There were 4 retail bonds issued this year, yet all 4 were assessed not to have sufficient margin of safety according to Benjamin Graham’s criteria of earnings coverage and stock value ratio. Despite so, all 4 bonds have hovered around the par value since listing. Is Benjamin Graham’s art of bond analysis as described in The Lost Art of Bond Investment outdated?
To answer this question, let us go back to the first principles. The safety of a bond depends both on the issuer’s ability to pay and willingness to pay. The ability to pay in turn depends on the issuer’s recurring earning capability and/or adequacy of assets to extinguish the bonds. The willingness to pay depends largely on the management’s integrity and is usually safeguarded by convenants in the bond agreement restricting management’s rights, such as declaring excessive dividends to shareholders, or allowing bondholders to take over the company …