My L Brands (LB) bond finally filled.

music selection:  “Throwing It All Away” — Genesis

Each Friday I explore an income investing opportunity.  It is a passion and a mission.  It has become trendy in the early retirement community to have a 100% equity asset allocation.  I find this reckless.  I personally keep a 40% allocation to various forms of income: bonds, MLPs, REITs, BDCs, preferreds, and closed end funds invested in debt and debt like securities.  Yields are sufficient that this income covers my annual budget 118%.  I will never be forced to “sell low” and still have 60% equity to do the heavy lifting of staying ahead of inflation.  I firmly believe most retail investors should have a substantial allocation towards individual corporate bonds bought at a discount to par, especially those on the early retirement path.

One of my favorite ways to invest for income to purchase distressed bonds trading at a significant discount to par when the financials indicate the is still “money good”.  A recent example of that is the L Brands (LB) 6.875 coupon 1NOV2035 bond (CUSIP: 501797AL8).  I have had a good till canceled order open at 83.4000 since September 21st.  The order filled on Wednesday during the market rout and has me set to earn 9.408% annualized yield to maturity.  If the bond trades back at par before maturity, the return will improve.  The LB bonds have shown weakness before only to recover to par within 24 months.  I’m hoping for another blockbuster return here.

Also open is the Revlon (REV) 15FEB2021 maturity 5.750 coupon bond (CUSIP: 761519BD8) with annualized yield to maturity of 20.005%, the Monitronics (MONINT) 9.125 coupon 1APR2020 maturity bond (CUSIP: 609453AG0) with annualized yield to maturity of 44.796%, and Community Choice Financial (CCFI) 10.750 coupon 10MAY2019 maturity bond (CUSIP: 20367QAB3) with annualized yield to maturity of 53.454%.

I have three more good till canceled orders open.  These are Amtrust Financial (AFSI) 6.125 coupon 15AUG2023 maturity bond (CUSIP: 032359AE1) at 95.000.  A fill today would result in a yield to maturity of 7.534%.  This is a range bound position that trades between 95 and par on a fairly regular schedule that I would trade in and out of.  Also, CEC Entertainment (CEC) 8.000 coupon 15FEB2022 maturity bond (CUSIP: 125137AB5) at 85.000.  A fill today would result in an annualized yield to maturity of 14.84%.  Finally, I have GTC order at 87.000 for the 9.875 coupon 15JUL2021 maturity Pyxus International (PYX) bond (CUSIP: 018772AS2).  A fill today would result in an annualized yield to maturity of 16.768%.

These are strong yields that can be achieved with much less risk and volatility than equity investing.  Investing in discounted corporate bonds, with a margin of safety, is my highest conviction idea right now.  A word of warning however, there is some mania in the yield bond market right now.  The spread between 10 year Treasuries and 10 year Corporates is at an all time low.  So it is critical if you are ravenous lizard playing the Financial Velociraptor  home game, you do not chase these prices higher.  Patience while stalking prey is the raptor way.

A final note of housekeeping.  I will be selling out of enough JPS (a closed end preferred fund that was purchased at a discount to NAV) to replenish the funds from the purchase of the L Brands bond.  My allocation is full up but there is room to tweak by trading in an 8.04% yield in favor of a 8.24% that has upside potential for capital gains.

Income Investing Opportunity Of The Week

Never miss another opportunity to devour prey!

6 thoughts on “Income Investing Opportunity Of The Week

  • October 12, 2018 at 8:52 pm
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    VIX has been going crazy for a couple of days, but it always seems to recover from a peak within 30d. Meanwhile, VIX puts are tanking. Have you considered buying VIX puts at one of these peaks and waiting for the fall?

    Reply
    • October 13, 2018 at 12:24 am
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      I have a full allocation to short VXX/UVXY. I’m hesitant to go big when the yield curve is so close to inverting.

      Reply
  • October 15, 2018 at 10:02 pm
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    What are your thoughts on Navient? Student loan debt that can never be discharged sounds like a good deal to me. ( CUSIP 78490FKJ7 ). Seems like the company is safer than its high leverage would imply.

    Incidentally, ATM puts in NAVI stock are also appealing.

    Reply
    • October 15, 2018 at 10:12 pm
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      I’d sooner short Navient. Just because those debts can’t be discharged does not mean they are current. And they aren’t. Delinquencies are rising for student debt. A lot of it CAN’T ever be paid back which means it WON’T. It is just a matter of time in my opinion before the political winds shift to allow these to be discharged in bankruptcy. With 4 million millenial/Z people reaching voting age a year for the foreseeable future (and about as many Boomers slipping the mortal coil), domestic politics are destined to take a sharp turn to the left once the last hurrah of Trumpism dies down (2024?)

      One of my main investing themes at this time is there is a bubble in subprime lending. Eighteen year olds with no credit or work history certain qualify as subprime lenders. Many of them will have made poor choices after being handed six figure loans before they learned to do their own laundry. It is a recipe for disaster. Best of luck if you try it.

      Reply
  • October 16, 2018 at 5:51 pm
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    Wow on the 20367QAB3 – Community Choice Financial, 10MAY2019 maturity, 10.750 coupon, they really dropped the past few days. I have few of these bonds (fellow Stansberry Credit subscriber). I can’t decide weather to buy more or start sweating due to the drop in value the past few days. I see no news on the bonds. Is there a decent place to learn what is happening when a drop like this happens with a bond?

    Reply
    • October 16, 2018 at 9:06 pm
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      The move is surprising but not unprecedented for a high yield bond. Remember, most of the buyers are a very small number of institutions. If just one changes its mind, the liquidity can go bust. I do notice the bond is back up 10 cents today.

      My thoughts are that discounted bond investing needs to be driven by the spread between the 10 year treasury and the high yield index. That is at historical lows demanding caution and great selectivity. In time, the credit cycle will turn. Many enormous bargains will be available allowing you both to back up the truck and increase your diversification at the same time. I am personally taking no action on 20367QAB3.

      Reply

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