When I was an investment grade corporate bond manager (2001-2003), my analysts would come to me and explain the credit metrics of the company whose bond we might buy. Now, that was a period of great stress in the credit markets. Often my analysts would stress that the low enterprise value to EBITDA ratio would help protect us, and it did.

Fast forward to 2006-2007. Companies with low enterprise value to EBITDA ratios are being taken private, and the corporate bonds with no change-of-control covenants are being downgraded to junk, because of the additional senior bank debt subordinating the old corporate bonds.

This is another situation where the manager wants Goldilocks. Not too hot, lest it be taken private. Not too cold, lest it default. It’s a tough situation to be in, and if I were managing a bond portfolio, I would move to higher quality with corporate bonds (not much yield give-up), while buying junk-rated corporate loans, so long as they have protective covenants.

It’s a tough situation. Clients want yield and safety, and the trade-off is tough. The best a corporate bond manager can do is to play it safe with spreads so tight, and wait for a better day to take credit risk.