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Update Discounted Bonds

I closed my position for Seventy Seven Energy.

music selection:  “Gutter Ballet” — Savatage

On 8DEC2015, I bought two bonds from Seventy Seven Energy for 36.55 cents on the dollar.  I paid 2 dollars in commissions plus 9.57 in accrued interest.  Seventy Seven later declared bankruptcy and went into debtor in possession status.  Court ordered restructuring wiped out equity holders and awarded shares in the newly (mostly) debt free company to bond holders.  I received 65 shares for my trouble.

On 20APR2017 Patterson-UTI (PTEN) acquired Seventy Seven in an all stock deal.  I received 1.7851 shares of PTEN for each share of SVNT in my brokerage account.  Today, I sold those shares of PTEN for 22.37 each, bringing in about 2,595 in cash.  During the bond holding period, I also collected 66.24 in coupon payments.  Overall, the trade was in force for 504 days and yielded 187.11% annualized.  Not too shabby for an investment where I was “wrong” in my assessment.  That’s the power of distressed bond investing.  Even when you lose, there can be some recovery.

I have two more positions similar to Seventy Seven where I either have received shares or expect to receive shares.  Those are Energy XXI and Erickson Aviation.  These two should see me earn a small net profit.  In addition, I have three issues that have gone bankrupt for which there will likely be no recovery.  I expect to declare these securities worthless on my 2017 tax return.  These are Midstates Petroleum (979 realized loss), Noranda Aluminum (190 realized loss), and Square Two Financial (531 realized loss.  Those are total realized losses of 1,700 dollars.  Which is less than just the gain on the SVNT/PTEN recovery.  All time gain across all discounted bond positions on the Raptor comes to 9,399 against what was at the peak of roughly 21,000 capital at risk. This is a great way to invest when the premium for distressed debt to treasuries is high (it is currently “low” and I’m waiting for the credit cycle to roll over to purchase more distressed debt.)

Devour your prey raptors.


{ 2 comments… add one }
  • Chris B April 27, 2017, 1:29 pm

    The 3 unrecoverable bonds were smaller commitments than the wins. Was that because they were further out on the risk spectrum to begin with? Any advice to share about a “sweet spot” on the risk/reward spectrum? One cannot simply pull up past performance charts on these sorts of things.

    • The Lizard King April 27, 2017, 2:18 pm

      Chris, you nailed it. In each case I bought 2 bonds (minimum Interactive Brokers commitment). That way, I automatically risk weighted the bonds. The sweet spots to me are defined by 84 cents on the dollar which is the expected value break even point on C rated bonds and under 40 which is the expected average recovery on bonds that enter bankruptcy. The real trick though is evaluating the balance sheet to see if there are recoverable assets. You know by what they have to sell in liquidation what the bonds should be roughly worth as a floor.

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