I sold JCP and will exchange UNTUS.

music selection:  “Radio Ga Ga” — Queen

I have been trying to catch a bid on the JC Penny bond for several weeks.  I finally sold CUSIP 708130AD1 for 97 cents on the dollar today.  I originally bought the bond at 89.912 cents on the dollar on 19JUL2019.  The trade was in force for 119 days and yields about 7.8%.  That annualizes to about 24% and you can add in the coupon rate of 5.65% for a total annualized return of almost 30%.  Not bad for a sleepy bond that was always money good.

Unit Corporation is making a tender offer for its 6.625 coupon bonds (CUSIP 909218AB5) with 15MAY2021 maturity.  There are three options: 1) do nothing and keep your existing bonds 2) exchange for 735 in principal on a 10% coupon bond maturing 15DEC2024 3) exchange for 1,000 in principal on a 7% coupon bond expiring 15DEC2025.  It should be noted that the existing bond is UNSECURED.  The 10% bond is SENIOR SECURED and the 7% bond is JUNIOR SECURED.  The existing bond is thus moving down in the capital structure.

I am going to exchange for the 7% coupon bond.  It pays a better interest rate, has more time for gas prices to rise, and has better bankruptcy protection than the existing bond.  Secured bonds are collateralized by the firms assets.  The thesis for this bond has always been that the bond tracks, rather irrationally, the price of natural gas rather than the cash flow position of the company.  With 4 years left there is a lot of time for the price of gas to rally and the bond to trade at par.  My original yield to  maturity was about 26%. The YTM on the new bond is about 20% but if the bond rallies to par because of natural gas price strength, the return will be much higher.

Ravenous lizards might be tempted by the 10% senior bond’s tasty coupon.  Don’t fall for it raptors!  The yield to maturity there is only about half that of the 7% bond.

Devour your prey raptors!

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Update distressed bonds JCP and UNTUS

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2 thoughts on “Update distressed bonds JCP and UNTUS

  • November 16, 2019 at 4:04 am

    I have a good chunk of Unit bonds. I’m concerned about adding the duration risk with the two new bonds. The new EBITDA/interest coverage, $220M/$50M (approx/est) still is around 4, pretty good. They should be able to continue paying the interest going forward even if energy prices drop some. If a good chunk of the 2021 bonds are tendered they should be able to pay off the remaining 2021 bonds easily? I’m inclined to hold on to the 2021’s. I’m not looking to increase my YTM, just get my principle back. Denbury did the same thing recently. The earlier dated 2021 bond which I bought after the tender is much smaller now has been climbing slowly. They still have another big bond coming due in 2021, but they did push out some major debt to a later date. Any thoughts on my Unit theory would be appreciated.

    • November 17, 2019 at 4:49 am

      A large conversion to the 7% and 10% bonds would likely make the current bond pay out at par at maturity. The danger is in the unlikely event of bankruptcy, you have moved down in the capital structure. The new bonds are secured by collateral and then again by the residual.


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