I hold a bond of a company that filed Ch. 11 last December. It is Edison Mission Energy. There is an active market for this bond, at about 50 % of what I paid for it. How does one determine the likelihood that this bond will eventually be redeemed for the price paid? I am wondering whether I should sell it instead of holding it.
I hold a bond of a company that filed Ch. 11 last December. It is Edison Mission Energy. There is an active market for this bond, at about 50 % of what I paid for it. How does one determine the likelihood that this bond will eventually be redeemed for the price paid? I am wondering whether I should sell it instead of holding it. Ho, ho. Ha, ha. Hee, hee. Welcome to the world of junk-bond investing. You knew when you bought it --as did I, as did anyone who bought that bond-- that you were making a speculative bet that might not pay off. Well, --surprise, surprise-- that reality has come to pass. Now the game switches over to managing that risk, and there's a whole bunch of things you can do, the chief are to sit tight and wait for the workout, or dump it for what you can get. If it's not a marketable position, you're probably not going to be able to get out, and even then, you'll be low-balled. Your other choice is to accept the fact you're going to take a loss, no matter what you do, but hope the workout offers a more favorable result than trying to sell now. Flip a coin, and move on. Being able to sustain tolerable losses is simply a part of investing. They happen, and they have to happen, or else there would be no upside, either.
blearynet,You wrote, I hold a bond of a company that filed Ch. 11 last December. It is Edison Mission Energy. There is an active market for this bond, at about 50 % of what I paid for it. How does one determine the likelihood that this bond will eventually be redeemed for the price paid? I am wondering whether I should sell it instead of holding it.I have a couple EME bonds as well. I think I paid just over 78 for mine back in 2010 and received a few coupons. I think I read an analyst report right after the filing that they were expecting a workout of about a 50 cents on the dollar. Right now my bonds look like they're trading around 56.So now it's a judgment call. If you're optimistic on the work-out, you might hang on. But it also looks like it might be a pretty good time to get out.I believe that when the BK was announced, the bonds were trading at or below 50. If the work-out is realistically more than a year away, 56 might be a pretty good price - if I can actually get it on just a couple of bonds. I've just been sitting on them and not really paying attention since the BK until you said something. Looks like I might ought to consider selling them now. But don't take that as advice. I really don't have enough experience in this area to tell what a workout might be worth.- Joel
I believe that when the BK was announced, the bonds were trading at or below 50. If the work-out is realistically more than a year away, 56 might be a pretty good price - if I can actually get it on just a couple of bonds. I've just been sitting on them and not really paying attention since the BK until you said something. Looks like I might ought to consider selling them now. But don't take that as advice. I really don't have enough experience in this area to tell what a workout might be worth.Joel, Actually, you do have enough experience, as your own comments reveal. You're aware of the price changes that have occurred, and you're aware that no one intentionally pays more for an object than a reasonable estimate of its worth. If the current bid is in the neighborhood of mid-50's, then that's as good an estimate of what the workout will be as attempting to grind through the numbers. Ask yourself this, Who is currently bidding for those bonds? Not some retail investor who read a book about distressed investing and now thinks he/she can make a killing. I'd have to pull T&S to get a better idea of who the current players might be. But I'd bet that all bids are from pros and that any small lot being sold is a retailer deciding to cash out and move on, which isn't a bad choice. Taking the loss gets a monkey of worry of his/her back and frees up capital that can probably be better deployed elsewhere. Sitting tight has its advanatages, too. So, "it all depends". Sell or sit tight? Who knows? But that's why investing plans get written before positions are put on, so that when things don't work out, the investor knows exactly what he/she will do and move on.Charlie
Same sinking boat myself!I bought two positions: one in the 2017s and one in the 2027s. Good to hear some different opinions on what's going to happen. Thankfully, these positions are in my individual account and not in my Roth, so if I decide to sell after doing some more DD, I'll at least get some tax benefit. If any of you sell, please post so we can all get an idea on what price the market will support.Better luck next time!
If any of you sell, please post so we can all get an idea on what price the market will support.folgore, The price obtained by a small seller will depend on the lot-size being sold and the time of day/day of week it is offered out. Less than marketable lots will be low-balled, if they get any bids at all. Time of day does matter, but I haven't yet discovered the optional time. I just know, from watching prices a lot, that prices do vary throughout the day, and, probably throughout the week, depending on the rhythms of the underling desks. E.g., if your solicitation of bids is put out during their lunch hour, how much attention will it get? As for trying to get a fair bid on a Friday afternoon, forget about it. Do you really think they'll bid to buy and then carry the position over the weekend? Charlie
Thanks for response, Charlie. In the past three years, I've had significant experience buying bonds, but I've never considered selling until now. Does selling bonds work the same way that selling stocks with a limit order does? In one of the earlier posts in this thread, it was mentioned that EME was priced at around 56. Can I simply put an order in at the beginning of the day stating that I'm willing to sell my shares for no less than 56? Are bond sell orders Good till cancelled or good until the end of the day?Thanks!
folgore, If you're holding the bonds at a direct-access broker like IB, you can offer them out at whatever price you'd accept, or just hit the bid, and see if a desk somewhere will execute. But probably, your account is at E*Trade, Zions, Schwab, etc., meaning, they will run you through their online '"solicit ten bids" process and then get back to you through their order-entry messaging system in a pre-set, fixed time. (Typically, 10 to 20 minutes.)The message will say something like "There were 7 passes. 3 bids. The best is XX. This bid expires at XX. (which is typically 5 to 10 away.) If you wish to sell, convert your order from "Solicit bid" to "Sell", and submit. If you don't like the offer, just let it expire. Before you attempt to sell, pull T&S to see where lots your size are trading at and decide what you'd accept. If the bid comes in close enough to that, take it. Otherwise, try again another day. Scott reports that sometimes it has taken him weeks to get a price he'd accept. I've sometimes waited months. The lot was small, and the desks were screwing me around. So I waited until the demand for those bonds changed. Other times, I've gotten out fast and at very top price. At the retail level, selling is a crap shoot. So know exactly what you will and won't accept before you start the process, and don't give up too quickly. Charlie
Same sinking boat myself! folgore,I wouldn’t give up so easily... I also hold Edison Mission bonds which I accumulated in early 2010 at an average cost in the mid 70’s (high 50’s after adjusting for interest) Current losses are not too bad for a defaulted bond... I wish all my defaults did so well :)I think Edison Mission bonds are now a natural gas play . The bonds trade on the prospects of a natural gas (and coal) price recovery. Wholesale electricity prices slumped when natural gas prices collapsed (to under $2). This and the high-cost of government mandated environmental upgrades to coal-fired plants caused many power producers to exit the unregulated market and retire or dispose unprofitable coal-fired generators. In Dec 2012, EIX agreed to turn-over 100% of Edison Mission Energy to its unsecured creditors. The official reorg and separation is expected to take effect in Dec 2014 (so that EIX can utilize tax losses, I think I read somewhere). So a good portion of Edison Mission bond value now reflect the prospects of the wholesale electricity market at the end of 2014.But meanwhile NG prices have rallied and other power generation asset prices are also rallying on hopes that wholesale electricity prices have finally hit a cyclical low and are now on an uptrend. See Ameren(AEE) sale of Genco’s coal-fired plants to Dynegy(DYN) and the subsequent rally of Amerenenergy bonds Amerenenergy (02360XAL1) - 7.00% 04/15/2018(http://cxa.gtm.idmanagedsolutions.com/finra/bondcenter/BondD...).Edison Mission Energy bond prices have also rallied so far this year. Edison Mission Energy (281023AR2) – 7.75% 06/15/2016(http://cxa.gtm.idmanagedsolutions.com/finra/bondcenter/BondD...).So, I will hold my EME bonds for now and monitor Natural Gas, Coal, and Electricity prices. I’m prepared to bet on a recovery in the wholesale electricity market and I’m still hoping for a good profit on these bonds (north of 75). JMHO for what it's worth (nothing),Howard
Many thanks to both Charlie & Howard for your thoughtful responses!Charlie, if ever you write a book on bonds, please let me know! There are few individual bond investors out there with your breadth of knowledge.Howard, thanks for making a good case for holding onto the EME bonds. The fact that EME's price has held up as well as it has indicates that you may be right about a possible rebound or that at least a significant number of big investors currently agree with you. Clearly, a sound argument can be made for holding as well as selling. Some more DD before a decision is definitely called for.
Charlie, if ever you write a book on bonds, please let me know! There are few individual bond investors out there with your breadth of knowledge.folgore, Thanks for the kind words. But now come some necessary disclaimers. Chris has far more breadth of bond investing experience than I ever will. I came very late to the trade. And there are others who've posted in this forum who are have far more money under management in bonds, or who are both bolder and braver, or who understand far better than I ever will segments of the bond market, such as preferreds, or even just how to use bond funds effectively. In short, what I can do well --a multi-sector gig-- is just a tiny, tiny fraction of all that could be done in the world of fixed-income investing. I take my bond investing seriously, and I make a good living from it. But there are no secrets, and there's nothing I could put into a book that can't already be found in them. As I've said before, bond investing is best done, Ben Graham-style, as a value gig. That's where beginners need to begin. The rest is just tiny details that are picked by actually doing bond investing, one purchase at a time, all the while trying to stay out of trouble (and learning how to manage it when it does come your way). Charlie
Clearly, a sound argument can be made for holding as well as selling. folgore,Yeah, I think it’s a marginal call.If one needs cash, or has a better investment in mind, or holds bonds exclusively for income, or is uncomfortable with risk, then selling at 55+ for a defaulted bond makes good investment sense.But for me, recent calls and maturity redemptions have meant cash is piling up... and I consider cash as “the enemy”. So I sleep better when my cash is invested in just about any “real” asset (even a non income producing BK’d entity). I guess the current in-phrase for this is “risk is on” (thanks to Ben Bernanke).Howard
Charlie,But there are no secrets, and there's nothing I could put into a book that can't already be found in them.TrueAs I've said before, bond investing is best done, Ben Graham-style, as a value gig. That's where beginners need to begin.True and trueBut there are few practical books built for and by the small investor in the bond world. Most of them start out with 50k ports and rattle on about diversifying, how the markets are effected by macro issues and the complexities of the markets. Often the little gal or guy feels like individual bond investing is out of their reach. How many times have we had the argument on this board about the differences between holding a fist full of bonds and holding bond fund. You write well. You are diligent. You believe the little guy can. You know many of the pitfalls. You know the hurdles the little guy faces that aren't addressed any where else I know. I don't know of a book that talks about buying singles and threes. I don't know of a book that talks about studying spreads of said singles and small odd lots. I don't know of a book that talks about waiting for your price or how to study the market, from the little investors point of view, how to set a price range. I don't know of a book for the small investor that talks about how to deal with good junk, bad junk, good junk gone bad or bad junk gone to worse. TMF was an innovator when it came to arguing that the average schmoe can invest in stocks. They built a site and published books and host a radio show founded on the idea that the little guy can invest in stocks and win. I've learned a ton from them and even more from the boards and added my successes and failures to the small stash of investing wisdom that I have. You are right, many people have written well about various topics related to investing. I don't know of someone who has started out with B. Graham investing thesis and takes that show to the little guy bond world. Ben did it, his most famous student W.E.B. does it but no one talks about the nuts and bolts of doing it. You have one system built on that concept and it is worthy of sharing beyond the tiny number of viewers that this board gets. Its not about running Charlie's system like a McFranchie, its about the idea that it can be done and here is one place to start monkeying with it until you figure it out for yourself.Just sayingjack
I don't know of a book that talks about buying singles and threes. I don't know of a book that talks about studying spreads of said singles and small odd lots. I don't know of a book that talks about waiting for your price or how to study the market, from the little investor’s point of view, how to set a price range. I don't know of a book for the small investor that talks about how to deal with good junk, bad junk, good junk gone bad or bad junk gone to worse. Jack, All of that stuff is just tiny, tiny details that can be worked out on the fly, and the following story (probably apocryphal, but found in the Torah) is a propos. "On another occasion it happened that a certain heathen came before Shammai and said to him, "Make me a proselyte, on the condition that you teach me the whole Torah while I stand on one foot." Thereupon he chased him away with the builder's cubit that was in his hand. When he came before Hillel, (he also asked Hillel to teach him the entire Torah while standing on one foot) Hillel replied, "What is hateful to you, do not do to your neighbor: that is the whole Torah while the rest is commentary; go and learn it." [Tractate Shabbos 31a] If asked to summarize all of Ben Graham “while standing on one foot”, how would you reply? Probably something like the following. “Buy at a sufficient discount to intrinsic-value create margin of safety. Now go and practice.” Yeah, the intro bond books can be helpful for the vocab. But the basic concept that underlies all of bond investing comes from the market place. To buy a bond is to make an exchange. “How much am I paying, and what am I getting in return?” Effective bond-investing is no more complicated than that. Scan, vet, execute, and then do it again. Charlie
If you do sell, be persistent. It can take weeks or longer to unload a single position in a thinly traded Bond.If memory serves, I spent over a year trying to unload a single of Bausch and Lomb 2028. E*Trade would mark it at a price I'd like to sell, but the only bids came in $10 below. It can be tough to get the right value and the spread really works against you when you try to sell.But it can be done for sure.Workouts can go either way, I had closed out a Position in Ahern a year ago or so at what I thought was a great workout in the 60s (maybe), to see they're getting back par (although it's spread over a year instead of one lump sum). And I've had more than a few that ended up as an Escrow CUSIP and not much more.Good Luck.Scott
Charlie,You say All of that stuff is just tiny, tiny details that can be worked out on the fly, and the following story (probably apocryphal, but found in the Torah) is a propos. And I don't disagree. I will also point out that story is not in the Torah and it is very enlightening. As you know there is the Torah and the "Oral Torah" and the Talmud the 2nd and 3rd offer insight into the first. Jewish scholars have not stopped there, they continue to find ways to explain and understand those three texts in a way that works today. In almost every Temple and Synagogue at least once a week there is a lively argument about the interpretation of text. Certainly we can learn a great deal about life via the school of hard knocks. Certainly we can learn a great deal about the market via the school of hard knocks. This doesn't mean they should be the only and best means of learning about life or the markets. Others have tread these trails and have shared their experience, knowledge and wisdom. We have all benefited from them. The journey of a thousand miles does not begin with the first step, it begins with a choice. Millions of people fear to choose to take that step because they are afraid of what is down that road; what they fear is the unknown. You have been down that road. You can write from the small, private investors point of view, the view of a peer. I'm not suggesting a tome, one of my favorite and most used books is "The Elements of Style" by Strunk and White. IMHO it is the best text on writing the American English language ever written; 85 pages not including the index. When fishing season ends it might give you something to do. Seriously consider it. jack
The journey of a thousand miles does not begin with the first step, it begins with a choice. Millions of people fear to choose to take that step because they are afraid of what is down that road; what they fear is the unknown. You have been down that road. You can write from the small, private investor’s point of view, the view of a peer.Jack, Such a project doesn’t interest me. Under various handles over the past dozen years, I’ve probably done 10,000 posts in this forum. Here and there, there’s maybe a memorable sentence, maybe a worthwhile insight. But I, too, am just a traveler, for the journeying never ends. I was writing for myself, and that’s how I learned my craft. How many investors keep a journal in which they do a post-mortem on every trade they make, asking what they did right and -- more importantly -- what they did wrong, so they can benefit from the lessons the market gods offered? Those who train traders say -- to a man or a woman -- they have never met a successful trader who doesn’t keep a journal. No exceptions. Not one. If anyone truly wants to learn bond investing, the means and materials are there. What isn’t there, what most investors lack, is the determination to pursue a goal until success is met. Investors are their own worst enemy, not the markets they attempt to engage. When market success doesn’t come easily, they give up and blame everyone but themselves. Your buddy, Lokicioius, tried to put together a “recipe” version of bond-investing, and that FAQ is useless, dangerous, misleading crap, because such a step-by-step manual cannot be written in enough detail to make it useful to anyone who isn't self-aware enough that they don't need to have the details spelled out for them. "Investing can be learned, but it cannot be taught." There are too many studies proving exactly that point to doubt it. Could I train someone to become a bond investor? Sure, and I’m doing it, my daughter, who’ll have half my portfolio dumped in her lap when I die and needs to know how to manage it. But we’re the exactly the same Meyers-Brigg type, with a long, shared history and culture, and it’s easy for me to get inside her head, and she’s tough enough, independent enough, that she’ll push back hard when I’m pushing too hard, and we both understand nothing personal is meant, that the idea is what matters, and that we’re looking at it differently.With my son, that Hegelian heuristic doesn’t work. There’s no better partner on a trout steam in terms of easy, back-and-forth sharing. But no amount of anyone’s training will ever make him an investor. Just doesn’t have a feeling for the game, and, fortunately, doesn’t need to. Should I live long enough, and if they show interest, I’ll train my grandkids to run a bond portfolio the way it needs to be run. But no one else. Time is too short, and I’ve got too many other research projects going to write an investment manual that doesn’t need to be written. Ben Graham said enough in The Intelligent Investor to get anyone started, and the guy is nothing if not a stand-up comic of the dry, droll sort who truly understands the problems investors have dealing with risk. That’s a great book, and it doesn’t need a rewrite from me. Charlie
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