TOP WEBSITES FOR INCOME INVESTORS (KIPLINGERS)

KIPLINGER'S | March 2016

9 Top Free Sites for Income Investors

Five years ago, Kiplinger’s turned to longtime investment writer and in-house income guru Jeff Kosnett to launch a newsletter designed to steer income-starved readers to the best investments for dependable, spendable income. Today, Kiplinger’s Investing for Income continues to attract a growing army of satisfied readers.

How does Jeff uncover opportunities for his subscribers month after month? Of course, he spends a lot of time interviewing money managers and mutual fund masterminds, as well as the men and women who actually run real estate investment trusts (REITs) and master limited partnerships (MLPs). And he mines the Internet, searching for great ideas and studying the raw data to identify broad trends and profitable prospects. We asked Jeff to share with Kiplinger.com readers his favorite free sources for reasoned discussion and hard-to-find financial data. Bookmarking these sites will be a valuable step toward making you a more successful investor.

 

Closed-End Fund Center

Web address: www.cefa.com

Key data: Discounts and premiums to net asset value

Best for: Sorting and screening 629 closed-end funds

The keys to understanding any closed-end fund are data about current and historic discounts and premiums to net asset value, distribution rates, whether and how much the fund borrows (leverage), and total return on net asset value. This site offers all of that and more, plus the tools to sort and screen more than 30 varieties of funds in too many ways to count.

Kosnett Comment: CEFA’s tables show each fund’s distribution yield next to its income yield. The two won’t match, but they should be fairly close. If the income figure is low but the distribution is high, the fund is selling assets or issuing new shares to maintain the illusion of a fat yield. It could be headed for a distribution cut.

Eaton Vance Monthly Market Monitor

Web address: www.eatonvance.com

Key data: The numbers on all aspects of income investments

Best for: Total returns and average duration of bonds

This fund company’s site is loaded with free stuff. The best is the monthly monitor (accessible in the site’s Institutional Investors section): 40-plus pages of charts and tables about all aspects of stocks, bonds, bank-loan funds, commodities, industry sectors and more. All this — including total returns and average duration of more than 20 kinds of bonds — is nicely laid out on single pages.

Kosnett Comment: The page called “fixed income spread analysis” uses simple bar charts to show the current and past yield advantage of various categories, such as junk bonds or preferred stocks, over Treasuries. When the spread is unusually narrow, there’s more risk. When it’s wide, it’s usually a good time to invest.

FRED

Web address: www.stlouisfed.org

Key data: 382,000 statistical series from 82 sources

Best for: Financial data, graphs and charts from the government and everywhere else

If you want to see a trend in, say, inflation, growth, interest rates or stock-market returns for just about any period, you’ll find it here. This takes the place of any almanac, encyclopedia or reference book — and it’s updated daily. FRED is the acronym for Federal Reserve Economic Data and is the brainchild of the Federal Reserve Bank of St. Louis.

Kosnett Comment: You may go weeks or months without using this, and then you’ll refer to it several times in one sitting. It’s comforting to know that someone has gone to the effort of assembling all this info in one place.

SEE ALSO: 7 Promising Dividend Stocks Yielding 5% or More

FRED

Investing in Bonds

Web address: www.investinginbonds.com

Key data: Real-time market data on bond trading action and prices

Best for: Owners (or potential owners) of individual corporate and municipal bonds and anyone else who wants to see how bonds are priced and what they are yielding at any given time

Kosnett Comment:The Securities Industry and Financial Markets Association (SIFMA), the bond dealers’ trade association, runs the site and has a news feed as well. Some of the commentaries, though, are dated.

Robert W. Baird & Company

Web address: www.rwbaird.com

Key data: Relative yields of municipals and Treasuries

Best for: Analysis of taxable and tax-free bond markets

The managers of Baird Core Plus Bond fund and other excellent no-load income funds publish a combination of basics with just enough financial-market-speak to keep the pros happy with their Capital Markets Perspective. The insights live at Baird’s corporate site (address above) not the Baird Funds' consumer site. Offerings include both tax-free bond and taxable-bond commentaries. A recent subject is the tight supply of new bonds, which keeps prices high and yields low. There is also a colorful market commentary called, ahem, The Bull and Baird Blog.

Kosnett Comment: Baird’s municipal bond letter illustrates such basics as the ratio of tax-free bond yields to Treasury yields and the equivalent yield you need to earn on a taxable investment to net the same after-tax income.

Pimco

Web address: www.pimco.com

Key data: Outlooks and forecasts from the fixed-income behemoth (with $1.43 trillion under management) formerly known as the Pacific Investment Management Company

Best for: Investors who like to see commentaries and explanatory articles that put the market’s gyrations in perspective. For example, an article called “Emerging Markets Trying to Turn the Corner” makes the case for some, but not all, investments in those countries. The Pimco blog about the issues of the day is well-presented and with graphics.

Kosnett Comment: The departure of Bill Gross from Pimco changed this site from his soapbox to more of a team effort.

EMMA

Web address: www.emma.msrb.org

Key data: Muni bond trading details

Best for: Screening the tax-free bond universe for top yields

Electronic Municipal Market Access, from the Municipal Securities Rulemaking Board, shows every municipal bond trade, plus key background information about thousands of issuers. If you own tax-exempts, you can see a price graph for each bond based on months of trades, just as you can chart a stock or a fund. You can also screen the tax-free bond universe in detail. For example, when you search for all AA-rated Arizona water and sewer bonds due between 2024 and 2029, up pop the yields and other particulars.

Kosnett Comment: EMMA is easier to navigate if you know your bond’s CUSIP number.

REIT.com

Web address: www.reit.com

Key data: Historical returns and other performance information for real estate trusts going back to their invention in the 1960s.

Best for: Avid real estate investment trust fans and anyone who wants to see new offerings and news tidbits about the industry and its members. The site is run by the National Association of Real Estate Investment Trusts (NAREIT).

Kosnett Comment: It would be good if NAREIT would link to a resource that provides up to the minute data on the individual REITs’ net asset values and prices to book value. You need a brokerage link to that kind of research.

TCW

Web address: www.tcw.com

Key data: Monthly updates by sector, such as the High Yield and Mortgage Market updates. Find it all under Insights from TCW, a global asset management firm.

Best for: Bond fund investors, especially if you dabble in risky or unusual areas like junk bonds, mortgages and bank loans. There are also excellent forecasts and commentaries from the portfolio managers and analysts.

Kosnett Comment: This is some of the best perspective on individual bond-market segments and what’s driving them up or down.

Falling Credit Quality of US Firms (WSJ)

Mind The Bond Market Fractures — Credit Downgrades Highest Since 2009

by Wall Street Journal • October 12, 2015

 

By MIKE CHERNEY at The Wall Street Journal

Falling profits and increased borrowing at U.S. companies are rattling debt markets, a sign the six-year-long economic recovery could be under threat.

Credit-rating firms are downgrading more U.S. companies than at any other time since the financial crisis, and measures of debt relative to cash flow are rising. Analysts expect profits at large companies to decline for a second straight quarter for the first time since 2009.

The market for riskier debt has become snarled, raising fears that companies could have trouble repaying their obligations following several years of record debt issuance, low corporate defaults and persistently low interest rates. Reflecting those concerns, investors are now demanding more yield to own corporate bonds relative to benchmark U.S. Treasury securities.

The softening U.S. corporate fundamentals have been largely overlooked as investors focused on sharp declines in the shares, bonds and currencies of many emerging-markets nations. Many analysts say the health of China remains the largest source of uncertainty in the global economy.

But rising downgrades and an increase in U.S. corporate defaults indicate “some cracks on the surface” of the domestic-growth outlook, said Jody Lurie, corporate credit analyst at financial-services firm Janney Montgomery Scott LLC. Many investors closely monitor debt-market trends as an indicator of U.S. economic health.

Bond prices for some U.S. companies have suffered. A 2024 McDonald’s Corp. bond dropped from about 104 cents on the dollar in April to about 99 cents in June after an S&P downgrade in May, according to MarketAxess data.

Bond prices for some U.S. companies have suffered. A 2024 McDonald’s Corp. bond dropped from about 104 cents on the dollar in April to about 99 cents in June after an S&P downgrade in May, according to MarketAxess data. PHOTO: MIRA OBERMAN/AGENCE FRANCE-PRESSE/GETTY IMAGES

In August and September, Moody’s Investors Service issued 108 credit-rating downgrades for U.S. nonfinancial companies, compared with just 40 upgrades. That’s the most downgrades in a two-month period since May and June 2009, the tail end of the last U.S. recession.

Standard & Poor’s Ratings Services downgraded U.S. companies 297 times in the first nine months of the year, the most downgrades since 2009, compared with just 172 upgrades. Meanwhile, the trailing 12-month default rate on lower-rated U.S. corporate bonds was 2.5% in September, up from 1.4% in July of last year, according to S&P.

About a third of the downgrades targeted oil and gas companies or firms in other commodity-linked industries, following a plunge in oil prices in the second half of 2014, said Diane Vazza, head of global fixed-income research at S&P.

Corporate finances are on the decline in other sectors, too. Wireless provider Sprint Corp., hotel and casino operator Wynn Resorts Ltd., insurance company Genworth Financial Inc. and pet-supplies company PetSmart Inc. were among the companies downgraded by S&P this year, highlighting the breadth of industries affected.

Those companies are in the junk category, meaning they are rated double-B-plus or below, but even higher-rated companies like McDonald’s Corp. and Mattel Inc. have been downgraded this year.

Bond prices have suffered. A Sprint bond maturing in 2025 fell from about 96 cents on the dollar to about 77 cents in September after Moody’s downgraded the company. A 2024 McDonald’s bond dropped from about 104 cents in April to about 99 cents in June after an S&P downgrade in May, according to MarketAxess data.

“We’re seeing more widespread weakness across more industry sectors in the U.S.,” Ms. Vazza said. “It’s become broader than just the commodity story.”

U.S. companies have increased borrowing to levels exceeding those just before the financial crisis, as firms pursue big acquisitions and seek to boost stock prices by buying back shares. According to one metric, the ratio of debt to earnings before interest, taxes, depreciation and amortization for companies that carry investment-grade ratings, meaning triple-B-minus or above, was 2.29 times in the second quarter. That’s higher than the 1.91 times in June 2007, just before the crisis, according to figures from Morgan Stanley.

“The metrics that you measure health and credit by have peaked a while ago,” said Sivan Mahadevan, head of credit strategy at Morgan Stanley. “They are beginning to deteriorate.”

Many investors and analysts say the concerns are overdone. They note that the U.S. economy is still expanding and that many large firms continue to raise money at historically low rates. They say the U.S. unemployment rate, which held at 5.1% in September, is the lowest since 2008, despite unease over slowing economic growth overseas.

While “there are some areas of weakness,” Ms. Lurie said, “there are many other points to show positive economic growth.”

Corporate finance chiefs have been willing to absorb downgrades because a stellar rating has become less important, with little price difference between some bonds with ratings a few notches apart. And until recently, companies had little trouble selling debt regardless of their rating.

But lately some companies, including the U.S. arm of Spanish bank Banco Santander SA, have had to pull bond deals and others, like chemical producer Olin Corp., had to pay higher interest rates than initially expected. Bankers lowered the price and increased the interest rate recently on a loan being sold to investors for insurance brokerage Integro Ltd., according to S&P Capital IQ LCD.

Another cause for concern: the earnings outlook is starting to dim, as slower growth in China and low commodity prices begin to hit firms’ revenue. In the third quarter, earnings for S&P 500 companies were expected to decline 5.1% over the same quarter last year, according to data as of Sept. 30 from FactSet. That follows an earnings decline of 0.7% in the second quarter compared with the year ago period.

Big U.S. companies with global footprints, like Caterpillar Inc., Monsanto Co. and Hewlett-Packard Co., have all announced layoffs in recent weeks. Analysts and investors say a strong U.S. dollar compared with currencies in other countries will hurt some U.S. companies’ revenues in the coming months.

Worries about companies’ financial health have pushed the difference in yield—called the spread—between corporate bonds and ultrasafe U.S. Treasurys to its highest level in more than three years, according to Barclays data. A bigger spread means investors want more interest relative to Treasurys to compensate them for the added risk of buying corporate bonds.

The spread for investment-grade firms recently hit 1.71 percentage points, up from 0.97 percentage point in July 2014, a move that analysts warn has foreshadowed broader economic troubles in the past.

“We are less dependent on global growth than many other developed countries, but we are not immune to the weakened economic fundamentals outside the United States,” said Gary Cloud, a portfolio manager who helps oversee the $463 million Hennessy Equity and Income Fund.

Source: Cracks Emerge in Bond Market – WSJ

New Money Market Rules (Pensions & Investments)

Don't delay moves on money market, investors warned

By: Rick Baert

Published: September 21, 2015

Among the issues with delaying, they warn, are the potential for investment losses and reduced liquidity from a last-minute rush to the exits that could negatively affect the nearly $1 trillion of assets now in institutional prime funds.New rules requiring floating net asset values and potential withdrawal restrictions on institutional prime money market funds won't take effect until October 2016, but some money managers and consultants are warning the time to move out of them is now.

“I understand why some people might have the perspective that it's too early. ... But it's not too early to have these conversations,” said Kimberly Gillett, manager research analyst-U.S. fixed income, Towers Watson & Co. LLC, New York. “Decisions will need to be made, and if you can already make the change to Treasury and government money market funds, it's an easy change to make.”

Prime funds are popular tools for pension funds, endowments and foundations, and custodians for cash sweeps and short-term transitions for rebalancing; they're seen as highly liquid with a set $1 NAV. But on Oct. 14, 2016, Securities and Exchange Commission rules will require floating NAVs on institutional prime money market funds, and the boards of money market funds will be allowed to impose fees and restrictions on investors that want to withdraw funds in times of financial crisis.

Retail prime funds will keep the fixed $1 NAV but their boards will be allowed to impose the same fees and restrictions as institutional funds; government money market funds will have the fixed NAV as well, but will have no fees or restrictions.

No exodus

Sources at money market fund managers interviewed for this story agree there's been no exodus by institutional investors.

“In the institutional prime market, there's about $900 billion now, about the same as in July 2014” when the SEC approved the rule change, said Thomas Callahan, managing director, co-head of BlackRock Inc.'s global cash management group, New York. “There's been a lot of talk about a grand shift from prime to government funds, but industry flows haven't indicated that it has happened — yet.”

Brandon Swensen, senior portfolio manager, co-head of fixed income at RBC Global Asset Management (U.S.), Minneapolis, argued that now's the time to make the change as the maximum allowable maturity for securities in prime funds is 13 months. “We're at 13 months before the regulations take effect, so the composition of prime funds means that people should act now,” Mr. Swensen said. “There's no perception of any risk before October 2016. ... But through time, as more money moves, there could be dislocation, a large-scale liquidation of securities at the same time. That could cause some potentially serious problems.”

Bud Person, executive vice president, wealth management and cash division, Federated Investors Inc., Pittsburgh, said the shift in assets to government from prime funds could affect spreads. “We do think with any meaningful shift, a couple hundred billion dollars or more, that you could see as a result that spreads would widen. It's just supply and demand. If you have some investors selling out of prime funds and into government funds, government yields will stay lower and prime yields could go up.”

That could make prime funds attractive even with a fluctuating NAV, said Mr. Person, “so you may have some institutional investors staying with prime funds despite the new rules. Those fluctuating NAV prime funds could have the potential to outperform certain government funds in certain time periods and circumstances. Institutions will have to look at prime funds not just with their yield but on a total-return basis.”

Declining yields of government money market funds could make them off limits to many pension funds whose investment committees have limits on how low yields on approved investments can go, said Robert Zondag, co-managing partner, American Deposit Management LLC, Delafield, Wis.

“Many committees have investment policies that limit what they can use from both yield and safety perspectives,” Mr. Zondag said. “Such constraints could limit their options, especially close to the October (2016) date.” ADM is an institutional cash manager with about $5 billion in AUM.

'3 powerful market currents'

BlackRock's Mr. Callahan said that money market reform is one of “three powerful market currents colliding simultaneously,” along with the ramifications of Basel III banking regulations and future changes in the Federal Funds rate.

He said hundreds of billions of dollars being pushed by banks to government money market funds because of Basel III “could aggravate the shortage of government collateral and make government funds more expensive.” Also, the yield premium in institutional prime funds relative to government funds will be partially determined by the level of the Fed Funds rate. “Right now that spread is about 12 basis points,” Mr. Callahan said. “Is that enough premium to move from a (constant NAV) government fund to a (fluctuating NAV) prime fund? Probably not. But if rates go up, is 20 basis points enough compensation? 30? 50?”

Those uncertainties, not any foot-dragging, are the real reason asset owners aren't acting, Mr. Callahan said. “Those concerns make institutions uncertain, and when they're uncertain, they watch and wait. That's what you're seeing now.”

Mr. Swensen of RBC Global and Towers Watson's Ms. Gillett both warned that another unintended consequence of the new rules could be what Ms. Gillett called a “potentially interesting scenario” involving overall corporate bond liquidity. “There are definitely issues concerning liquidity if everyone tries to move assets all at the same time,” she said.

“There's an indirect aspect of this that's difficult to quantify, but there is linkage” between a large outflow from prime funds and corporate bond liquidity, Mr. Swensen said. “Prime money market funds are a sizable holder of corporate bonds. That will significantly shrink as a result of the outflows, and a sudden rush (to) exits could have a negative effect on corporate bond financing. Corporate bonds will price lower liquidity into spreads (on the secondary market). The sudden shrinking of prime money market funds will be another direct hit on corporate bond liquidity.”

However, Messrs. Person and Callahan disagreed, saying liquidity won't be an issue. “The repo markets are contracting rapidly, a lot of issuers are terming out their short-term debt, and Treasury bill supply is shrinking,” Mr. Callahan said. “With large demand and limited supply in the front end, we are confident liquidity will be substantial for prime funds.”

Peter Yi, senior vice president and head of short-duration fixed income, Northern Trust Asset Management, Chicago, said he expects institutions to make the move from prime funds starting early next year.

“It all depends on what's the right liquidity solution,” Mr. Yi said. “If a balanced solution exists today, then we encourage them to move when they are ready. If not, we want to start working with them now to think about all the enhancements they think they need to improve their liquidity management experience. ... I'd say in early to mid-2016, we think that's a good time frame to conclude our final discussions and put this all together with thoughtful recommendations.”

Original Story Link: http://www.pionline.com/article/20150921/PRINT/309219981/dont-delay-moves-on-money-market-investors-warned

Making Money from Volatility (WSJ)

Playing The Market Plunge
The Return of Volatility Has Investors on Edge. Here's What to Do Next
By JEFF D. OPDYKE, JANE J. KIM, ELEANOR LAISE and LAURA SAUNDERS

Lest anyone had thought the rally of the past 14 months had restored calm to the stock market, Thursday's trading action was a reminder that the investing game is as dicey as ever.

During one brief afternoon spasm in which the Dow Jones Industrial Average plunged nearly 1,000 points, happy assumptions about the markets' solid footing and the U.S. economy's enduring recovery were wiped away. More selling on Friday reinforced the growing sense of unease.


"People had been thinking, 'Oh, that [global financial crisis] thing; I'm glad that's over,' and we're back to the races again," says Rob Arnott, chairman of Research Affiliates, a Newport Beach, Calif., investment firm. "But when expectations are that everything is fine again, a bolt from the blue can come from anywhere to send this market lower very quickly. It's a wake-up call that risk remains in the system."

Most unsettling was the apparent lack of an explanation for Thursday's violent swing. With the Greek debt crisis as a backdrop, some pointed to glitches in computer-trading programs. But upsets in a mechanism as complex as the global financial markets have no simple causes. Regulators and economists are poring over the trading tape in search of an answer.

It wasn't only individual stocks that were whipsawed. Several exchange-traded funds—portfolios that are listed on stock exchanges—traded at zero for a spell on Thursday. One, Vanguard Industrials, a basket of 372 stocks, fell from $54.66 to zero at 2:46 pm, then shot back up around $40 by 2:48 pm, then crashed right back down to 20 cents at 2:54 pm, then leaped back up by $54 by 3:06 pm.

The good news was that many of the trades that took place during those perilous few minutes are being canceled. The bad news is that the Dow still lost 5.7% for the week, its worst performance since March 2009.

Greece has investors the world over fretting that an economic contagion will sweep through Europe, which could, in turn, undermine major U.S. companies that sell into the European market. And although the U.S. economy is looking a bit healthier these days, fund managers say analysts' earnings estimates for U.S. companies are inflated by unrealistic profit-margin expectations; if earnings later this year start to arrive lighter than expected, the stock market could again see a sell off.


This week's instability and the possibility of more troubles have prompted investors like Maureen Green to rethink their portfolios. The 62-year-old retired nurse in Sarasota, Fla., estimates she lost about $40,000 on Thursday and is now planning to sell a chunk of her stocks. She says that until this week she had considered herself an aggressive investor, with 65% to 75% of her investments in stocks. Now, she's planning to bring that equity allocation closer to 55%.

"After having gone through the last two years," Ms. Green says, "there was such a lump in my stomach. It's too scary, especially when you're retired and this is what you're living on."

At times like these it is important to remember that the soundest investment strategies are built on level-headed stability and long-term execution. Not only can periods of high volatility be tamed—they can even create opportunities for profits.

Investors concerned with safety needn't flee stocks entirely to tone down their portfolio's risk. Lou Stanasolovich, president and chief executive of Legend Financial Advisors in Pittsburgh, offers clients several low-volatility portfolios that combine bond holdings with stock-focused funds that can also trade options or sell stocks short. Shorting involves selling borrowed shares in the hopes of buying them back later at a lower price.

Legend's most conservative portfolio, designed to have less volatility than an intermediate bond fund, has a 75% bond allocation. But it also includes mutual funds like Hussman Strategic Growth, which can use options and index futures to reduce exposure to market swings, and Caldwell & Orkin Market Opportunity, which uses short-selling and other strategies to neutralize the negative impacts of falling stock prices.

Investors who simply want to insure against a big market tumble can buy "put" options that rise in value as a broad-market index like the S&P 500 declines because they allow the owner to sell the index at a higher level.

Another options strategy that can help tamp down volatility: covered-call writing, which involves selling call options on stocks you already hold. (Selling a call obligates you to sell the shares at a predetermined price on or before a predetermined date.) The "premium" you receive—the price of the option that the buyer pays to you—tends to rise along with market volatility, and that income can provide some buffer against modest stock declines. In market rallies, however, this strategy lags because, amid soaring prices, stocks get called away by the buyer of the call options.

People who don't want to dabble directly in options trading can pursue this strategy through a fund such as the PowerShares S&P 500 BuyWrite ETF.
Investors seeking insulation from the market's ups and downs might also consider a counterintuitive step: buying direct exposure to market volatility. The iPath S&P 500 VIX Short-Term Futures exchange-traded note, for example, seeks to mimic the Chicago Board Options Exchange Volatility Index, or VIX.

Since volatility spikes tend to coincide with stock-market crashes, such an investment should zig when stock holdings zag and provide "a way to smooth out the entire portfolio," says Paul Justice, associate director of ETF research at investment-research firm Morningstar Inc.
Matthew Tuttle, a financial adviser in White Plains, N.Y., actually made money on one of his portfolios during Thursday's wild ride. He had a 15% position in the iPath exchange-traded note. That position, which gained 12% on Thursday, helped Tuttle's portfolio—which also holds gold and is short Treasurys—eke out a 1% gain for the day.

"Initially, when we put the trade on, it was a protection strategy," says Mr. Tuttle, who added the VXX in March. But he says he's also been able to profit from the position, which is up 31% since he bought it.

People can also invest in "bear market" funds, which aim to move in the opposite direction from specific market indexes. Though these funds do well in down markets, "their long-term returns haven't been very good,' says Russel Kinnel, director of fund research at Morningstar. ProFunds' UltraBear ProFund, for example, posted total returns of 65% in 2008, lost 52% last year and is down about 7% so far this year.
Meanwhile, so-called long-short, market neutral and absolute-return mutual funds, which follow hedge-fund strategies in hopes of generating returns in any market environment, can help pare losses in a down market, but often lag during a bull run.

A market plunge is also a good opportunity for investors to evaluate their diversification strategies. Diversification isn't only about owning a broad mix of drug stocks, retailers and energy companies. The practice takes many forms—across asset types, time and credit profiles, among others.

Over the last decade, even a strategy as simple as holding 60% stocks and 40% bonds beat the Standard & Poor's 500-stock index by more than six percentage points, and with far less risk. Over long periods, owning exposure to multiple types of assets, from stocks, bonds and cash to alternative assets like real estate, gold and commodities, can smooth the ride and boost returns.

In shorter time periods, diversification is less of a cure-all. An extreme downdraft can pull many asset classes down at once. During the financial crisis, notes financial planner Dean Barber in Lenexa, Kan., 38 of 41 asset classes declined at once—everything but cash, gold, and short-term Treasurys. So investors should be mindful of their time horizon: the sooner they need their money, the more of it should be in cash.
The strategy known as dollar-cost averaging is an easy way to diversify away the risk of time: by buying stocks in regular intervals rather than all at once, investors can lower the risk that they're jumping in at a short-term market top.

Grant Gardner, research director at Russell Investments, recommends investors also diversify across credit risks. How sound, for instance, is the insurance company that sells an annuity, or the municipality backing your local-government bonds? Concentrating too many of your assets in a single financial-services company can expose a portfolio to the risk that a major upheaval disrupts that firm's operations.

Finally, investors should marshal their cash smartly. For a decade or more, Wall Street's financial-planning machinery has claimed to have optimized the investing equation and boiled it down to simple calculations encouraging investors to abide by asset-allocation models heavy reliant on stocks, bonds and alternative assets. Cash was generally limited to a small fraction of an overall portfolio.

Yet cash serves a useful purpose, even if it earns paltry yields. It's emotional ballast.
In moments of unexpected market convulsions, low-cash portfolios are more painful both financially and psychologically. During Thursday's meltdown, for example, Christopher Schons, an aviation-policy analyst in Arlington, Va., watched nearly 10% of his family's wealth vanish on paper in just minutes. "I felt like I was in a Dali painting," he says.

Mutual-fund firm Invesco takes a "barbell" approach in its Charter Fund that is easily applicable to individual investor portfolios: 80% to 85% of its assets in investments on one side and 15% to 20% in cash on the other.

"Cash doesn't have market risk," says Ron Sloan, chief investment officer of Invesco's U.S. core equities group. "Don't be afraid to leave money on the table for your own sleeping comfort."

—Jason Zweig contributed to this article.
Write to Jeff D. Opdyke at jeff.opdyke@wsj.com, Jane J. Kim at jane.kim@wsj.com, Eleanor Laise at eleanor.laise@wsj.com and Laura Saunders at laura.saunders@wsj.com

Printed in The Wall Street Journal, page B7

Bonds that Keep Up with Inflation (Forbes)

Forbes.com
Intelligent Investing Panel
The Case For Corporate Bonds
Alexandra Zendrian 02.10.10, 6:00 AM ET


Corporate bonds and equities have much in common--they have both had significant rallies since last March, and there are still opportunities in both markets for those willing to look for them.

"Default rates are down, and corporate earnings are improving," says Calvert Investments Chief Investment Officer Cathy Roy. She advises investors to buy corporate bonds from companies with strong fundamentals. Roy adds that investors should buy short-term bonds with durations of between two and five years as interest rates are slated to go up soon.

Knowing this Roy says floating-rate bonds are a good defensive play, as when interest rates go up these bonds get a boost. Calvert is underweighting mortgage-backed securities, as there doesn't seem to be a natural buyer in that market, and is also underweighting Treasuries.

Some financial advisors say corporate bonds are the best of a beleaguered bunch. To wit, corporates are in a much better place relative to Treasuries, says Shannon Zimmerman, an analyst with Motley Fool. This is because much of corporate America is deleveraging, while the government is taking on more debt.
.

Still, since higher interest rates and inflation seem increasingly imminent, bonds could be adversely affected.

As a result, Zimmerman says to look to bond alternatives. One way is for investors to take about half of their fixed-income assets and put them into blue-chip dividend stocks like: Johnson & Johnson, PepsiCo, Coca-Cola Company and Kraft Foods. That way investors gain a more steady income stream through dividends but remain exposed to the upside of equities market.

This is also the time to consider Treasury Inflation-Protected Securities (TIPS), Zimmerman says. TIPS prosper in an inflationary environment because they rise with inflation.

In this recovery Advisors Asset Management Chief Executive Officer Scott Colyer anticipates lower-quality corporate bonds will recover better than higher-grade ones. Why? Because during recoveries riskier investments tend to outperform safer ones.

Not all agree. Brent Burns, president of wealth management firm Asset Dedication, says that investors should aim for higher-rated bonds because of their security. Since he anticipates some AAA companies will not maintain that status for long, he recommends AA bonds, as AA is the new AAA.

Burns recommends investors purchase individual bonds as they provide more control over their portfolio than an exchange-traded fund. This is because with an ETF you are stuck with the entire basket of bonds, whether you want them all or not. LPL Financial Chief Investment Officer Burt White also sees some opportunities in investment-grade corporate bonds. "Once corporations embark on a path of deleveraging and cleaning up balance sheets, corporate bonds benefit over long periods of time," he says. He adds that "corporate credit-quality trends tend to be long-lasting." White says that as companies' balance sheets get healthier, "the prospect for narrower yield spreads suggests additional room for improvement."

Though White sees opportunities in investment-grade corporate bonds, high-yield bonds remain his firm's favorite fixed-income investment. "Following the past two recessions in the early 1990s and 2000s, high-yield bonds posted impressive outperformance for the subsequent two years following a bottom in the economy and a period of underperformance," he says. White anticipates these bonds delivering high single-digit or low double-digit returns.

Other financial advisors prefer exchange-traded funds. "Most individual investors probably shouldn't buy individual bonds because of the lack of diversification," says Klingman & Associates Chief Executive Officer Gerry Klingman. He recommends the iShares IBOXX Dollar Investment Grade Bond Fund ETF and mutual funds such as the Dodge and Cox Income Fund (DODIX) and Vanguard Intermediate-Term Investment Grade Fund (VBIIX).

Investors mindful of the potential rise in interest rates can also try the Leader Short-Term Bond Fund (LCCMX). It's top five holdings are the Freeport-McMoran Copper & Gold Floating-Rate Note, Fifth Third Bancorp FRN, Citigroup FRN, Hertz 10.5% and General Electric Capital Corp.

John Lekas, president of Leader Capital, adds that investors should avoid emerging market funds because they can become so volatile so quickly. For an example, one need look no further than Dubai, where news of widespread defaults sparked a near panic.

GM Reaches a Deal with Largest Bondholders (NY Times)

May 28, 2009, 9:42 am

click link for the SEC filing

G.M. Reaches a Deal With Bondholder Committee
General Motors said in a regulatory filing on Thursday that it has proposed a new deal to a committee representing many of its largest bondholders, offering up to a 25 percent stake in exchange for not opposing G.M.’s reorganization plan.
The filing also fills out many of the details of that plan, crafted under the eye of the Treasury Department.

Under the terms of the deal, G.M.’s bondholders would receive a 10 percent stake in the newly reorganized carmaker. They will also receive warrants to buy an additional 15 percent of a new G.M. if the company rises to a certain level of value.

GM Bondholders Hanging Tight - NY Times Dealbook

May 22, 2009, 8:03 am

G.M. and Creditors Face White-Knuckle Weekend
The long weekend will be anything but a holiday for General Motors, the giant automaker struggling to stay out of bankruptcy protection.

The company reached a deal Thursday with its union on concessions, but it is now racing the clock to persuade its bondholders to eliminate $27 billion in debt and avoid a bankruptcy filing.

G.M. has until Tuesday to persuade thousands of bondholders to agree to swap their debt for equity, which would fulfill its last significant requirement for restructuring ordered by President Obama. There appears to be little chance that the required 90 percent of bondholders will agree to its terms, making the prospect of bankruptcy increasingly likely for G.M., The New York Times’s Bill Vlasic reported.
Analysts said that the United Automobile Workers’ deal with G.M., which followed similar concessions to Chrysler, will increase pressure on bondholders to accept the company’s offer.

“I think there’s a shot it will succeed, but a very small one,” David Cole, chairman of the Center for Automotive Research in Ann Arbor, Mich., told The Times.
A coalition of small bondholders protested the terms of G.M.’s offer in Washington on Thursday. Larger, institutional bondholders have also opposed the deal, which calls for them to receive 225 shares of G.M. stock in exchange for each $1,000 worth of debt.
A G.M. spokesman, Greg Martin, told The Times the company had made no decision on whether to extend the exchange offer beyond the Tuesday deadline.
“We have made it clear that our viability requires us to take these actions to restructure our operations and reduce the liabilities and debt on our balance sheet,” Mr. Martin said.

G.M., which is subsisting on $15.4 billion in government loans, has until June 1 to meet the broad criteria for restructuring spelled out by a special presidential auto task force.

Under a plan announced last month, the Treasury Department would control at least 50 percent of the stock in a restructured G.M. A health care trust for union retirees would have about 39 percent, with bondholders getting 10 percent and current shareholders the remaining 1 percent.

Advisers to a committee of G.M.’s biggest bondholders, representing about 20 percent of the $27 billion in bond debt, have repeatedly criticized the plan as unfair and designed to fail. They have also accused the government of seeking to use them as scapegoats for a potential bankruptcy filing. Under their own proposal, G.M. bondholders would own 58 percent of the reorganized carmaker. These advisers have said that they are willing to negotiate with the company and the government but have made no headway thus far.
As for the U.A.W., details of its agreement with G.M. are being withheld pending a ratification vote by 61,000 union workers in the United States, which is expected to take place next week. But the deal does include financing the retiree trust. People close to the talks said the union agreed to allow G.M. to finance half of its future retiree health care costs — estimated at $20 billion — with company stock.

The Obama administration hailed the agreement as an important step in G.M.’s comeback plan.

The U.A.W.’s president, Ron Gettelfinger, had been critical of G.M.’s plans to cut an additional 21,000 union jobs, as well as increase its imports of vehicles made in China, South Korea and Mexico.

Whether those job cuts are addressed in the agreement is still unclear. But by agreeing to amend its contract, the union can rightfully say it has completed the task laid out for it by the Treasury Department.

Since G.M. first appealed for government assistance last fall, the U.A.W. has made several modifications to its 2007 contract, including eliminating a program that guarantees paychecks to laid-off workers. By completing its agreement on health care, the union has heeded Mr. Obama’s call for shared sacrifice among all G.M. stakeholders to fix the troubled company.

“The union has worked very well to create the right optics and to be in sync with the message the White House has put out there,” John Casesa, a principal in the automotive consulting firm Casesa Shapiro Group, told The Times.

The U.A.W.’s deal with G.M. follows a similar health care agreement it reached with Chrysler, which is also surviving on government loans.

Despite the agreement, Chrysler was forced to file for bankruptcy protection on April 30 after it failed to persuade a group of banks and hedge funds to unanimously agree to take cash payments to retire $6.9 billion in debt.

Now G.M. will make one last push to persuade its bondholders to take equity for their debt.

G.M.’s president, Fritz Henderson, has said repeatedly that bankruptcy is a “probable” outcome because of the difficulty in persuading 90 percent of the bondholders to agree to its restructuring terms.
In the event of a bankruptcy filing, the bondholders may be offered less attractive terms in exchange for their debt.

“The financial community and the union trust have been in competition for this stock,” Mr. Cole of the Center for Automotive Research told The Times. “But with the union deal settled, the pressure is only going to increase on the bondholders.”

Financial Times: GM Bondholders to Obama: We Are Main Street

Private GM bondholders face large losses
By Nicole Bullock

Published: May 18 2009 19:34 | Last updated: May 18 2009 19:34

“Creditors have better memories than debtors,” says Chris Crowe, an electrician and home inspector from Denver, who stands to lose his son’s college fund on what has turned out to be a poor investment in the bonds of General Motors.

Quoting Benjamin Franklin, Mr Crowe made an impassioned plea for a better deal for GM’s bondholders during a rally of individual investors in Philadelphia last week. The group, which calls itself the “Main Street” bondholders, has also gathered in Tampa, Florida and Warren, Michigan. This week they head to Washington, DC, to lobby their congressional representatives. A press conference is planned for Thursday.

Small bondholders and large money managers alike oppose a government-backed plan that calls for them to swap their $27bn in bonds for a 10 per cent equity stake in GM. Without their support, GM is likely to follow its smaller rival Chrysler to bankruptcy court by the end of the month.

Individual investors hold about 20 per cent of the $27bn in unsecured debt in question. Beyond GM, individuals form a significant part of the overall US corporate bond universe – although their presence in this market is not as big as it is in the municipal bond market, where individuals are the bedrock buyers, or the stock market.

Data from the Federal Reserve show US households hold $1,600bn in corporate bonds, 25 per cent of the $6,300bn market. Typically, they are holders of blue-chip companies, rather than obscure small caps.

One of the main reasons for this is that retail investors and particularly retirees in need of income have been attracted by the higher yields that corporate bonds pay, against the background of a long decline in US interest rates.

Robert Williams, director of income planning at the retail brokerage Charles Schwab, said: “People look at their bond portfolio and they want to chase yield.

“There is no way around the fact that higher yields come with higher risk.”

Bondholders at the GM meeting in Philadelphia did not understand that risk as they scooped up GM bonds yielding 7 to 8 per cent. Several said they thought their money was relatively safe because they owned bonds instead of GM stock, even as the company’s business prospects deteriorated. Equity holders have a weaker position than bondholders in the event of a corporate default. GM also sold $4.7bn “retail notes” that were designed for individuals.

The GM bond dispute is playing out against a rally in corporate bonds, in spite of expectations of the worst spate of defaults in US history and larger losses than ever on the debt of companies in distress.

Since early March, US investment-grade corporate bonds have returned 6.7 per cent and high-yield bonds 23 per cent after losing 6.8 per cent and 26 per cent, respectively, in 2008, according to a Merrill Lynch index. MGM Mirage, the casino operator that warned of default just a few months ago, sold $1.5bn junk bonds last week.

Retail investors have recently poured cash into high-yield mutual funds at a record rate. They are drawn by high interest rates compared with the alternatives and a confidence that the losses will not be as severe as they might have thought a few months ago. If they are right, the rewards for this extra risk will be high.

The average yield on investment-grade bonds is 6.81 per cent and for junk bonds it is almost 15 per cent. The 10-year US Treasury yields 3.15 per cent.

However, the GM experience shows losses can be large when a corporate bond investment sours, a fact that will have been noted by many other individual holders of GM bonds.

With time running out on a June 1 deadline imposed by the government for GM to sort out sacrifices among its creditors, a bankruptcy filing looks likely. GM bonds fell to fresh lows last week with long-term debt quoted at less than 5 cents on the dollar.

GM’s bondholders argue that they are being asked for disproportionate concessions compared mainly with the United Automakers Union. Bond analysts largely agree. Unions will receive 39 per cent of GM and $10bn in cash over time for a $20bn claim that is related to a healthcare benefit fund and, like GM bonds, is unsecured.

The GM situation follows a bankruptcy at Chrysler where a group of its secured lenders, which did not inc­lude individuals, dismissed a debt-cutting deal as unfair.

The GM bondholders are calling on Barack Obama, US president, to intervene on their behalf for better terms in GM’s restructuring and for a voice in the negotiations. Only about 35 supporters attended the Philadelphia meeting and about 30 showed up for the rally the same day in Tampa. But the Main Street bondholders have one advantage over the large money managers who dominate the market and GM’s investors base.

“These retail bondholders might have a political lever to pull,” said a securities litigator at a big New York firm.

At last week’s rally, Mark Modica took the podium and said: “I have more than one reason to hope that GM stays out of bankruptcy.” Mr Modica not only holds GM bonds; he is also a manager at a GM dealership.

The group and the events are being sponsored by the 60 Plus Association, a non-profit conservative advocacy group for senior citizens.

Meanwhile, William Nast, a semi-retired lawyer from Harrisburg, Pennsylvania, is looking at a loss of almost $9,000 that he will not soon forget. “Maybe the next time I look for a car, I will look at a Ford,” he says. But he makes it clear he will probably steer well clear of Ford bonds.

Copyright The Financial Times Limited 2009

WSJ Deal Journal: Basis Trade ( Bond + Credit Default Swap)

May 4, 2009, 1:30 AM ET

The Brighter Side of ‘Evil’ Credit-Default Swaps
By Heidi N. Moore

Credit-default swaps have been demonized as having played a role in the struggles of insurer American International Group and in the collapse of Bear Stearns.

But these derivatives can be a force for good. Indeed, demand for credit-default swaps is among the factors spurring the revival in the market for corporate bonds. Large institutional investors, hedge funds in particular, are buying more investment-grade and high-yield corporate bonds of late and are pairing them with credit-default swaps to earn extra return, according to investment bankers.

The bond-swap combinations are called “basis packages,” though they aren’t sold together. The name refers to “basis trades,” a common way for investors to take advantage of the price differences between a derivative and the underlying security. In the current iteration, an investment bank sells bonds on behalf of a company and the buyers then buy swaps tied to the bonds. In the past month, this investment strategy has helped spur demand for bond offerings from Lenar, Supervalu and Toll Brothers.

Credit-default swaps are a kind of insurance policy against issuers defaulting on their debt. In the past few years, hedge funds bought swaps largely to bet a company might default, and then bought the underlying bonds because they needed to pair the so-called short (swaps) and long (bond) positions. Now, hedge funds want the bonds and are buying the swaps to juice their returns and pair the trade.
It can be a profitable strategy in volatile markets, which is one reason bankers say it has picked up steam in the past month.

Here is how the math can work: A hedge fund buys a company bond trading at 50 cents on the dollar and a swap tied to the debt at, say, 80 cents on the dollar. If the issuer defaults and the debtholders get, say, 30 cents on the dollar in a recovery, the hedge fund would have a loss of 20 cents on the dollar for the bonds but a return of 50 cents on the dollar on the swap.
Such basis packages drove hedge-fund interest in recent high-yield deals, such as Supervalu’s $1 billion offering on April 30, according to people familiar with the deal. Supervalu originally intended to sell only $500 million of bonds, but hedge funds looking to fill basis packages doubled the demand. These people say it was sold to 200 institutional investors. In fact, the Supervalu offering was spurred by what investment bankers call “reverse inquiry,” which means buyers actually approached the investment banks—Credit Suisse Group, Bank of America Merrill Lynch, Citigroup and Royal Bank of Scotland Group—seeking out a deal.

The strategy poses risks if investors have to sell positions to meet margin calls for the bonds or the swaps before either brings a return.

Credit-default swaps may not yet have a sparkling-clean reputation—but for many investors that is a secondary concern, since sitting around on piles of cash is no way for a hedge fund to live.

GM Bondholders Make Counter Proposal (Marketwatch)

Bondholders present plan to win GM control
By Shawn Langlois, MarketWatchLast Update: 10:24 AM ET Apr 30, 2009


SAN FRANCISCO (MarketWatch) -- General Motors bondholders on Thursday will present a counteroffer to the automaker's debt swap that would relieve creditors of their $27 billion of debt in return for a majority stake in the company.

The move, which also aims to ease concerns over the U.S. government nationalizing the Detroit giant, comes as similar talks between Chrysler and its debt holders reportedly were on the verge of collapse.

The ad hoc committee of GM (GM) bondholders said their plan would see them get 58% of the new company in return for debt forgiveness while saving U.S. taxpayers $10 billion in cash.
The union health-care fund, based on the $20 billion in benefits owed, would own 41%. Existing stockholders would receive 1% of the new GM under the plan.

Eric Siegart, senior managing director of Houlihan Lokey Howard and Zukin and financial advisor to the bond group, said the government would not get equity under the scenario because it would not have to reduce any of its $20 billion in loans.

"We do not believe that nationalizing one of America's largest and most important companies is the right policy decision for our country," he said.

The group plans to propose the plan to the Auto Task Force on Thursday afternoon, but President Barack Obama's team previously urged creditors to take the original proposed deal or risk getting even less in the courts.

Treasury officials have said that 90% of GM bondholders must take part in the exchange. The automaker has until June 1 to complete the debt-for-equity swap to avoid a bankruptcy filing.

GM shares gained 3.9% to $1.88 in early trades but are still down 92% in the past year.




Copyright © 2009 MarketWatch, Inc. All rights reserved.

it's out: GM OFFER TO BONDHOLDERS swapping stock for debt

This link will bring up more details of the offer:
http://www.gm.com/corporate/investor_information/exchange-offer/


GM to offer $27 billion stock-for-debt swap

By Christopher Hinton
Last update: 8:36 a.m. EDT April 27, 2009
NEW YORK (MarketWatch) -- General Motors Corp. (GMGeneral Motors Corp


GM) said Monday it intends to offer $27 billion in common stock to its debt holders as part of a restructuring plan. According to the Securities and Exchange filing, GM will offer 225 shares of common stock to each $1,000 of debt. The Detroit automaker values the offer at $27.2 billion, and has set a deadline for debt holders to respond by May 26. "Exchange offers are a vital component of GM's overall restructuring plan to achieve and sustain long-term viability and the successful consummation of the exchange offers will allow GM to restructure out of bankruptcy court," the company said in a statement

Financial Times: GM's New Offer to Bondholders

GM plans new offer to holders of bonds
By Bernard Simon in Toronto

Published: April 24 2009 03:00 | Last updated: April 24 2009 03:00

General Motors is set to make a fresh debt-exchange offer to its unsecured bondholders on Monday consisting almost entirely of equity in the beleaguered carmaker, which would be far less generous than previous offers.

GM, which is racing to meet a June 1 restructuring deadline set by the US Treasury, will also soon outline a fresh set of proposals to the United Auto Workers union aimed at reducing labour costs. In February, GM demanded the UAW accept shares rather than cash for half of its contribution to a union-managed healthcare trust to be set up next year.

The plan required unsecured bondholders to exchange at least two-thirds of their holdings, with a face value of $27bn, for equity and other securities. GM's last offer totalled 24½ cents on the dollar, comprising 8 cents in cash and 16½ cents in new unsecured debt.

But the US administration's industry taskforce has demanded deeper sacrifices.

Neither the bondholders nor the union are keen to commit themselves without knowing what deal has been cut with the other. However, legal requirements, such as minimum offer deadlines, have forced GM to give priority to the bondholders.

Separately, the deadline for Delphi, GM's biggest parts supplier, to reach agreement on outstanding issues with GM has been extended to May 4.

Production cuts

General Motors plans sharp cuts in its North American vehicle production this summer to bring down swollen inventories caused by the steep drop in demand for its cars and trucks.

The embattled carmaker also ascribed the cutbacks to concern about the stability of Delphi, its biggest parts supplier, which has been struggling to emerge from bankruptcy protection for more than three years.

GM said the normal two-week summer shutdown would be extended by one to eight weeks at 13 of its 20 assembly plants in an effort to reduce dealer inventories.
Copyright The Financial Times Limited 2009

CNN: GM not paying June 1 interest

GM won't make $1B June debt payment

June payment would be due a day after government's deadline for company to submit restructuring or bankruptcy plan.

By Peter Valdes-Dapena, CNNMoney.com senior writer
April 22, 2009: 1:10 PM ET

NEW YORK (CNNMoney.com) -- General Motors won't be making a June 1 debt payment of $1 billion, a company spokeswoman said Wednesday.

The debt is due the day after GM's government-imposed May 30 deadline to have an aggressive restructuring plan in place or be left to face bankruptcy.

GM (GM, Fortune 500) said it wouldn't make the June 1 payment because as part of its restructuring, the company will be offering to exchange bondholder's debt for equity in the company.
"We're going to have an exchange offer open anyway," said GM spokeswoman Julie Gibson.

A press representative for GM bondholders was not immediately available to comment.

While GM CEO Fritz Henderson has said that bankruptcy has become "more likely" in recent weeks, he has also said that an out-of-court restructuring remains a viable option.

GM has received $13.4 billion in federal loans and could receive an additional $5 billion before May 30. Beyond that, the Treasury department task force overseeing restructuring for GM and Chrysler has not said how much more support GM might be eligible to receive if it is able to restructure and reduce its debts and other obligations.








Find this article at:
http://money.cnn.com/2009/04/22/autos/gm_june_debt

OBAMA PLAN: GM BOND HOLDERS TO GET STOCK (REUTERS)

EXCLUSIVE-UPDATE 3-GM readies all-equity offer for debt-sources
Sat Apr 18, 2009 1:30am BST



* Equity conversion for bondholder, UAW debt-sources

* Offer targets $48 bln of debt in equity exchange-sources

* Treasury could convert its own loans to GM stock-sources (Adds analyst comment)

By Soyoung Kim and Emily Chasan

DETROIT/NEW YORK, April 17 (Reuters) - The Obama administration has directed General Motors Corp (GM.N) to prepare a new restructuring plan that would pay off bondholders and the automaker's major union in stock in exchange for $48 billion in debt, people briefed on the plan said on Friday.

The U.S. Treasury, which has provided $13.4 billion in emergency funding to keep GM operating since the start of the year, has indicated that it could also convert those taxpayer-backed loans into GM stock, the sources told Reuters.

GM, which is working to complete a restructuring that could include a bankruptcy filing, plans to make the new proposals to bondholders and the United Auto Workers union within the next two weeks, the sources said.

The sources asked not to be identified because of the confidential nature of the talks between the automaker and President Barack Obama's autos task force, which is charged with retooling the U.S. auto industry.

GM and UAW representatives could not be immediately reached for comment. A Treasury spokeswoman had no comment.

The proposals emerged after two weeks of intense talks between the autos task force, headed by former investment banker Steve Rattner, and GM executives in Detroit.

The stock-based payout to GM's major union and its bondholders would represent much deeper concessions for both groups than the terms they had been offered under the GM bailout loans approved by the Bush administration.

"The task force was clear this was the best way for GM to achieve success going forward," said one of the sources.

Under the terms of its former restructuring plan, GM had aimed to cut its roughly $28 billion of bond debt by two-thirds and convert half of the remaining $20 billion it owes to its retiree health care fund in equity, rather than cash.

But the autos task force rejected that plan, saying GM needed to cut more debt from its balance sheet in order to be a profitable company.

It was not clear what specific terms the UAW would be offered, but both people briefed on the plan said the union's higher payout relative to bondholders would be maintained.

An equity-based debt exchange would make the union, the U.S. government and GM's existing bondholders all major stockholders in the recapitalized automaker.

Peter Kaufman, president of investment bank Gordian Group LLC, said GM bondholders would only agree to the terms of the deal under discussion if they feared they would do worse without such an agreement headed into a bankruptcy for GM.

"I continue to maintain that any deal that happens outside bankruptcy will result in an nonviable GM," he said. "Why would bondholders take this deal? Only if they feared that a worse deal would ensue in Chapter 11."

TWO-TRACK APPROACH

GM Chief Executive Fritz Henderson, who assumed the top job in late March when the Obama administration ousted his predecessor, Rick Wagoner, told reporters on Friday that GM management had spent the past two weeks working with U.S. officials on a revised business plan.

That plan, which will include more job cuts and plant closures, will be shared with bondholders and the union as talks on the planned debt restructuring intensify in coming weeks, he said.

Henderson said it was still feasible for GM to avoid bankruptcy, but said the automaker was also working on detailed plans for a filing if it is forced to take that route.

"From the perspective of bondholders and the union, equitizing their debt would heighten the need for GM to have a viable business plan and a management team to execute on it," Gordian's Kaufman said.

Earlier, a person familiar with the plans of a committee representing GM bondholders said the creditor group was willing to make "deep concessions" if GM can produce a viable business plan and get equal sacrifices from other stakeholders. [ID:nN17347408]

The talks between GM and the UAW and between the automaker and its bondholders have been largely stalled since February. Those negotiations have played out in parallel because both groups are negotiating an unsecured claim under the threat of bankruptcy.

The UAW, which has made a series of concessions to GM since 2005, has defended its proposed higher payout ratio of 50 percent versus roughly 33 percent for bondholders as justified by its prior actions.

The union agreed to create a trust -- known as a Voluntary Employee Beneficiary Association -- as the centerpiece of a ground-breaking 2007 contract intended to slash GM's costs. (Reporting by Soyoung Kim and Emily Chasan; writing by Kevin Krolicki; editing by Leslie Gevirtz, Richard Chang)

© Thomson Reuters 2009 All rights reserved.

(from the street.com ) Moody Comments on probability of GM Bankruptcy

Business News Update
GM Bankruptcy Chance 70%, Says Moody's
Ted Reed
04/07/09 - 11:58 AM EDT
Credit analysts fully expect a bankruptcy filing by General Motors

The likelihood is 70%, Moody's analyst Bruce Clarke said Tuesday, reiterating the odds he set in December. Meanwhile, KDP analyst Kip Penniman reiterated recently that: "We believe a pre-packaged Ch. 11 financial reorganization is GM's only path to successfully reducing its pre-existing liabilities and negotiating competitive labor contracts.

"We expect the (Obama) administration would prefer that Chrysler and GM restructure outside of bankruptcy," Clarke wrote. "(But) given the lack of progress achieved and the additional progress that will be required in the revised plans, this threat will need to be seen as credible in order to compel adequate movement on the part of stakeholders."

While it is possible the administration is bluffing, wrote Clarke, "any attempt to call that bluff could be a risky strategy."

The administration has identified three key restructuring targets for GM: reducing unsecured debt by two thirds, reducing wages and benefits in the United Auto Workers contract, and making half of its future contribution to the union-administered retiree health care trust in stock rather than cash.

Not only has GM so far failed to achieve these targets, but its problems are compounded because it is unlikely to meet assumptions in its plan regarding vehicle sales, cost savings, market share and pricing, Penniman wrote.

Among the problems pushing GM to file, Penniman wrote that while the UAW may agree to contract cuts, "it will prove a tough sell to the rank and file UAW members who will ultimately vote on the plan." Also, retirees are unlikely to back a plan to fund a share of their health care obligations with stock, and if the UAW agrees, "we would expect to see a very emotionally charged series of lawsuits filed against the UAW and GM.

Also, Penniman said, "there would remain a significant number of bondholders who would choose not to participate in any debt exchange." Meanwhile, secured lenders would likely be asked to voluntarily sacrifice collateral in order to provide super-priority status for government loans, but "any effort to cram down the secured lenders outside of bankruptcy court would set a dangerous precedent.

"We believe the chances that GM could accomplish all of this 'voluntarily' are essentially zero," he wrote.

Bankruptcy remains a possibility for the other Detroit automakers, Clarke wrote. He said the risk is "moderately below" 70% for Ford(F Quote - Cramer on F - Stock Picks), while Chrysler's risk is higher than 70%.
--------------------------------------------------------------------------------



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Ford: Good Response from Debt Buyback, Debt Downgraded (Bloomberg)

Ford Reduces Debt 38% With Buybacks of Bonds, Loans (Update3)


By Keith Naughton and Caroline Salas

April 6 (Bloomberg) -- Ford Motor Co., slashing costs to stay off government aid, said it trimmed $9.9 billion of borrowings as the company completed its largest debt restructuring.

The transactions, which reduce automotive debt by 8 percent, will “substantially strengthen Ford’s balance sheet,” the second-biggest U.S. automaker said today in a statement. Ford had sought to erase as much as $11.3 billion in notes and loans in a three-pronged effort. The company’s shares rose to their highest close in six months.

“It gives them more time, and the timing was really good because it would be a lot more difficult if they borrowed money from the government,” said Mirko Mikelic, senior portfolio manager at Fifth Third Asset Management in Grand Rapids, Michigan, which holds Ford bonds. “It’s always a great move when you can buy back your debt at 30 cents on the dollar.”

Ford on March 4 offered investors the chance to accept discounted payouts for the notes and loans, trimming debt costs as the automaker tries to stem losses that totaled $30 billion in the past three years. The Dearborn, Michigan-based company has avoided U.S. assistance, while General Motors Corp. and Chrysler LLC survive on $17.4 billion in federal loans.

The company, which lost a record $14.7 billion last year, said it will save more than $500 million in annual interest costs. The automaker and its Ford Motor Credit Co. finance unit will use $2.4 billion in cash and 468 million Ford Motor shares to repurchase the debt. The shares are valued at $1.76 billion based on today’s closing price.

Shares Rise

Ford rose 52 cents, or 16 percent, to $3.77 at 4:15 p.m. in New York Stock Exchange composite trading, the highest close since Oct. 3. The shares have gained 64 percent this year.

The automaker has enough liquidity left to remain self- sufficient and not seek government aid, Treasurer Neil Schloss said in an interview.

Should the U.S. auto market, which is at a 27-year-low, not recover, Ford is better shape to seek government aid, JPMorgan auto analyst Himanshu Patel in New York said in a research note.

“The exchange could be aimed in part at mollifying the concerns of various stakeholders and a possible precursor to eventual government aid,” said Patel, who has a “neutral” rating on Ford shares. “Ford has now accomplished a fair amount of what was asked of GM and Chrysler.”

Schloss said the debt restructuring “met all our expectations.” Shelly Lombard, an analyst for bond researcher Gimme Credit in New York, said he had expected more than $11 billion in debt to be retired.

Rating Lowered
Standard & Poor’s cut Ford’s corporate credit rating today to SD, or selective default, and said it would assign a new rating by mid-April based on the automaker’s balance sheet and business prospects. S&P said the new rating will likely not be higher than about CCC, or 8 grades below investment status. The previous rating was CC, or 10 steps into junk.
Fitch Ratings said the debt transaction are a “positive step in managing the company’s liability structure” and left Ford’s ratings unchanged. Fitch and Lombard at Gimme Credit said they were concerned that Ford access to funds is declining.

“With poor operating results now expected through 2009, Ford’s liquidity is becoming strained,” Lombard wrote today in a note. “Although Ford’s future still depends on a recovery in auto sales, the debt restructuring and union contract changes have decreased the chances of a Ford bankruptcy.”

Notes Rise

The automaker’s $579 million of 4.25 percent convertible notes due in 2036 gained 6 cents to 46.5 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The securities yield about 10 percent.

Ford Credit’s $3.5 billion of 7.25 percent notes due in 2011 were unchanged at 72 cents on the dollar, according to Trace. They yield 22.2 percent, or 21.3 percentage points more than similar-maturity Treasuries.

The automaker’s bonds gained 36.6 percent in March after Ford asked investors to swap their debt, according to index data compiled by Merrill Lynch & Co. That compares with a 1.9 percent return for GM securities, Merrill data show.
The automaker, which consumed $21.2 billion in cash last year, is tapping some of its available funds to finance the buybacks. Ford is using $344 million of its $13.4 billion in automotive cash, Schloss said. Ford Credit is spending $2.1 billion of its $18 billion in funds, he said.

‘Decisive Actions’

“Ford continues to lead the industry in taking the decisive actions necessary to weather the current downturn,” Chief Executive Officer Alan Mulally said in a statement.

The final phase of Ford’s offer, which ended April 3, included a cash-and-stock proposal valued at about 28 cents on the dollar to induce holders of $4.9 billion in convertible bonds to trade for the company’s common shares. Bondholders claimed $4.3 billion of that proposal, an 88 percent take rate that the company considered oversubscribed, Schloss said.

Ford also offered to spend $1.3 billion to buy back unsecured non-convertible debt. Holders claimed $1.1 billion of that amount, retiring $3.4 billion in debt, the company said.

Ford on March 23 also said an offer to repurchase its term loans was oversubscribed, prompting the company’s finance arm to double to $1 billion the cash it planned spend on the so-called Dutch auction. Ford said today that it will buy $2.2 billion of the principal amount of the debt, at 47 percent of face value.

The automaker had $25.8 billion of debt at the end of 2008 after borrowing $23.4 billion in late 2006, giving it more cash than GM or Chrysler. As collateral for that financing, Ford put up all major assets, including its headquarters and blue oval logo.

U.S. automakers are struggling after industry sales of cars and light trucks fell to a 16-year low in 2008 and declined 38 percent in this year’s first three months. Ford’s U.S. sales fell 41 percent in March.

To contact the reporter on this story: Keith Naughton in Southfield, Michigan at Knaughton3@bloomberg.net; Caroline Salas in New York at csalas1@bloomberg.net

Last Updated: April 6, 2009 16:34 EDT