From today’s Wall Street Journal article “Junk Funds Dabble in the Best of the Worst”

Source: http://online.wsj.com/article/SB123422518352665619.html

Why did this catch my eye? Value investors, like Mohnish Pabrai, love Sears stock now, and if value guys love the equity, the bond must be a steal.

Some managers, like Thomas Price of Wells Fargo Advantage High Income, are going for B-rated credits yet are avoiding the next rung down, triple-C. “The likelihood of bonds surviving there is lower,” he says.

One way managers like to pick bonds is to subject them to a stress test. The ideal they look for: issuers whose total debt is three times or less earnings before interest, taxes, depreciation and amortization. If the multiple is around 4.5, that is still good.

What managers call “the line of death” is six times. Thus, casino owner Harrah’s Entertainment Inc., whose multiple is 8.2, and retailer Michaels Stores Inc., at seven, are way too risky for all but the most intrepid of value hunters.

Mr. Vaselkiv holds bonds in the dicey retail sector — from Sears Holdings Corp., maturing in 2011. This retailer, like others, has seen same-store sales plunge lately, and its bond prices have been punished.

The Sears bond now changes hands for around 72 cents on the dollar. But the debt/Ebitda multiple is just 2.0.

So Mr. Vaselkiv’s bet is that the price will bounce back and meanwhile he will collect its rich yield, 21.5%. He is confident that Sears will weather the storm.

Sears’s Cash
“They’ve got $1.1 billion in cash and they’ve been buying back debt,” he says. The cash on hand is enough to buy back the 2011 bonds, and by then he figures the company will have an easier time raising capital.

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