Barron's: Let's move on and talk about a few companies that look interesting to you. Philo: One is Hanger Orthopedic, which is the largest operator of orthotic and prosthetic patient-care centers in the U.S. It is a public company (HGR). They do manufacture and distribute, but they primarily service braces and artificial limbs. This business has very favorable demographics, and they have a recurring revenue component, as there is a replacement cycle for these products. The regulatory environment looks pretty favorable, and they have gotten price increases. On a net-debt basis, which is debt minus cash, it is 3.6 times leveraged. Its public enterprise value trades at 7.75 times Ebitda [earnings before interest, taxes, depreciation and amortization]. On an annual basis, the company generates 8% of its net debt in free cash. Most important to us is that the 3.6 times leverage, in our judgment, represents two times asset coverage, and this company is a dependable free-cash-flow generator. When these bonds, which mature in June 2014, were issued, they yielded 10.25%. Now they are priced at 103 and yield 9.1%, which is 7.62 percentage points over [comparable] Treasuries. We consider it to be a solid Group II credit -- in our language, middle-of-the-road risk, at two times asset coverage -- but it doesn't have the lowest cash-flow volatility.

Barron's: What about the issue you mentioned that is now trading like a junk bond? Philo: These bonds, which mature in April 2016, had a coupon of 6.6%. But because of the downgrade, the coupon is now 7.85%. They are trading at 92 cents on the dollar, which is yielding 9.5% -- or 6.73 percentage points over Treasuries. Their net debt is about $2.8 billion and the market cap is roughly $4 billion. Under the worst-case scenario, this year's Ebitda could come in at $600 million, which would mean a very modest cash burn. But we think they are on the road to recovery, and normalized cash flow is $1-billion-plus. Our view is that the asset coverage exceeds two times.

Philo: Another so-called crossover credit was issued by Harley Davidson (HOG), specifically its bonds that mature in June 2018 with a coupon of 6.8%. The bonds are now trading at 79 on the dollar. The yield is 10.4%, roughly 735 basis points over Treasuries. Barron's: So it sounds like Harley has enough cash on hand? Philo: Yes, they do. We own bonds issued by the company's finance subsidiary, which is called Harley Davidson Financial Services. Unencumbered financial-subsidiary assets, primarily accounts receivable, are 120% of its unsecured debt, which is very high for a finance company. Even if loan originations slow down a lot, a well-run finance company throws off a ton of free cash, and the credit performance has held up quite well. Our analysis is that it will continue to do so.