Is Debt the New Equity?

As bond investors begin to experience never before seen risks, they are asking themselves if debt is the new equity.

Case in point – the investors who own the secured debt of Chrysler.  Even with the company teetering on the brink of insolvency, the bondholders felt confident that they would get most of their money back since they were first in line and the bonds are secured by land, machines and other hard assets.  That is, until the Obama administration tried to strong-arm the bondholders into handing over most of their stake to unsecured creditors like the UAW.

Now that Chrysler is in bankruptcy, the bondholders will at least be participating in a process that is based more on economic and legal rights than one driven by political power.

Outrageous and Dangerous Behavior

The tactics of the Obama administration would be considered reasonable on the part of market participants but are outrageous coming from the executive branch of the government.  Facing persecution from a president with unlimited money and power, the bully pulpit and effective control of the banks holding Chrysler debt, the secured bondholders found themselves in a true David vs. Goliath situation.

Thankfully, the creditors had the courage to stand their ground.  Had the Obama administration prevailed in politicizing capital seniority, confidence in the credit markets would have been greatly shaken and made it even more difficult and costly for business to raise capital in the U.S.

Debt Investing and ETFs

ETF investors should be careful to review the holdings of their funds’ portfolios before investing. The iBoxx $ High Yield Corporate Bond Fund (HYG) tracks an index designed to provide a balanced representation of the U.S. dollar-denominated high yield corporate bond market through some of the most liquid high yield corporate bonds available.  Top holdings include quality names (for the junk world) including Dollar General,IntelsatCSC Holdings and HCA.

Another high yield ETF is the SPDR Barclays Capital High Yield Bond ETF (JNK).  The State Street fund has a slightly different profile that includes holdings in HCA and Intelsat, but also in Citigroup and GMAC.

Although neither fund holds a significant stake in Chrylser debt, HYG appears to be a safer bet for ETF income investors.