Don't Junk Your Junk Bonds

You still have some time to join the high-yield bond party.

CB Richard Ellis, a highly indebted and thinly profitable commercial-realty brokerage, recently issued $350 million in ten-year bonds bearing an interest rate of 6.625%. They were rated double-B, putting them firmly in junk territory. Only 15 months earlier, Ellis had sold $450 million worth of bonds due in eight years with an interest rate of 11.625%. Same company, same ratings, roughly the same maturities and similar "covenants" (the conditions bond underwriters forced Ellis to accept).

Ellis, like the economy, is only marginally better off than it was during the recession. It has been paying down bank debt, and its stock (symbol CBG), after collapsing from $41 to $2, has recovered to $19. But commercial real estate remains weak -- and that's Ellis's only business. Yet not only will Ellis pay a lot less interest on its new bonds, it will pay a smaller "spread" relative to yields on Treasury bonds. The bonds it issued 15 months ago yielded eight percentage points more than the going rate on ten-year Treasury bonds. The bonds it issued recently yield just four points more than Treasuries.

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Jeffrey R. Kosnett
Senior Editor, Kiplinger's Personal Finance
Kosnett is the editor of Kiplinger's Investing for Income and writes the "Cash in Hand" column for Kiplinger's Personal Finance. He is an income-investing expert who covers bonds, real estate investment trusts, oil and gas income deals, dividend stocks and anything else that pays interest and dividends. He joined Kiplinger in 1981 after six years in newspapers, including the Baltimore Sun. He is a 1976 journalism graduate from the Medill School at Northwestern University and completed an executive program at the Carnegie-Mellon University business school in 1978.