A split decision in boxing occurs when only two of the three judges scores a contender as the winner. In bondland split rated bonds means two of the rating agencies each rate the bonds quite differently. For example, perhaps Standard & Poor’s rates a bond issue as junk, while Moody’s rates it as low investment grade. If Fitch also rates the issue, they often agree with one or the other rating agency.
Trying to find yield in the bond market today is like trudging through a parched desert in search of an oasis. Here are a few split rated bonds whose future prospects look very good and they actually sport acceptable yields.
Attention Nordstrom shoppers! Nordie’s stayed in the game and its prospects based on the economy reopening look good. Nordstrom’s JWN +1% top line continues to improve. Debt is manageable at approximately $5.45 billion. During a recent analyst call, management said sales were, “below the zoom line,” meaning shoes, pants/slacks, dresses and suits should improve with an open economy. Digital sales have improved and if the company doesn’t do something stupid like the LBO it considered in 2018, these bonds have a good chance of being upgraded. This could create a 50-100 basis point spread, causing the bond price to rise.
One Nordstrom bond we like and own is the Nordstrom 4.00% due March 15, 2027 (CUSIP: 655664AS9). It’s split rated Baa3 by Moody’s, BB+ by S&P, and BBB- by Fitch. Bonds are priced around 106.20, 2.75% to the December 15, 2026 worst call and 2.80% to maturity.
If you are holding your nose over the big premium, remember you can amortize or capitalize the premium. Your brokerage firm should automatically amortize the premium and your CPA will use it as a deduction against income the bond generates. Consult your tax professional. I personally went for the yield and own the 2028 bonds.
A company you’ve probably never heard of is Ovintiv OVV +1.5%. It’s an energy producer of natural gas liquids and natural gas. The company’s cash flow and finances have improved and leverage looks like it will decline. Analysts expect free cash flow post dividend payments to be around $900 million this year. But it all revolves around crude oil demand and prices. Ovintiv Exploration bonds are rated Ba1 by Moody’s, BBB- by S&P, and BB+ by Fitch. If you don’t want a maturity too far out on the yield curve then consider the Ovintiv Exploration 5.375% due January 1, 2026 (CUSIP: 651290AR9) priced around 113.20 to yield 2.05% to the worst call of October 1, 2025 and 2.22% to the January 1, 2026 maturity.
Scratching around and studying split rated bonds is certainly a worthwhile endeavor as the Federal Reserve continues keeping rates low. Corporate balance sheets are in good shape and CFOs continually call in high coupon debt, then issue lower coupon debt or just extinguish that debt. They are doing their job and the consequences are positive.