Bondholders feel the strain

Buoyed by healthy balance sheets and cash reserves, corporate America is preparing to reward its shareholders with increased dividends and share buybacks. But as Saskia Scholtes reports, the prospect of such activity is worrying bondholders

Corporate bond investors have been riding high for the past few years. Credit quality has steadily improved, default rates have fallen dramatically and once-neglected balance sheets have been patched up. Rating downgrades still outpaced upgrades on US corporations in 2004’s second quarter but only by the narrowest of margins, and through a combination of cost cuts and profitability gains, corporate America’s cash reserves have seen remarkable growth.

Unfortunately for bondholders, however, the