Calling All Bonds: Why Corporate Bond Holders Should Sell

Includes: AMAT, BHI, ED, IBM, KMB, SPG, VZ
by: Stephen Rosenman

Sometimes, a company's best opportunities aren't confined to selling its products. Today, corporations can take advantage of investors' voracious appetite for bonds to help their P&L statements.

Interest rates have plummeted allowing companies to borrow at attractive rates. Yet many companies are still paying absurdly high rates on older bonds, wasting money needlessly. Some corporations pay over 8% on investment grade medium-term loans, 400 to 500 basis points higher than the going rate. Rectifying this money bleed should boost earnings for years to come. Refinancing lowers debt cost at no risk. It's time to call those bonds.

I did a screen of callable bonds rated at least A- by Moody's and S&P maturing after 2016 with a coupon of at least 7% and a price of at least $120 (see table below).

The spread between coupon and current bond yield ranges from 350 to 550 basis points, representing a chance to decrease interest payments. Many of the bonds are sizable. For instance, each of the two Verizon (NYSE:VZ) bonds amount to $2 billion, a potential savings of $100 million a year on each for the company.

My suggestion for Applied Materials (NASDAQ:AMAT), Baker Hughes (NYSE:BHI), Consolidated Edison Ed (NYSE:ED), IBM (NYSE:IBM), Kimberly-Clark (NYSE:KMB), Simon Property (NYSE:SPG) and Verizon: Call your bonds and, if needed, reissue debt at today's much lower yields. You are assured of coming out ahead.

My advice for those lucky bond holders who have benefited from this windfall: It's time to sell. Your bonds are selling at a substantial premium and should be called away as corporations catch on. I'd suggest moving to equities such as Verizon, Kimberly Clark and Consolidated Edison, all of which yield far more than their bonds.

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.

Disclosure: I am long KMB.