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Update Discounted Bonds

The last of my money good bonds sold.

music selection:  “Midnight Blue” — Lou Gramm

I  have had a limit order open to sell RCII at 95 cents on the dollar for some time.  It cleared market today.  On 15SEP2016 I bought two of the 4.750 coupon 1MAY2021 maturity Rent A Center (RCII) bonds at 85 cents on the dollar.  I paid 9 dollars in commissions and 35.68 in accrued interest.

Today, I sold the bonds at 95 cents on the dollar.  I paid 9.75 in commissions and received 47.24 in accrued interest.  All told, the trade was in force for 619 days and yielded 14.54% on an annualized basis.

I no longer have any discounted bonds in the portfolio that are likely to be ‘money good’.  I have some shares and warrants from liquidation proceedings in Erikson Aviation, Energy XXI, and Midstates Petroleum that might eventually be worth something but I am expecting nothing.  The closed positions (26) returned a simple annualized average of 80.74% on 10,794 in profits.  The four losing positions have losses of 1,930.78.

I am not currently looking at any new discounted bond positions.  The spreads versus the 10 year Treasury are really tight.  That is going to spell disappointment for a lot of bond investors.  The cycle always comes back around and I will get a better interest rate in the future.  Probably after there is a financial shock to the system that reverses market mania.

Devour your prey raptors!

{ 6 comments… add one }
  • Chris B April 27, 2018, 6:16 pm

    Thanks for this. I need to take another look at a junk bond watch list I put together in late 2016. Probably I’ll pour a bourbon first, because there will be ROMO -regret of missing out!

    • The Lizard King April 27, 2018, 7:05 pm

      I’m finding absolutely nothing attractive in the high yield bond space. There is mania out there.

      • Chris B April 27, 2018, 8:23 pm

        …as interest rates are rising!

        I’m getting practiced in the dark arts of the bear spread and the collar.

  • Chris B May 2, 2018, 3:26 am

    What are your thoughts on the following CUSIPs?

    Sanchez Energy 79970YAD7
    Genworth 37247DAP1
    Noble 65504LAP2
    Ferrellgas 315292AR3
    Revlon 761519BF3

    • The Lizard King May 2, 2018, 4:15 pm

      Sanchez – Interest expense is already consuming more than half of EBIT. If the Fed Funds rate is 4% or higher at their maturity is 2023, I think they will find it challenging to refinance the debt. Could default. Moody’s Caa1 rating and trading for 72. Pricing was in the 30s as recently as 2015. They are a default risk if the price of oil doesn’t hold up. Don’t like it at this price.
      Genworth – I bought this at 71.25 in Feb 2016 and later sold for 92.00. I think it is money good but not attractively priced at 95. Would rather have a CEF for diversification at current yield.
      Noble – Money good so long as oil price holds up. Not attractively priced at 93.25
      Ferrellgas – They have just barely covered interest expense the last year. Will find it difficult to refinance if rates keep rising.
      Revlon – Have failed to cover interest expense with earnings over the past 3 year period. Toxic.

  • Chris B May 2, 2018, 5:12 pm

    Thanks! I agree the junk bond market is overextended. Those were the best I could find! There are a couple of interesting options possibilities on JNK and HYG such as bearish verticals if we accept that junk bonds will not be going even higher in the next year or two. Volumes in those markets are light enough it’s hard to pin down an exact quote, but for example the mid estimate for a JNK bear put spread at 40 and 39 maturing in January 2020 is $0.75. Might be had for $0.60, which is where it was when I started typing. This would be some good recession insurance that is likely to pay off even without a recession.

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