I bought the Unit 6.625 coupon bond with 15MAY2021 maturity.

music selection:  “The Bliss” — Volbeat

I am working to reposition the yield generating portion of my portfolio from high yield equity to distressed bonds.  There have not been a lot of good opportunities yet.  The spread between the high yield indexes and the 10 year Treasury is at a historic low.  That is going to end badly for a lot of Mom and Pop investors, probably little old pensioners, that have been reaching for yield.  When the credit cycle turns, and it always turns, the spread will likely expand to 1,500 to 2,000 basis points about the 10 year Treasury.  That is, you will have loads of opportunities to buy bonds that are “money good” at discounts up to 50%, thereby earning a double in capital gains in a few short years AND get paid 15% or more above the ‘risk free’ rate to wait.

I’ve gotten clued in to Unit Corporation (UNT) and their 6.625 coupon bond.  The bond will need to be refinanced within 20 months (they can’t realistically pay for it from cash on hand and non core asset sales) and I believe they will have no trouble (no trouble at all!) refinancing.  In less than two years, I expect to collect par on this bond, even though I bought it at a pretty steep discount and am getting paid 7.47% annually to wait.

Unit Corp was originally a contract drilling company.  It still does some contract drilling but has vertically integrated into a exploration and production company.  It has 160 million barrels of oil equivalent in reserves across over 6,000 wells.  The production is “dry” with only 17% being crude and the majority being gas and “drip”.  The company has reserves to last about 9 years.

E&P companies must continuously spend to replace reserves as they deplete.  The MO of oil companies big and small since the shale boom has been to buy reserves by borrowing to buy up smaller competitors or their land under lease.  UNT has done this once and since shifted to maintaining and even growing the company organically from free cash flow.  This company isn’t going to hit it out of the park but it is going to survive the next oil crash.  The company has also been raising cash by selling off non core pipeline assets.

The company has grown reserves 7% a  year without borrowing since the last acquisition.  Management knows how to “run a railroad”.  The price of the equity and the bond has gotten beaten up with the decline in natural gas prices.  I don’t expect prices to stay in the dumpster for long.  And the company can meet debt service even with another 40% decline in revenue.

I fully expect the company to be able to refinance as it has attractive cash flow and interest coverage.  But in the event of a liquidation, I estimate 80 cents on the dollar will be recovered.  That makes any price for this bond under 80 a slam dunk.

I was able to get a good till canceled limit order on CUSIP 909218AB5 filled yesterday at 77.5 cents on the dollar.  The bond is a buy up to 80 but I think patient raptors playing the home game can do better.   Thursday’s close for example was 76.5150.  If I hold to maturity and collect par, the yield to maturity on this bond will be 26.27%.  If the company refinances sooner and the bond rockets back to par (likely!) the yield to maturity could be much higher.  I feel good about this high yield opportunity that comes with less risk than owning equity.

I’m fully invested at the moment, including a little margin now that I have purchased this bond.  I’m looking to raise cash by selling the JCP bond I bought at 89.912 for 97 cents on the dollar.  The market has caught on that JCP will not be going bankrupt before the bond matures and can easily make full the bond holders.  I expect to get my cash back with a very attractive net yield to maturity.

Devour your prey raptors!

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5 thoughts on “Buy CUSIP 909218AB5

  • September 27, 2019 at 3:41 pm
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    Interesting play. I wish it was as easy to get a quote on a company’s debt-to-assets ratio as it is to get a PE ratio. There are many companies with high leverage but stable cash flows, and they are safer than other companies with low leverage and volatile cash flows. Yet you have to dig for the key piece of information.

    JCP is doomed in the long run, so good play getting out!

    Reply
  • September 27, 2019 at 11:14 pm
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    Thanks for your post!
    How do you expect your current distressed bond holdings to be impacted by a turn in the credit cycle?

    Reply
    • September 28, 2019 at 12:27 am
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      Josh,

      A large part of the appeal of distressed bonds is the outcome is largely binary. They can either pay or they can’t. If they can pay, you aren’t concerned about a temporary drop of 50%. You just hold to maturity. Some of them will take a nominal price hit when the downgrades come. But I’ve done my due diligence and feel confident I’ll get back par in most all cases and “enough” in the rare liquidations to be worth my while and then some.

      Reply
  • October 2, 2019 at 1:44 pm
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    Raptor,

    What’s your current thinking on 018772AS2 Pyxus Int’l 9.875% due 7/15/21? I’m considering buying more on it’s current dip – the current ask is just 60!

    Reply

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