New discounted bond.

music selection:  “My Own Summer (Shove It)” — Deftones

Each Friday, I explore opportunities in the fixed income space.  Today, I’m going with my favorite strategy of buying discounted but money good corporate bonds.  On tap is L Brands (LB).  LB is the company behind the infamous Victoria’s Secret brand as well as Bath and Body Works.  The company gushes free cash flow but the stock is a little beaten up after taking on debt to return cash to shareholders.

The longer dated bonds have declined in price as the market sours on Victoria’s Secret as it struggles to adjust to declining mall traffic.  A turnaround is in play and I think the bonds are super safe.  Free cash flow is four and half times interest coverage.  Cash flow could fall by half and the bonds would still be money good with room to spare.  And while Victoria’s Secret is struggling with flat sales, Bath and Body Works has modest top line growth and excellent bottom line growth.  I think the less glamorous brand could support the bonds by itself.

As a result, I have put in a good till canceled bid for the LB 6.875 coupon bond with 01NOV2035 maturity (CUSIP: 501797AL8) at 83.4000 which was Wednesday’s closing price.  The bond has perked up a little to just over 85 but I expect to get filled within a couple weeks.  A fill today would result in an annualized yield to maturity of 9.4%.  That assumes holding the bond to maturity.  The last time LB bonds declined below par in the 2008 financial crisis, they returned to par within two years.  I expect between 15 and 25% annualized yield on my likely holding period.  All this with less risk than holding equity as I am senior in the capital structure.

As far as updates on my other bonds goes, the following results are as of Wednesday’s close.  REV (CUSIP: 761519BD8) is showing unrealized P&L of 916 dollars and an expected YTM of 20.005%.  MONINT (CUSIP: 609453AG0) is showing unrealized P&L of 1,119 dollars and an expected YTM of 44.796%.  CCFI (CUSIP: 20367QAB3) is showing unrealized P&L of 300 dollars and an expected YTM of 53.454%.

I also have three other good till canceled limit orders open.  These are AFSI (CUSIP: 032359AE1) at 95.0000.  The bond closed Wednesday at 99.5750 and is 4.82% above my entry price.  That price would result in a 7.521% yield to maturity, although I would expect to trade out of the bond early as it has been range bond between 95 and par for many months.  CEC (CUSIP: 125137AB5) has a GTC limit order set at 85.0000.  Pricing as of Wednesday’s close was 91.6720 or 7.85% above my entry price.  A fill would result in a YTM of 14.596%.  Finally, PYX (CUSIP: 018772AS2) has a GTC at 87.0000.  Recent close was 97.3250 as the bond is showing strength lately.  This is 11.87% above my entry price, which would have a YTM of 16.658%.

Devour your prey raptors!

Friday Fixed Income

Never miss another opportunity to devour prey!

2 thoughts on “Friday Fixed Income

  • September 27, 2018 at 1:45 pm

    I’ve been watching LB for a while and almost bought the stock earlier in the year. Thanks for making me aware of the opportunity on the bond. I’ve bought a small position on this bond and plan to hold it for a while.

    It’s a much better bet in my opinion as it pays a similar yearly return to the dividend, but there’s no risk of it being cut to turn around the company. And if 10 years from now, LB looks like a bankruptcy risk, owning the bond is a much better place to be than owning the stock.

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