Credit Rises From the Dead

If you're a high-grade credit, the bond markets are open for business. On Monday, Cisco Systems (Nasdaq: CSCO) completed a $4 billion bond offering. It's hardly an act of desperation -- Cisco is adding to its war chest for potential acquisitions. The company already has nearly $30 billion of cash and equivalents on its balance sheet, but much of that amount is held overseas and would incur taxes if it were repatriated.

January a record month
Cisco isn't the only quality issuer raising money, either: Non-financial companies issued $167 billion worth of bonds in January, the highest amount on record for that month and more than double the previous high mark of $80 billion recorded in January 2001, according to Dealogic.

The following table shows the top eight single U.S. investment-grade bond issues so far in 2009:

Issuers*	Size (in Billions of Dollars)
GE Capital (a unit of General Electric (NYSE: GE))	10**
ConocoPhillips (NYSE: COP)	5.95
AT&T (NYSE: T)	5.48
Verizon Wireless (NYSE: VZ)	4.23
Altria (NYSE: MO)	4.22
Cisco Systems (Nasdaq: CSCO)	4
GE Capital	3.94
Caterpillar Financial Services (a unit of Caterpillar (NYSE: CAT))	3

Source: Dealogic. *Non-financial firms only. **FDIC-backed.

High or low -- who has it right?
The situation results from favorable circumstances that have boosted supply and demand for highly rated bonds. For the best-rated companies, low corporate bond yields mean the opportunity to obtain funds at attractive rates. For investors, yields look appetizingly high. How does that work?

The answer to this paradox is that while corporate yields are low in absolute terms (good for the issuer), the difference between yields on corporate and U.S. Treasury bonds is high (good for investors who are in the business of bearing some risk in return for extra yield). That phenomenon, in turn, is a result of Treasury yields' having been exceptionally low recently -- on Monday, the 10-year bond yielded more than 3% for just the first time since November.

Take a lesson from bond investors
Still, the bond market is differentiating sharply between higher- and lower-quality issuers. In that respect, stock investors can take a lesson from their bond market peers: In this environment, it is vital to focus on companies with clean balance sheets that generate cash flows sufficient to repay debtors and reward shareholders.

Copyright © 2008 Universal Press Syndicate.