Gimme Credit's Top Bonds List Led by Abbvie, Entergy, Phillips 66
02/21/2013| 12:16am US/Eastern
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--Research firm sees M&A, shareholder-friendly activity as threat to corporate bonds
--Bonds are underperforming this year, partly due to such risks
--Gimme Credit tells investors to play defense against risks with careful bond selection
By Patrick McGee
In its twice-yearly list of the top 10 investment-grade bonds, research firm Gimme Credit LLC throws a spotlight on companies whose bonds it expects to shine. Among its picks are company bonds targeted to outperform against a backdrop of shareholder-friendly activities--which are often detrimental to bond holders--and amid a surge in mergers and acquisitions, which can saddle a company with debt.
The list includes bonds from Abbvie Inc. (>> AbbVie Inc), Entergy Corp. (>> Entergy Corporation) and Phillips 66 (>> Phillips 66)--companies with little in common except that each is in some stage of internal restructuring, making them unlikely targets for buyouts from private-equity investors.
Such businesses, "having been through their respective spinoffs and restructurings, or change of ownership, are not likely to have that kind of risk," said Gimme Credit analyst Philip C. Adams. "Is there further M&A risk? I don't think so. What you see is what you get."
So far this year, threats of a new buyout frenzy have helped keep investment-grade bonds from gaining in the secondary market, analysts say. That is leaving fixed-income investors with little hope of receiving anything beyond paltry yields.
"With event risk clearly on the rise, success in the corporate-bond market will come, more than ever, from careful security selection," Carol Levenson, Gimme Credit's director of research, said in the report, to be published Thursday.
Although mutual-fund investors have put cash into high-grade bonds in each week of 2013, including a $1.3 billion inflow last week, bond returns are negative so far this year. A Barclays index of industrial bonds shows total returns at -1.48%. That hurts their reputation as a safe and steady asset class, and the negative results look especially bad next to stocks, which have risen nearly 7%, to five-year highs.
Analysts say investors are concerned about companies issuing debt to buy back stock, gear up for acquisitions or go private.
Thursday's Gimme Credit list is designed to choose bonds that are likely to buck this trend.
Abbvie is a global biopharmaceutical company recently spun off by Abbott Laboratories (>> Abbott Laboratories). Gimme Credit says the Chicago's company's margins are lofty, free cash flow is strong, and its debt load is manageable. Abbvie also owns rheumatoid arthritis drug Humira, a "blockbuster" product "whose sales have more than doubled over the past four years to over $9 billion," the Gimme Credit note says.
Its 2.90% bonds due 2022 last traded at $98.828, yielding 3.04%, according to MarketAxess. Bonds have a face value of $100. They have Baa1 and A ratings from Moody's Investors Service and Standard & Poor's Ratings Services, respectively.
Another pick is Entergy, an electric-power-production and retail-distribution company. Entergy is expected to complete the sale of its electric-transmission business this year, freeing up $1.2 billion, ridding it of a cash-hungry business and improving its cash flow outlook "for 2014 and beyond," Gimme Credit says.
Its 5.125% bonds due 2020 last traded at $107.969, yielding 3.904%. They carry Baa3 and BBB-minus ratings from Moody's and S&P.
A third selection is energy firm Phillips 66, which separated from ConocoPhillips (>> ConocoPhillips) last year. The report says the new company delivers diversification with its international refining and marketing business, plus its interests in natural-gas processing and international chemicals.
Mr. Adams said Phillips plans to reward shareholders this year but that the company can afford it without squeezing bondholders. "They will be doing some share repurchasing, but they came cruising through 2012 with a very strong balance sheet," he said.
He called Phillips 66 an aggressive purchase, noting their bonds have already rallied since they were issued last March. But he anticipates further gains as the company becomes better known.
"The bonds were issued prespinoff, and it takes a while for people to prove the fact that they'll be successful post spinoff," he said. "The acceptance of the bonds, by the investment community, grows over time."
Phillips' 5.875% bonds due 2042 last traded at $118.042, yielding 4.728%.
-Write to Patrick McGee at patrick.mcgee@dowjones.com
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