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Subject:  Prospect Capital’s Bonds Date:  1/4/2013  1:12 PM
Author:  globalist2013 Number:  34590 of 36397

STARDARD DISCLAIMERS: The following post is NOT meant to be investment advice.

Yesterday, so sure I was that I’d be putting my bond investing on hold in 2013 that I didn’t even run a single scan. But this morning, as I was marking myself to market, I noticed that my projected returns for the year are mid-30% (based on the price action in bonds so far this year). So I admitted I would be crazy to walk away from an investing gig that I already had up and running, and I’m back to scanning daily. Period. That what a bond investor does. He/she shops daily. Every day. Period. End of discussion. That doesn’t mean he/she is buying every day. But he/she is looking. That’s the job. When prices are live, you’re in the market looking.

Not unexpectedly, even after laying off for just one day, I was already behind. Arcelomittal’s bonds are jumping back up above par even after recently getting whacked down to junk status. That might mean that traders are expecting a global recovery. Why else would they be marking up the bonds of an industrial they were marking down just a couple months ago when --meanwhile-- none of the crucial fundamentals have changed? In fact, they’ve only gotten worse. But those price gains offer comfort to those who got in low 80's. (Raise your hand if you bought when you should have.)

Ditto the action with Edison Mission. They’ve filed Ch 11. Ratings have been pulled. But the bid for the bonds across all maturities is roughly the same, low 50’s, which implies a very fat recovery to bond-holders.

MBIA’s bonds are again edging up, but I'm glad I exited the bulk of my position when I did.

Countrywide’s bonds are piggy backing on BofA’s ascent.

Venezuela’s bonds continue their climb above par, creating a margin of safety for those who got mid 70’s. (Again, raise your hands if you took the small, judicious position you should have.)

But this morning, I want to dig into Prospect Cap a bit, mostly for the sake of exercise. On a tax and inflation-adjusted basis, none of their bonds offer a real-rate of return. But their pricing is interesting. New issues are being brought to market with less of a coupon, suggesting their rating might be a tad better than its official triple-BBB. Said another way, why are their costs of borrowing going down?

Cpn Due Price Offer Yield Adj_YTM
5.500 08/15/16 104.450 4.42 -1.9%
4.375 01/15/20 100.000 4.53 -1.6%
4.275 01/15/20 101.000 4.53 -1.8% <<= new issue
5.125 12/15/30 99.500 5.25 -1.1%
5.000 12/15/30 98.950 5.17 -1.1%
4.875 01/15/31 98.850 5.05 -1.2%
4.750 01/15/31 101.000 5.05 -1.4% <<== new issue
6.625 11/15/42 103.500 5.62 -0.4%
6.125 12/15/42 99.475 6.23 -0.5%
6.000 12/15/42 99.250 6.12 -0.6%
5.875 01/15/43 98.750 6.03 -0.7%
5.750 01/15/43 101.000 6.03 -0.9% <<== new issue

That’s a puzzle, right? In part, bonds in the secondary market no longer being artificially supported by the underwriters should offer more yield than new issues, which is what is being seen. OTOH, sometimes the underwriters misjudge demand, and new issues promptly go to a premium. But, in this case, two things are happening. The underwriters are squeezing as much money out of the IPO market as they can (because the bond price drops when support ceases), but the costs for Prospect to borrow are going down, imply a whole bunch of things. One, obviously, a bond bubble is happening, and investors who should know better are chasing yield. Two, why are Prospect's borrowing costs going down? Is there a way to play that from the equity side?

Puzzles, right? and that’s what I love about the bond market. You can’t spend two minutes digging through data before you stumble onto anomalies that beg for explanation. Sometimes, you can turn a profit on them. Sometimes, they turn on you. But that, too, is part of the fun.

Trade well, Charlie
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