Community Choice Financial takes a dive.

music selection:  “Am I Evil?” — Metallica

Each Friday at the raptor, I explore opportunities in fixed income investing and similar instruments.  Today, I’m updating the performance of my portfolio of high yield bonds bought at a discount to par.  This is a great way to invest that involves lower risk than owning equity and often times has greater returns.

First up is Community Choice Financial (CUSIP: 20367QAB3).  This 10.750 coupon bound was bought at 75 cents on the dollar.  The expected annualized yield to maturity was 53.45%.  My expectation was that since the company was in negotiations to extend maturities with institutional and accredited bond holders, retail bond holders would be paid in full at maturity.  Now it seems that all bond holders will be compensated with new “payment in kind” (PIK) bonds with a maturity five years out.  These bonds have a 10.750 stated coupon but interest will accrue and only be paid at maturity.  The bonds have fallen to around 50 cents on the dollar.  I still expect to be made whole but it looks like it will take another five years.  Unfortunately, the company is also defaulting and forgoing the currently due coupon payment.

There is a chance one of the securities law litigation mills will pursue a class action suit against CCFI but I am doubtful there are enough retail bondholders outstanding to make it worth their while.  For now, CUSIP 20367QAB3 is a HOLD.  That does not mean initiate a new position, accumulate, or sell.  It means if you are a ravenous lizard playing the home game and you currently have bonds, continue to hold till maturity of the PIK replacement bonds.  The new annualized yield to maturity will be somewhere around 14%.  Still enough to be worth waiting.

CUSIP: 032359AE1 was purchased at 95 cents on the dollar and is currently trading at 93.5900.  I have an unrealized loss of 84.60.  This is a range bound security with a great deal of safety.  I have a good till canceled limit order to exit at 99.5000.  This bond is a buy up to 95.0000.

CUSIP: 12505JAA1 was purchased at 83.7000 cents on the dollar and is currently trading at 84.9690.  I have an unrealized gain of 101.52 on this bond.  The expected annualized yield to maturity is 10.08%.  I am hopeful for an opportunity to sell at par before maturity to increase my return but will glad to hold until maturity for a very safe 10.08%.

CUSIP: 501797AL8 was purchased at 83.4000 cents on the dollar and is currently trading at 85.1000.  I have an unrealized gain of 136.00 on this bond.  The expected annualized yield to maturity is 9.41%.  This is a long dated bond maturing in 2035, much longer than the 5 years I usually target.  The underlying is L Brands (LB) the company behind Victoria’s Secret and other “aspirational” ladies clothing brands.  Similar bonds have fallen on hard times when the underlying stock has languished only to return to par within a couple years.  I fully expect to supercharge my returns by selling for par or better within 5 years.

CUSIP: 609453AG0 was purchased at 65 cents on the dollar and is currently trading at 74.5000.  I have an unrealized gain of 950.00 on this bond.  The expected annualized yield to maturity is 44.80%.  I expect to be paid in full on 1APR2020 when this bond matures.  There is good interest coverage.  The company is profitable.  They should have no problem refinancing the debt.

CUSIP: 761519BD8 was purchased at 75.5000 cents on the dollar and is currently trading at 79.4900.  I have an unrealized gain of 254.10 on this bond.  The expected annualized yield to maturity is 20.01%.  The underlying company has a timeless and enduring brand (Revlon) and a highly motivated insider that would stand to lose literally billions in personal wealth in the event of a default on this bond.  It is a mortal lock to be paid in full on 15FEB2021.

I also have good till canceled limit orders open on two additional bonds.  CUSIP: 018772AS2 is a 9.875 coupon bond with a 15JUL2021 maturity, currently trading for 96.5780.  I have an order open at 87 cents on the dollar for this bond.  Fulfillment today would result in an annualized yield to maturity of 16.92%.  The bond has traded within my range within the last three months but has seen recent strength making a fill in the next couple weeks unlikely.  My other limit order is for CUSIP: 125137AB5, a 8.000 coupon bond maturing 15FEB2022.  It is currently trading at 90.1250 and my limit order is open at 85 cents on the dollar.  Like the other bond I’m bidding on, this one has traded within buy range in recent memory but has lately shown pricing strength.  A fill today would result in an annualized yield to maturity of 14.81%.  In both cases, raptors playing the home game should not chase these issues higher.  Wait for your price as patience while stalking prey is the lizard way!

Devour your prey raptors!

Update Discounted Bonds

Never miss another opportunity to devour prey!

2 thoughts on “Update Discounted Bonds

  • November 9, 2018 at 8:19 pm

    That sucks about CCF. I wonder what are the odds of it being restructured again in 5y? Pretty high I would suppose. They restructured the debt as a zero coupon, suggesting the execs are just buying time to milk a salary until full liquidation.

    Speaking of bankruptcy, my best call of the year was to short Sears (SHLDQ) and now I hold a few $3 strike price put options I picked up in January for $1.88. The options are trading around intrinsic value of $2.70-$2.80, but could appreciate another ~7% and save me a commission if I hold them until the stock is voided and options settled in cash. How long might that take? No telling… Weeks? Years? What would you do in this situation? Sell now or wait?

    I’m leaning toward waiting because it’s a small position and only a couple of months away from being long-term capital gains. The equity is so deep underwater I see little hope for it, but somehow the stock has lately been bid up from about 12 cents to over 30 cents.

    • November 10, 2018 at 2:57 pm

      I can’t offer individualized investment advice. Lack the proper license. I’m happy for you. I looked at SHLD for puts but they all seemed to expensive. I did pick up a synthetic short in JCP and it has done well. Doubt it matters if you hold out for the extra 7% of 2.75 though. That’s pennies. Unless you have thousands of contracts, it just can’t move the needle.

      CCFI should be able to make good on the bond in 5 years. It’s not technically a zero coupon bond. It’s PIK and the interest is due at maturity instead of periodically. The company is in a high margin business that has fallen on what I think are temporary hard times politically. Anyway, that is why you diversify when buying discounted bonds. Some of them go against you.


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