So Frontier is a bit of a mess with a lot of debt coming due in 2024-2025 that could cause them some real problems without some restructuring.However, they have some high yields that trade well below par that are due in 2020, 2021, 2022, etc. They have the cash flow to cover these currently. What do you all think about the 2020 bonds? The YTM is pretty attractive, but I am admittedly fairly new to bonds.I dipped my toe in on some 4/15/2020 8.50% at about $520. TRACE had them trading yesterday between $556-640. On my broker's site, I only see an offer at $620 and some at $700 right now on the low end. (Is there a better place to see what supply is out there?)I think that there is a decent chance they go ahead and settle this issue in full in April in order to kick restructuring down the path until closer to 2024. But even if they do restructure or try to repackage, I think that odds are pretty good that they pay out over fifty cents on the dollar. Thoughts?
Hawk, First, kudos to you for being brave enough to post about an actual, ongoing investment "opportunity" and to include some facts that might be relevant to making a decision to buy. So let me counter with some other facts. FTR's debt is rated Caa3/CCC, i.e., both major houses agree that Frontier's debt is highly risky. In fact, I'd estimate that odds of default are greater than not. Second, the yield-curve for FTR's debt has inverted. In 20 years trafficking in the bond market, I have never yet seen a inverted YC not followed by a filling for BK. Three. Pull a long-term chart for the common using weekly bars. FTR's price has gone from nearly $150 to its present status as a penny stock. How soon before the company is delisted? Its Current Ratio is a very weak 1.14x. The 5-year trend on its balance sheet for net-worth is downward. If current receivables are compared to current payables, the company seems to be able to pay its bills. But when its financials are dug into a bit further, the company seems to be surviving by borrowing, not from making a profit. What I'd suggest its this. Treat FTR's debt as deep OTM puts where the diff between a bond's current price and a Ch 11 workout is the prem you'll likely lose and size a position that's appropriate to the estimated risks of being wrong. Again, thanks for doing your post. This forum has all but died, and it's good to see some activity again. Arindam
I did not realize that my local phone company was in such deep whatever. Not that I am a customer any longer, but interesting none the less.
Arindam,Thank you for taking the time to reply to my post. I appreciate the information and the suggested approach/strategy. And please continue to throw more facts at me. I understand that this is a risky trade, similar to an option (I think that was a good analogy), and that the market discounts so heavily to reflect the risk of a restructuring. So, it is just a little dabble at this point. A couple of follow up questions.1. I have been using my online broker to view bonds and prices. But, I do not think that they are the best or most effective resource for that. Are you aware of a good resource for viewing bond pricing for corporate bonds across the total market? Hopefully with some historical data tools as well? I have looked at FINRA, but have not found it to be as user friendly as I was hoping. But, perhaps that is just my lack of experience showing.2. Are there some examples on workouts after a Ch 11 that can be reviewed to better get a feel for potential risks and just how the overall process tends to go? (case studies?)Thanks again.
I did not realize that my local phone company was in such deep whatever. Not that I am a customer any longer, but interesting none the less.Yes, it has been a pretty ugly fall. Although not quite the same as GE, there is a similarity in this instance that I think that there were many invested here for the dividend and were not really aware of how bad the debt/obligations situation was. A lot of capital (via share price) has disappeared. Has to be frustrating for the income investor that was counting on this as retirement income.Of course, I think that you have also hit on one of the key issues. You are not a customer anymore. Unless there was a move involved, there likely was a reason for you to make a change. And that also likely reflects on why they are where they are.
Of course, I think that you have also hit on one of the key issues. You are not a customer anymore. Unless there was a move involved, there likely was a reason for you to make a change. And that also likely reflects on why they are where they are.Exactly. Frontier used to provide the phone, cable and DSL broadband. I wanted faster broadband, and Comcast/Xfinity was my other choice. I spend more than I did with Frontier, a good bit more, but I get more, including several times faster broadband and better cable TV. Worth it to me. My daughter similarly abandoned Frontier for the same services.
Hawk, Finding Historical data for bond trades is tough (or very expensive). FINRA really is the best source these days. Yeah, in some of the books directed at professional investors there are discussion of workouts by industry. Regrettably, the cited ratios probably won't apply in our very distorted times. Everyone will have their own methods and preferences for dealing with bond investing. Mine is to treat it as a combo of grocery shopping and options trading. Arindam
I have been using my online broker to view bonds and prices. But, I do not think that they are the best or most effective resource for that. Are you aware of a good resource for viewing bond pricing for corporate bonds across the total market? Hopefully with some historical data tools as well? I have looked at FINRA, but have not found it to be as user friendly as I was hoping. But, perhaps that is just my lack of experience showing.Not sure to what extent this will help but I normally use two sources: 1) my primary broker's Web site (Fidelity) and 2) FINRA's Web site. Neither is ideal, I suppose, but Fidelity allows you to download detail into a spreadsheet which I often do after running a search. Since not every single issue out there is available for sale via Fidelity (or any other broker, I imagine), FINRA can help if you want to do some additional research for a particular issuer. I don't think that there is a quick download to CSV type of an option via FINRA but I appreciate pricing. I found that pricing for same issue can be quite different across bond desks. I remember looking at TD Ameritrade and comparing with Fidelity some years ago and almost always (or just always) Fidelity's pricing was better for just about any issue, liquid or not. I among others on this forum gave up using TDA for fixed-income purchases (and research).When it comes to CEF and ETF research, I often head on over the fund's Web site after looking things over on Fidelity and Morningstar. I find that certain fund managers have most detail on their Web sites as well as on EDGAR/SEC.
Hawk, Now that I'm back home again --and not trying to post on the fly-- I can make a fuller answer to your questions. You asked: " I have been using my online broker to view bonds and prices. But I do not think that they are the best or most effective resource for that. Are you aware of a good resource for viewing bond pricing for corporate bonds across the total market? Hopefully with some historical data tools as well? I have looked at FINRA, but have not found it to be as user friendly as I was hoping."First, a broad caveat. Bonds are an institutionally-dominated market in which us retail investors are doing a mere 2% of the transactions. Therefore, not much effort is made by anyone to accommodate us. In fact, they wish we'd go away. Therefore, data is hard to get. Spreads are wide. Commissions are abusive. That's the landscape, and it isn't going to change. Second point. There is no "bond market". There are only networks of underlying dealer desks associated with the brokers who sell sell bonds. The networks mostly overlap, such that if several brokers are quoting the same lot, the price and mins are likely to be the same. The hassle is this. Often enough the min is larger than would be prudent for a small account to buy and one has to "pay up", i.e., pull the book and find a different lot. albeit higher priced. What FINRA does that really helpful is offer charts showing where the bond has been trading. They also report T&S --Time and Sales--, but that's harder to make use of. IMHO, E*Trade has the best bond search engine, but their commission schedule is sucky. If you can execute thru IB (Interactive Brokers), do so, because your orders go to the desks without email intervention, which is hugely helpful when trying to sell. Also, I've often been able to get in cheaper and with a smaller lot than the other three (Schwab, ETrade, Fido) were showing. (Only recently have I re-established an account with TD, whom I left because of their abusive markups.) Let me get this online and I'll deal with your other questions in other posts. A
Hawk, Earlier in this (getting to be overly long) thread, you wrote: "I understand that this is a risky trade, similar to an option (I think that was a good analogy), and that the market discounts so heavily to reflect the risk of a restructuring. So, it is just a little dabble at this point."Do NOT "dabble". As Yoda said "Do, or do not do." If you're going to screw around with junk --and I buy a lot of it-- then you've gotta have a plan that addresses how you will manage your inevitable losses. The easiest way is proper position-sizing, which is s two-fold process of never over-betting on any single hand and always making sure the bets you're making aren't highly correlated. (Otherwise, you're just making the same bet.)Also, thinking about bonds as options isn't analogy. Bonds ARE options. To buy one is to buy the right, but not the obligation, to put it to its issuer at maturity. In fact, bonds are Euro-style options that can only be put at maturity (though --typically- the issuer retains the right to call them under certain conditions, for which privilege a prem is generally offered). Part of the problem with investing in spec-grade debt is that not much of it worth buying is ever available. Hence, building a synchronically diversified portfolio is nearly possible. But proper diversification can be obtained diachronically. That means you're always shopping and always making small bets that --cumulatively-- match your overall portfolio allocation to that asset class. So, more tactics. The two major rating houses use a 22 or 23 notch system, which is way too many for practical purposes, but whose historical default rates can be looked up. When those rates are paired with a Fib series and notched one step lower, something like a 89% default rate can be predicted for triple CCCs. If bets and payoffs are symmetrical, that's a losing trade (on average and over the long haul, or even in the short haul, if bet size --relative to account size-- isn't managed properly). But payoffs aren't symmetrical. They can be hugely out-sized relative to the prem one is paying (which is bond price minus BK workout) such that, over a basket of spec-grade debt, it becomes possible to be more profitable than if higher-tier and less default-prone debt is pursued. Basically, the bond investing gig is this. Bets involving upper-tier credits are mostly bets on the level and direction of interest-rates. Bets on lower-tier credits are mostly bets on the level and direction of a specific issuer's credit-worthiness. Fortunately, the stock guys do a ton of work on issuers' financials that can be borrowed, and traders --through price action-- summarize it. So, before investing, read the Moody's report, grind through their 10Qs, chart the common, look up the short ratio, etc., etc., and then guess whether worries are over-reactions. If so, size the position small and equally-sized to your other bets in that tranche, do the trade, and then go shopping for your next opportunity. A
Arindam,Thank you again for taking the time to respond to my questions. Great information and direction. Clearly there is much more to investing in bonds than I had initially surmised. Lots to digest.
Hawk, How much there is to learn --and practice-- about bond investing depends on one's goals. A good analogy is fishing. Are you happy cane poling for bluegills? Or do you want to be a bass pro? Identify your level of interest. Define your game. Allocate your time, effort, and capital accordingly.A
At some point way back FTR was a growth/momentum stock... I remember investing in it for a little while...weird to see it in penny status years later... weird, it's still pulling in $2+B a quarter in revenue but losing money... -$5B net income last q but "only" losing 200M a quarter before that...
.weird to see it in penny status years later...I have heard so many complaining rants about Frontier's service from family who had no choice but to use Frontier, that I can't say I am all that surprised. If you don't treat your customers well, eventually they will leave you. IP
And unlike phone companies of yore, customers have alternatives. Cellular or VOIP through an ISP.
Arindam,I have another question on these bonds. I was in FINRA today and it looks like the Amount Outstanding is down significantly (80-90%) from the Original Offering levels on mayny of 2020 & 2021 issues.Does this mean that they are calling them in? Or are they working side deals with the institutional holders to get them off of the books?Is there a way to know what exactly is happening or how these are being redeemed? Is there visibility on a different site than FINRA?Thanks again for your willingness to answer my questions.
Does this mean that they are calling them in? Or are they working side deals with the institutional holders to get them off of the books?In March, 2018, Frontier executed a tender offer that purchased a significant number of the bonds due in 2020 and 2021. https://www.businesswire.com/news/home/20180320005723/en/Fro...AJ
Hawk, I, too, noticed that FTR seems to have been paying down on those bonds. One way to find out would be to grind through the 10Qs. Another would be just to call their Investor Relations Dept and ask. And you're right they might be working side deals with "qualified buyers" to get the debt off their books. Frankly, FTR's debt is a lottery ticket that scares me more than I'm willing to invest much time exploring whether the reward/risk ratio is viable. If its stock hadn't crashed to pennies, then going long the bond and short the common would be the obvious trade. That could be done by selling the common short or by buying puts. The hassle with shorting the common is the often abusive borrow fees. The hassle with puts is the cost of buying enough time. But it's a trade I've done and turned a profit doing. Another possibility with FTR is this. Size a tiny position and accept the fact you might lose all of it (if the workout is adverse). But across a basket of such bets, you're likely to do well. Lastly, there's the problem of valuing one's time. If you spend X hours researching a trade that should be sized so that risks are no more than 1/2% of AUM, what other (better?) opportunities have you neglected? If you don't intend to be junk bond specialist, then don't let yourself get sucked into situations like FTR. For sure, you might win this one and even the next one. But unless you intend a campaign across at least two full market cycles, you're better off getting your exposure to the asset class through through things like Invesco's bullet shares, one of which does included FTR's debt in its holdings. I don't remember which one, but I noticed the allocation was close to just 1%. Arindam
Thank you Arindam and AJ for your responses. Learning a lot. I appreciate the insight.
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