Buffett’s Purchases May Put Spark in Junk Bond Market
If Warren Buffett is buying junk bonds, can other investors be far behind?
Investors said the famed value investor’s huge foray into the bonds of two troubled financial companies, Conseco Inc. and Finova Group Inc., could be just the tonic the beleaguered $681-billion junk bond market needs.
“Warren Buffett is the quintessential smart money,” said Richard Cryan, who helps manage $1 billion in junk bonds for Evergreen Funds in Boston. “It may mean that we’ve seen the worst of the bear market in high yield, because the smart money is moving in and seeing opportunity.”
At the same time, investors said Buffett’s arrival doesn’t mean all junk bonds, including the battered telecommunications and technology sectors, are ready to recover.
“I wouldn’t interpret the moves as a suggestion [that] the entire market is oversold,” said Brian Hessel, who helps manage $3.5 billion in junk bonds for J&W; Seligman & Co. in New York.
Junk bonds, which are graded less than BBB and carry high yields because of their risks, have fallen 5.19% this year including interest, Merrill Lynch & Co. said.
They have fallen victim to falling credit quality, rising defaults, poor earnings and sales, disappearing investor cash, banks’ reluctance to lend and illiquidity, among other reasons.
Buffett, with a $28-billion net worth, placed No. 4 on this year’s Forbes magazine list of the 400 richest Americans.
Through his Berkshire Hathaway Inc. investment vehicle, the 70-year-old Omaha, Neb.-based investor bought several hundred million dollars worth of bonds of Scottsdale, Ariz.-based Finova, a commercial lender, this fall, according to the Wall Street Journal, citing no sources.
Buffett also bought a similar amount of bonds of Carmel, Ind.-based insurance and finance company Conseco, the article said, citing sources familiar with the matter. Conseco is trying to turn itself around after overpaying in 1998 for loan company Green Tree Financial Corp. and ousting its chief executive in April.
“Buffett has bought a couple of fallen angels,” said Arthur Calavritinos, who helps runs the $792-million John Hancock High-Yield Bond Fund. “He’s in effect bought a value stock that gives him a handsome semiannual payoff from the coupon.”
Berkshire Hathaway did not comment on the article.
Conseco shares rose $1.69, or 15%, to close Friday at $13.19, and Finova rose 31 cents, or 45%, to close at $1, both on the New York Stock Exchange. The companies’ shares have fallen a respective 28% and 98% this year, having closed 1999 at $17.88 and $35.50.
Berkshire’s Class A shares closed up $1,300 at $71,000 on the Big Board.
Conseco’s 9% notes maturing in October 2006 were recently offered at 73 cents on the dollar, with a yield to maturity of 16.3%. Finova’s 7.25% notes maturing in November 2004 were offered Friday at about 60 cents on the dollar, with a yield to maturity of 23.6%.
The bonds are considered “distressed” because they yield at least 10 percentage points more than safer U.S. Treasuries.
Conseco and Finova’s credit ratings have slid deep into junk grade from investment grade this year as their balance sheets became shakier and their share prices collapsed.
A large stake in Finova could give Buffett a big say on the lender’s recent agreement with Leucadia National Corp., a New York-based holding company.
In a Dec. 21 statement, Finova said Leucadia agreed to invest as much as $350 million if Finova restructures its $11.3-billion debt load.
The proposed restructuring, which requires the consent of bank lenders and bondholders, would excuse Finova from paying back all of its debt. If it fails, Finova warned that it may face a court-supervised reorganization.
