More on discounted bonds.

music selection:  “Hello” — Lionel Richie

Each Friday, I explore investments in the fixed income space.  Having some reliable yield is essential to early retirees as a hedge against sequence of returns risk.  There is growing evidence supporting the use of a rising equity glidepath but I am not going to follow that just yet.  The yield curve is close to inverting and the bull market is setting longevity records.  I’ll save rising equity for after the next major correction.  This week, I’m going to update on my discounted bonds.

I bought the Revlon 15FEB2021 maturity 5.750 coupon bonds for between 75.50 and 77.00.  Those bonds have a yield to maturity in excess of 19%.  Price action has been flat with bonds closing Thursday at 77.000.

I bought the Monintronics 1APR2020 maturity 9.125 coupon bonds for 65.00.  The bonds have a yield to maturity of 44.796%.  There has been some price strength to 74.223 as of yesterday’s close giving me a 922.30 unrealized capital gain after less than a month.

I bought the Community Choice Financial 10MAY2019 maturity 10.750 coupon bond for 75.00.  These bonds have a yield to maturity of 53.454%.  Price action has also been strong with the bond trading at 82.820.  That produces a short term capital gain of 703.80.

I have two more bonds with good till canceled limit orders.  Those are Alliance One International 9.875 coupon 15JUL2021 maturity at 87.00.  That bond would have a yield to maturity of 16.382% if it were to fill today.  Also on watch, is CEC Entertainment with a GTC order at 85.00 for the 15FEB2022 maturity 8.000 coupon issue.  If it fills today, the yield to maturity would be 14.370%.

I’m a pretty strong believer in investing in discounted bonds when you have some degree of confidence the bond will not default or that you will have strong recovery in a reorganization or liquidation.  My worst bond of this group has an expected return over 14% while carrying less risk than equity.  You can retire very comfortably on those kind of returns.  The only trouble is good discounted bonds are hard to find now as there is some euphoria in the current pricing.  The credit cycle is certain to turn however and provide a large number of bargains.

Devour your prey raptors!

Friday Fixed Income

Never miss another opportunity to devour prey!

2 thoughts on “Friday Fixed Income

  • July 27, 2018 at 6:54 pm

    Why these issues in particular? I’m a bit scared of any company on the verge of bankruptcy in this economy, because what will they do in a recession?

    • July 27, 2018 at 10:26 pm

      That’s a good question. Historically, I’ve done “cigar butt” discounted bond investing where I calculated liquidation value and bought below that price. Only about a third would actually default and I’d be on average compensated fairly for my effort. This time, I’m focused on financials and interest payment coverage. These companies can pay or at least refinance. Also, these companies mostly have large components of inside ownership. Management stands to lose millions or in the case of Revlon, even billions of dollars, by letting the company default. I expect them to pull out all the stops to make sure the bonds do not default. If you want to know more about a specific company, I can always go into more detail.


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