A good till canceled limit order for PYX bonds cleared market today.

music selection:  “Gimme Sympathy” — Metric

Longtime raptor readings will be familiar with my refrain that income investing is essential in early retirement.  I keep a 40% target allocation to fixed income and to other debt like securities.  My favorite way to invest is to buy corporate bonds that I expect to be money good at a discount to par.  This results in current income greater than the stated coupon rate (and the rates can be quite attractive) as well as provides an end game kicker of capital gains.

This approach to investing has far lower volatility than equity investing, even when you are reducing your risk by selling options.  It also has lower risk as bonds are higher in the capital structure than equity.  I’m going to focus on the PYX bond as it is a new position but also intend to provide a short update on progress of all existing corporate bond positions.  This will show that the returns are at a minimum similar to equity investing but with less risk.  That is the Holy Grail of investing and it is available to regular retail investors who are willing look beyond the simple and easy approach of buying an equity ticker.

I have had a good till canceled limit order open on 8 units of the Pyxus International (PYX) 9.875 coupon bond with 15JUL2021 maturity (CUSIP: 018772AS2) at 87 cents on the dollar.  Seven units cleared the market this morning (the eighth unit was canceled by my broker due to a minimum lot size of two bonds.)  The coupons will be worth 11.35% annualized on my cost basis.  Additionally, I stand to earn 14.94% in capital gains over the term of holding assuming full payment at maturity.

The annualized yield to maturity at this price point is 16.97%.  A higher return will be realized if there is an opportunity to sell the bond for near par before maturity and this is an expected outcome based on the trading history of this bond.  This is a return that handily beats the 9% or so long term average of the S&P 500 index.  And it happens with less risk.  I want to do more investing this way in the future, with a long term target of 65% portfolio allocation to discounted bonds.  The only reason I don’t move now is that even with as rosy as the picture looks, it is actually a bad time to go all in on corporate bonds.  There has been a lot of reaching for yield since the 2008 financial crisis and it has resulted in historically low spreads between the 10 year treasury and high yield corporate bonds.  The credit cycle will surely turn in time and much more favorable spreads will be available.  I plan to back up the truck when that inevitably happens.  Wise lizards playing the home game version will be watching their trailing stops on equity to raise cash for bear market repositioning when the time comes.

I also want to cover the results to date of existing holdings. First the bad news.  Two of my bonds are going through a negotiation process with institutional investors to exchange the bonds for new Payment In Kind bonds with later maturities.  I’ve already covered how this process has been irregular for Community Choice Financial (CCFI) – (CUSIP: 20367QAB3).  They are apparently angling to saddle retail investors with the same deal they make with institutional investors which might be challenged in court.  It looks very much though like I will receive PIK bonds with a maturity five years out in exchange for my May 2019 maturity bonds.  The price has fallen to below 50 cents on the dollar and I am sitting on about 2,300 in unrealized short term capital losses.  For sure, I still expect to eventually be made whole but the extended maturity means my expected annualized return falls from 53% to under 12%.

A similar theme is playing out with Monintronics International (MONINT) – (CUSIP: 609453AG0).  The negotiations with institutional investors are going much better with respect to this bond and it is near certain I will receive new bonds that are blended “cash pay” and “payment in kind”.  Cash coupons with a stated rate of 5.5% will be paid and an additional PIK amount will accrue at 6.5%.  This is a more attractive deal.  Annualized yield to maturity will fall from the mid 40s to the low 20s as a result of this move.  Still I can’t complain.  I current sit with an unrealized capital gain of 229 dollars in this investment.

In other news my current unrealized gain/loss position in my remaining bonds is as follows:

CUSIP: 032359AE1 – $390 unrealized capital loss

CUSIP: 12505JAA1 – $4 unrealized capital gain

CUSIP: 501797AL8 – $108 unrealized capital gain

CUSIP: 761519BD8 – $648 unrealized capital gain

Further, I have a good till canceled limit order open on CEC Entertainment (CEC) – (CUSIP: 125137AB5) for the 8.000 coupon 15FEB2022 maturity bond open at 85 cents on the dollar. The coupons would yield 9.41% against my cost basis and after capital gains my annualized yield to maturity (if the trade closed today) would be 14.84%.  This is an excellent low risk return for a bond I consider to be “money good”.

Devour your prey raptors!

 

Update Discounted Bonds (PYX)

Never miss another opportunity to devour prey!

5 thoughts on “Update Discounted Bonds (PYX)

  • November 18, 2018 at 3:46 pm
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    Weird things are going on in the bond market. The yield curve and implied future yield expectations say brace for a recession, but junk bonds are still relatively high – calling a bluff on the federal reserve’s forward interest rate guidance but complacent about the potential for bankruptcy.

    It doesn’t generate much income, but as an accumulator I actually feel safer in my protected put index positions. The combined setup of low unemployment, low yields, nascent trade frictions, and currency-funded militarism looks a lot like the early 1970s, before the embargo. If inflation finally pops, my investments will hit a floor (actually they’re already on the floor) but there will be no such luck for mainstream treasury and bond investors. Such investments have been “safe” for over 40 years, and are written into certain textbooks as “safe”. Yet in the age of Microsoft Excel there’s no excuse to be unaware of the implications of rapidly rising inflation on 30 year treasuries with 3.3% coupons.

    Reply
    • November 19, 2018 at 2:02 pm
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      You share my thoughts. It’s why I prefer REIT to bonds for my fixed income. Anything that produces value will retain value. Fiat does not produce any value. Its only purpose is a bridge between value-producing securities.

      Fiat can also be devalued overnight. It’s not a question of if, but when. The current system of creating money by borrowing has to explode at some point because you always need more money to pay back interest.

      Reply
    • November 19, 2018 at 11:08 pm
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      Chris, what is going on in the credit markets is unsustainable on several levels. But damned if the Fed hasn’t been able to muster a heroic effort to kick the can down the road further than I could have ever dreamed possible. I think everyone should have some kind of crisis management plan in this market. Mine involves diversification, fixed income, and trailing stop losses. Yours involves puts. I think both approaches are similarly valuable.

      Reply
      • November 20, 2018 at 11:19 pm
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        Lizard King what do you think of placing a 25% trailing stop on the corporate bonds you own? I haven’t in the past but with the way CCF has performed it has me re-thinking trailing stops on my corporate bonds.

        Reply
        • November 21, 2018 at 2:42 am
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          Dave,

          My “stop” is the average long term historical expected recovery in default of 40 cents on the dollar. If you buy at 80, that makes your “stop” 50%. Which I think is reasonable for low volatility assets that have better protection than equity. I’ve had bonds go to bk with zero recovery. I’ve had bonds go to bk with triple digit returns from being assigned equity that rallied. On the whole, diversification and the law of large numbers has left me with very attractive returns on high yield corporate bonds.

          Reply

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