I closed CUSIP 12505JAA1

music selection:  “Under The Milky Way” — Metric

On 19OCT2018, I bought the CBL properties 5.25 coupon bond with 1DEC2023 maturity for 83.7 cents on the dollar.  I picked up 8 bonds for cash out lay of 6,696, paying 15 dollars in fees and commissions as well as 165.67 in accrued interest for total out of pocket of 6,876.67.  The shopping mall owner was distressed but in a turnaround plan, selling off underperforming assets and paying  off debt with the proceeds.  Before COVID-19, I estimated the bond to be ‘money good’.

COVID-19 sent the company into bankruptcy.  The bankruptcy deal I was expecting unsecured bondholders were expected to receive around $0.36 on each dollar of principal by exchanging their bonds for new June 2028 secured bonds. In addition, the collective group would receive 90% of the equity in the new common stock of CBL after the company exited bankruptcy.  That didn’t sit well with institutional holders and the deal is now equity and preferred stock with no bond compensation.  I don’t like my chances in a move down in the capital structure so I’m taking my exit.

I sold today for 39.084 cents on the dollar paying 8.75 in fees and commissions.  Since the bond is in bankruptcy, it traded “flat” and I received no accrued interest.  I did collect 1,078.00 in coupons during the holding period, easing the loss.  The loss is 2,680.70 or 38.98% over 817 days (17.42% annualized).  It doesn’t feel good to take another COVID related bond loss (JC Penny) but that is the price you pay when you invest in distressed bonds.  I expect strong total returns over the long term with some lumpiness along the way.

New bond investments are hard to find as there is a cheery consensus and near record low spread between Treasuries and high yield bonds.  That is going to end badly for a lot of yield chasers.  And it is going to spell opportunity when the economic cycle finally rolls over.

Devour your prey raptors!

Closed CBL bond for a loss

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4 thoughts on “Closed CBL bond for a loss

  • January 14, 2021 at 5:49 pm
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    What do you think about GEO group? Their financials seem OK and their bonds yield 11.6%. The main issue is political risk, but if the Obama administration couldn’t find a way to disentangle from private prisons it seems unlikely a Biden administration would be able to either.

    Reply
    • January 15, 2021 at 2:27 am
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      I don’t know GEO group. A 11.6% yield is normally a red flag. The market is signaling risk. But it might be a good investment. Dig deeper!

      Reply
      • January 15, 2021 at 6:04 pm
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        GEO stats:

        P/E: 7.7
        fwd P/E: 6.78
        P/CF: 2.9
        P/S: 0.45
        P/BV: 1.16
        Debt+Preferred / Assets: 54.8%
        Debt+Preferred / EBITDA: 5.5
        EBITDA / Fixed Charges: 3.3
        Q3 ROE: 14.3%
        Current Ratio: 1.19
        Debt/Capital: 0.75
        Interest Coverage: 2.18
        Earnings Growth: -13.98%
        Sales Growth: -2.53%
        Beta: 0.9

        I can’t figure out why the market hates this company, and has hated it for a while. On paper, it looks great, but short interest was 18.8% in December. The just-reduced dividend yield is over 10%. Puts at the $9 strike yield over 7% in 35 days, or sell a covered call expiring next January at the $10 strike for a 13% return on top of 9.6% upside protection.

        I suppose the risk is that the Biden administration by fiat eliminates all private prisons and govt. agencies buy out most of the assets at book value or less. That is part of the Democratic agenda, but I don’t see it rising to the level of a priority within the next 2 years of Democratic control, just like it didn’t during the 8 years of the last Biden administration – there’s just not a strong lobby for it compared to police reform, climate change, etc. and it’s not going to become an acute problem like the pandemic or foreign affairs. GEO dropped just prior to the election, and never recovered from the start of the pandemic. They’re big GOP donors.

        The other risk is that the divestment movement cuts off their access to capital. Quite simply, I doubt this is a real issue.

        Reply
        • January 15, 2021 at 6:31 pm
          Permalink

          Socially aware investing, is I think, here to stay. The millenials and zoomers are into it big.

          Reply

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