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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5 thoughts on “Update distressed bonds JCP and UNTUS

  • November 16, 2019 at 4:04 am
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    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.

    Reply
    • November 17, 2019 at 4:49 am
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      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.

      Reply
  • December 17, 2019 at 6:49 am
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    Do you have any updated thoughts since the offer has been extended multiple times? Based on the PRs it looks like 160mm was offered in the initial early tender date, and during the first extension only 2.5mm additional was tendered, and now this PR didn’t specify an updated amount. It would appear that interest in underwhelming, which is a little surprising. The early tender period could end at any time, and those that didn’t tender now probably won’t be doing so later for a 5% haircut so unless they finally give in after many extensions it may be that 25% conversion is about all they are going to get.

    Correct me if I’m wrong, but I believe the exchange will happen regardless of the amount that participates so there is no minimum threshold. If 75% of the original bonds remain they will now be subordinated behind three-liens and quite risky. They already trade with a 60% yield, so any refinancing at par seems out of the question as UNT could never borrow unsecured right now. Any future exchange would at best put them behind all three liens so it would be for a worse exchange then is available now. Without an exchange isn’t bankruptcy inevitable, and if so won’t recovery be impaired by being behind two additional liens?

    What is everyone waiting on? Hoping the recent rebound in oil is enough to allow them to refinance? Early on they might have hoped that everyone else would exchange and just a few bonds would be left which could easily be refinanced or paid off at par, but that doesn’t seem to be feasible anymore.

    Reply
    • December 17, 2019 at 4:11 pm
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      Bond behavior can be a little weird if you are looking at it from an equity investor’s perspective. Remember, most of the bonds are held by institutions that have strict legal requirements on what they can hold. There may be a large holder that is between a rock and a hard place due to their covenants.

      An oil rebound is not going to help Unit. They need a rebound in natural gas prices which could be some time away with record Permian shale pumping (the associated gas is basically a byproduct that is dumped on the market or sometimes just burned off if they can’t sell it for more than transportation to market cost.) A lot of liquifaction for international transport is ramping up but that source of additional demand appears to be “priced in”.

      I took the tender offer. It seems like a slam dunk. I don’t think they can legally force the outliers to convert (it is a tender not a corporate action). It is possible an institutional holder with a “strong hand” is trying to wrangle better terms out of the tender before accepting. I did email Investor Relations asking about the results of the tender offer and what is going to happen with my bond. I got a note that the email had been forwarded to the appropriate party…then silence. Good information is hard to come by here.

      What I can’t figure out is why some huge hedge fund doesn’t buy up tons of the existing bond below 60 then accept the tender offer. Seems like a good arbitrage opp.

      Reply
      • December 17, 2019 at 5:36 pm
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        Yeah, the company never answers questions. I had to call both BofA and the bondholder service company handling the transaction to get a straight answer on how the senior bond option would work before deciding on which option I would take.

        My concern was that for a small holder the automatic round down could be a big percentage loss, and bondholder services confirmed that it would be. Since they don’t pay cash in lieu for partial bonds and can’t issue a bond value under $1,000, everything else is just rounded down and deleted. Good for the company, not good for the bondholder, especially because with the offer subject to proration you couldn’t even be sure in advance what you would be accepted before the round-down.

        So in the end I did the same as you and took the junior bonds.

        Reply

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