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.