THERE is a sit-down strike of sorts going on among managers of bond portfolios. They are shunning corporate industrial bonds, even the blue chips that were traditionally considered safe for widows and orphans. And whenever possible, they are organizing to demand more guarantees to protect value when new long-term debt is issued.
Small-time investors may benefit as a side effect.
The discontent flared up when bonds of RJR Nabisco Inc. fell by about $1 billion in market value last October after a leveraged-buyout battle began for the food and tobacco producer. Such large companies had previously been considered immune to takeovers.
Since institutional investors like pension funds are buying fewer corporate bonds, corporations have been issuing fewer such bonds. The average weekly volume of new investment-grade corporate bonds has dropped by about half since the RJR negotiations began.
For bondholders, RJR was the tip of an iceberg. Since 1984, more than 230 other companies were involved in deals that damaged credit ratings, such as mergers and acquisitions, stock-repurchasing plans, and large one-time payouts of dividends, according to Moody's Investor Service.
These restructurings, dubbed ``event risk'' by Wall Street, can benefit stockholders. But the huge amounts of borrowed money needed to finance the deals caused an average plunge in the market value of existing bonds of 15 percent, or some $154 billion - even without the RJR deal, Moody's says.
Of course, plummeting market value is on paper only - unless an investor tries to sell the bonds now. If a bond is held to maturity and the principal and interest get paid, no one is worse off. If the company goes bankrupt, bondholders may or may not get paid.
At a recent conference of the Fixed Income Analysts Society in New York, speaker after speaker pointed out alternatives to corporate industrial bonds.
For example, Gregory Kiernan, manager of fixed-income strategy at PaineWebber Inc., advocates phone-company and utility bonds, because regulatory review can limit their debt. He also picks BBB-rated bonds, because many have protective covenants (some such covenants may limit the amount of new debt a company can issue) and ``have less far to fall'' than so-called high-grade bonds.
Similar suggestions are now made to individuals by Shearson Lehman Hutton Inc., says Bill Addiss, national product manager for corporate bonds at the New York brokerage house. ``But if you are looking for the word `guarantee' in a fixed-income investment, you have to look at US Treasury bonds,'' he points out. SMALL-TIME investors who insist on industrial bonds should keep the grade of bonds as high as possible, with the shortest possible maturities, says Moira Garvey, an investment counselor at Advest Inc. in New York.
Mr. Kiernan also suggests looking for covenants that restrict activities that could hurt a bond's value, although he acknowledges that the pickings are lean.
Covenants were common until the late 1970s, when the ``institutional investors who had sophisticated information and diversified portfolios'' stopped requiring them, explains John B. Morris Jr., an assistant vice-president at Moody's Investors Service.
During the past five years, ``poison puts'' became popular; they trigger a bond recall in the case of a hostile acquisition. ``But they are worthless, because these deals rarely maintain their hostile status,'' Kiernan points out.
Oddly, many junk bonds have better covenants than high-quality issues do. Covenants giving holders a voice in restructuring plans were needed to entice investment in these high-risk, high-yield securities.