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1415 - Fixed Income Investment

Fixed Income Investment

by: Richard Hamilton

With interest rates at 40 year lows it seems difficult to find fixed income investments with high yields. Money Market funds are paying investors about 1.4% and Commercial Paper is only yielding 2.3%. For those willing to commit their capital for longer periods of time, a 5 Year Corporate Bond yields about 5%.
How does an investor find a good, high yielding, fixed income investment without taking too much financial risk? Many investors are looking into bonds issued by privately held companies that have strong balance sheets. Unlike fixed income investments that trade publicly, privately held bonds do not trade and therefore do not go down in value when interest rates rise. In addition, private companies do not have Standard and Poors ratings and therefore must offer investors a higher yield to attract their capital. In many cases, private companies that issue high yield bonds are not willing to sell equity because they believe the company will be worth more money in the future and would rather pay a high yield to investors than an equity stake in the company. This fact alone is a good sign for investors looking for an alternative fixed income investment to publicly traded bonds.
As an example, Global Financial Credit, LLC (http://www.glofin.com) is issuing a private placement of 3 Year Notes with a 12% Coupon that pay interest quarterly. A $100,000 investment will yield $12,000 per year of income or $4,000 every three months. The company has been profitable in every year for the last 3 years and management is not willing to sell equity in the company. This is an excellent situation for fixed income investors to pursue because the fact that management will not sell an equity portion of the company is exactly the reason a debt investor should be interested in the high yielding fixed income investments they are issuing.
If you are an income oriented investor it is important to consider each investment carefully and diversify your investments to minimize risk. Although there are very few high yielding investments available in the public markets, with a little digging and research fixed income investors can find much higher yielding securities in the private market without taking on more risk.

About The Author

Richard Hamilton is an asset backed investment banker with 20 years of experience with Kidder Peabody and Emerson Capital, Inc. He is currently retired and is consulting private companies regarding financial instruments.
rhamilton@emersoncapital.com

This article was posted on December 27, 2004

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