds has dropped from 13-17% in the 1980s to 7-10% now, fueling the huge market for debt-financed LBOs, stock buybacks and spinoffs. Capital markets have ceased punishing companies for a loss in credit quality; the spread between high-grade and low-grade debt is small. Companies under LBO threat make for risky debt investments: when Harrah's Entertainment Inc. (HET) LBO rumors surfaced in the fall, its bonds lost $0.10 on the dollar overnight. Bond safehavens include aerospace and defense companies like Boeing Co. (BA); its highly organized workforce is an LBO-deterrent. Conversely, some companies' debt can be had for cheap due to (what she sees as likely-unfounded) LBO threat: She likes the bonds of Motorola Inc. (MOT) (it's improved so much there's not much left for a buyer to do), First Data Corp. (FDC), ALLTEL Corp. (AT), Sara Lee Corp. (SLE), Deere & Company (DE), Safeway Inc. (SWY).