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By Jeremy Glaser | 11-01-2010 12:50 PM

A 'Defensive' Bond Pick

Spirit AeroSystem's 2017 bond looks attractive, despite talk of defense budget cuts.

Jeremy Glaser: For I'm Jeremy Glaser. I'm joined today with Rick Tauber, Senior Credit Analyst, to take a look at the defense aerospace industry  to see if there are any credit opportunities.

Rick, thanks for joining me today.

Rick Tauber: Thanks. I appreciate it.

Glaser: There's a lot of talk about budget cuts or potential budget cuts. That's an area that could obviously have a big impact on the defense industry. How have the aerospace and defense companies kind of held up, how the bonds held up in an environment where there is a potential for some cuts to that budget?

Tauber: Sure. I mean, the bonds have actually performed quite well I would say and held up very well in the face of that uncertainty. In the higher quality space, the investment grade area, for example, Raytheon which is rated weak A by the rating agencies, we haven't initiated coverage yet, but they came to mark with a 10-year bond 3.125% coupon, a spread of 60 basis points.

Now, Lockheed, which we do rate at A+ and also has the same rating agency ratings is a name that we follow. And if you compare that to the A+ Morningstar bucket, the spreads are at 94 basis points. So, the Raytheon issue relative to maybe where we would end up rating it is about 34 basis points tight to the market.

Now, on the high yield side, the bonds also trade reasonably well. They all trade above par amongst the names that we cover. But if you compare them to say the BB index, for example, which is probably the best benchmark, they trade slightly cheap to that benchmark. So, we actually see more relative value in the high yield part of the sector than the high grade part, but in both cases still trade quite well.

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