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.

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18 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
  • October 29, 2019 at 2:25 pm
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    These are all Stansberry Credit Opportunities plays….

    Reply
    • October 29, 2019 at 7:10 pm
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      You are correct. They are a great source of distressed debt ideas. I sometimes do my own research and trades in that area and have for about 4 years but it is REALLY difficult to find good plays right now. And some of my prior ideas, especially Gulfport, which I have flipped 3 times already come up in SCO as well long after I find them.

      Reply
  • November 8, 2019 at 4:45 pm
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    Unit Corp has announced they are seeking an exchange of their bonds for new bonds instead of paying them off. Prospectus indicates they will gut the covenants for the old bonds so your only option will be to buy the new bonds. Instead of getting cash for your old bonds they want to give you new notes. They probably can’t sell a bond issue to new investors so they keep the old ones on the hook with a longer maturity. Whole thing sounds fraudulent to me and I hope the bond holders will reject this plan. I’d just soon take my chances in bankruptcy than stay invested with these crooks.

    Reply
  • November 8, 2019 at 8:30 pm
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    Unit Corp announced plans to do an exchange on their 5/21 bonds for new bonds with longer maturities instead of paying off the 21 bonds. They want to gut the covenants on the old bond, leaving investors with little choice but to take the longer notes. Sounds fraudulent to me, I can’t imagine bond holders approving the covenant modifications. You could sell the new notes as soon as you get them but I doubt for full value. Bond is crashing today following earnings release.

    Reply
    • November 8, 2019 at 11:50 pm
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      Raymond,

      I haven’t had time to dig deep into the latest financials. Maybe by next week. This is a common tactic of firms with distressed debt. Usually, but not always, the tender offer is voluntary. That looks like the case from the press release. That is, Unit will make you an offer and you can vote from your broker’s portal to accept or reject the offer. They are likely not interested in what you or I think about their offer. They are trying to negotiate with the institutional bond holders that have probably 90% or more of the float of this bond. The can get bank financing to cover the difference related to retail investor holdings with little trouble. That would be good news. The risk of a 2021 bankruptcy would fall to near zero and the bonds would either rally or pay par at maturity. This isn’t as obnoxious as it sounds and is really a standard practice when indebted companies want to explore their options. I suspect most institutional investors will take the bait. The new bonds will have a higher coupon with a similar risk profile. They can’t play chicken and say “go ahead and file for bankruptcy protection” but the institutional investors are rarely allowed to hold “junk” rated debt or the debt of companies in BR. They are forced to sell into a panic and take a bath. You and I can hold through a reorganization.

      Reply
      • November 9, 2019 at 2:56 pm
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        Thanks for your reply. I hope you are correct. The wording of the proposed offer makes it look like you either accept the proposal or you are left on your own with bonds that have had their covenants gutted. You have to accept the proposal in order to exchange your bonds and vice versa. If you don’t accept, you don’t exchange, the covenants have been gutted and you are left holding an empty bag. But you are obviously more experienced at this than I am, so I’ll defer to your wisdom. Thanks again.

        Reply
        • November 9, 2019 at 4:58 pm
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          It can go either way depending on what was in original prospectus. But usually, the institutional holders exchange and the retail investors retain their original investment on original terms. I can’t offer individualized investment advice (license requirement). I am still holding the bonds and do not expect to sell at this time.

          Reply
          • November 9, 2019 at 7:16 pm
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            I was not expecting individual investment advice, and wouldn’t hold you to anything. Your comments make sense and I will hold my bonds as well. Too big of a loss at this point. Thanks.

          • November 13, 2019 at 11:34 pm
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            More information is out and I am evaluating. Leaning towards accepting the tender offer for 7% notes due 2025.

  • November 19, 2019 at 1:16 am
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    So if you decide NOT to participate in the “voluntary” tender offer, as long as the company doesn’t go bankrupt before maturity of the “Old Notes” which is 05/2021, is it safe to assume you will receive payout at PAR? Are they under any obligation to continue to pay the “Old Notes” interest payments and then return principle at Maturity? Or better yet, they can just call the Bond at PAR and pay on 12/19 (the next call date), especially, if there is a very small amount of “Old Notes” remaining? I would rather not take a $265 hair cut to exchange to a 2nd lien secured Note, and it would be insanity to exchange for a 3rd lien Jr Note, which you would be hard pressed to recover anything if they go into bankruptcy.

    Reply
    • November 19, 2019 at 3:33 am
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      Yes, if you decline to exchange and there is no bankruptcy, you collect PAR at maturity.

      Reply
  • November 21, 2019 at 2:16 am
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    My broker account shows i voluntarily merged my old Unit bonds to the new bond…. I never told my broker to take the offer in fact told him i wanted to keep the current bonds… i would rather get paid may 2021 and be done not wait 4 more years.. I bought these 25 bonds for 21252 on sept 19th so that is 85 cents on the dollar TDAmeritrade yes i have a custodial account with broker doesn’t seem like the dude is looking out for me. Do I have any recourse or just tell him to pull my bonds back as cutoff time has not passed.

    Reply
    • November 21, 2019 at 4:57 pm
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      Wayne, I’m sorry to hear you are getting bad customer service. I cannot offer personalized investment advice due to licensing requirements. As generic non-investing advice to you as a retail customer of a huge faceless corporation, I recommend you call TDA and keep asking for higher levels of supervisors until you get someone who can make a decision. Typically, corporate actions that require a decision can be changed up to the cut off date. Good luck.

      FYI, I am taking the 7% exchange. My thesis from the beginning has always been that the bond irrationally tracks natural gas prices and not the solvency of the company. Thus, I am banking on trading in for par or higher when natural gas inevitably has a price rally. I was concerned that early cash out will be hard to do with the old bond as it is not likely to trade in any meaningful volume after the tender exchange. Your mileage may vary.

      Reply

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