Sept. 14 (Bloomberg) -- Investors should buy bonds issued by Fairfax Media Ltd., Australia’s second-largest newspaper owner, as they are cheap relative to its liquidity position and prospects, Nomura Holdings Inc. credit analyst Ben Byrne said.

The Sydney-based media company’s 2011 and 2012 bonds are a good buy at 600 basis points and 625 basis points over the benchmark swap rate, respectively, Byrne said in a note to clients on Sept. 11. There’s also a trading opportunity on the lower cost of credit-default swaps on the company, he said.

The cost of protecting Fairfax debt from default, which peaked at 1,369 basis points on April 6, closed at 385 basis points on Sept. 11, according to CMA DataVision prices. A basis point, or 0.01 percentage point, is equivalent to $1,000 a year on a default swap contract protecting $10 million of debt.

Fairfax, publisher of the Sydney Morning Herald and the Australian Financial Review, said last month that a decline in advertising revenue had bottomed, as it reported an annual loss of A$380 million ($326 million). The global credit crunch saw investors shy away from riskier assets at the same time as media companies’ balance sheets were being dented by writedowns on shrinking demand from advertisers.

“Fairfax has had a tough run but it looks like advertising conditions have stabilized,” Byrne said in a phone interview from Sydney today. “The bonds are cheap considering the company’s cash generation, fairly strong liquidity position and the improved business confidence in Australia.”

Phil McLean, a spokesman for Fairfax in Sydney, said the company had no comment.

Fairfax will generate positive discretionary cash flow of about A$100 million per half-year, which will be used to reduce debt, Byrne’s note to clients said.

Fairfax has $350 million euros ($509 million) of outstanding 2012 bonds, with a coupon of 5.25 percent, and A$167.7 million of 2011 bonds which carry a coupon of 6.865 percent, Bloomberg data show.

Investors can profit from buying bonds and credit-default swaps on a company’s debt when the cost of protecting the bond is less than the yield premium. The strategy is known as a negative-basis trade.

To contact the reporter on this story: Sarah McDonald in Sydney at smcdonald23@bloomberg.net.

Last Updated: September 14, 2009 01:12 EDT