High-Yield Bonds Return to Favor with Telecom Tumble.

SUDDENLY, a few of L.A.'s vulture investors -- those who land when most money mavens take flight -- are again buzzing about convertible and high-yield debt. Ever since junk bond wizard Michael Milken brought Drexel Burnham Lambert to Los Angeles in 1979, with its storied strength in non-investment grade debt, Southern California has been a stronghold of profit-hunters who like to stalk returns in the face of corporate death.

Though never a part of the Drexel crowd, Pasadena bond manager Jeff Rollert, co-founder of the firm ALM Advisers, likes the look of some telecom corporate IOUs these days, especially convertible bonds. Each week seems to bring bad news to the overbuilt telecom sector, driving stocks and bond values down.

"You see telecom convertibles (bonds) trading from 25 to 50 cents on the dollar (of face value)," said Rollert. "I buy and sell 'em like hand grenades. I bought a bunch of different issues." Rollert is banking on diversification and a few home runs to counteract the bombs. Some ailing telecom outfits will be bought by stronger entities, restoring bond values, reasoned Rollert.

He also noted's AOL Time Warner's announcement last week it will roll out an "on demand" video service. The nation has an abundance of "unlit" broadband cable, its use pinched by what analysts call "the last mile." Getting homes and small businesses hooked up to the Internet superhighway, at broadband speeds, has proven expensive and slow. "But what we see is that AOL is betting that the problems of the last mile are going away," said Rollert.

If true, that means a lot more video traversing the Internet -- and thus a lot more traffic for the big telecom houses, translating into survival.

For now, though, Wall Street is spooked on the telecoms, and even the steadier communication giants have been rocked. Global Crossing Ltd., the ouffit with nearly 100,000 miles of laid cable spanning the globe, saw its stock sink to below $5 a share in trading last week, off from an all-time high of $79 in March 1999.

Global Crossing stock may never reward investors, especially those who bought a couple of years back. But its senior bonds due 2008, paying 9.65 percent, are trading at 67 cents per $1 face value, and thus offer an effective yield to maturity of more than 18.3 percent, noted Larry Post, president and chief investment officer for Metropolitan West Financial Group in West Los Angeles.

Global Crossing doesn't have to prosper -- it only has to survive and honor its debts, for bond investors to do well. Even so, Post is steering clear of Global Crossing bonds for now. "We have avoided almost all of the telecom," said Post. "We are being somewhat conservative, and investing in bonds of late-stage workout solutions."

Recently Post bought Scottsdale, Ariz.-based financial house Finova Inc. bonds at around 70 cents on the dollar, and they've since recovered to nearly par. Finova submitted a Chapter 11 reorganization plan to bankruptcy court in May, the details of which are being haggled over now. Most players in the distressed debt sector feel they are in one of the few games on Wall Street that will make money.

Stocks, noted both Rollert and Post, still are trading at historically high multiples, near 30 times earnings, even as the nation apparently sinks into a recession. But with so much capital seeking safety, yields on government bonds, or corporate blue-chip IOUs, are in the low single-digits.

But a well-selected portfolio of high-yield corporate bonds can offer investors handsome double-digit returns while waiting for the equity market bottom.