No. of Recommendations: 2
I have a grocery list of dozens and dozens of bonds that I monitor on a daily basis. Overall in general, I have noticed in particular the last week, yields improving on some medium term & long term investment grade corp notes.

But this thread is specifically about Sara Lee bonds, CUSIP 803111AM5. Roughly 21 years til redemption with a curent ytm in the 6.60% range.

The last couple days, the spread has widened signicantly on these bonds. There are presently two sellers who keep moving in front of one another; not with a ton of size mind you, but the price has moved down none the less.

I may take a first entry position in the $93.50 handle if it gets there.
Print the post Back To Top
No. of Recommendations: 7
ytm,

OK, I’ll play with you, given that I have to be at my desk anyway, rotating a newly-built fly rod in a drying rack 180 degrees every 10-15 minutes while a coat of epoxy on the guide-wraps cures enough so that it won’t sag.

You’re thinking about buying Sara Lee’s 6.125’s of ’32. If you go five, then commish would add $2/bond (if the trade were done through E*Trade). Let’s say you could get in next Monday at your target price of 93.500. Settlement would be the 14th. So let’s compute yields from then. The nominal YTM is going to be 6.68%. So the question to ask is this: “In today’s market and interest-rate environment, is 6.7% an appropriate yield for a long-dated, Baa1/BBB/BBB issue (assuming the ratings are creditable)?

The first step, always, is to pull a chart of the bond’s recent prices (at FINRA or similar). What you see is that price began falling around last September, traded sideways most of Spring, spiked in April, and then rolled over again to where it now is. So that’s one of the thing you need to explain to yourself. Why is this bond behaving the way it is? To my eye, the chart is worrisome. Now pull a chart for the stock. Compared to presumed competitors like Kellogs and General Mills (both of which have mostly traded sideways since the launch of September’s rally), SLE is tracking the broad market, suggesting that the stock guys, at least, aren’t worried. And a lowly 1.7% short ratio confirms that.

The stock guys aren’t worried. But the price action of the bond suggests that bond buyers don’t want these bonds. (Confirmed by the sizes of the current offers for Sara Lee’s four issues). That should worry you. This isn’t to say that the crowd is right, only that if you intend to make a contararian play, you had better know (or at least strongly suspect) why you might be right and why they might be wrong. “Who’s your counter-party?” That’s a question you always need to ask yourself.

Now do something as simple and unimaginative as taking a quick look at their balance sheet for the last four quarters and look at just two items: Net Receivables versus Accounts Payable. That’s ugly. They can’t meet current expenses from current revenues. Now look at another pair of numbers: Total Liabilities versus Total Assets (minus the fluff like ‘Goodwill’ and ‘Intangibles’). Again, the picture is ugly. They have a negative net-worth, meaning, should they file Chapter 11, the bond-holders are going to take a haircut. So that’s a number that needs to be estimated. “Just how bad might the downside be?” So the game a would-be buyer of these bonds is implicitly playing is this:

Risk = Likelihood of the most favorable event (aka, maturity) times the Magnitude of the event (a YTM of 6.7% over the holding-period)

divided by

the Likelihood of a downside event (aka, a Chapter 11 filing) (aka, around 13%) times the Magnitude of the event (aka, the workout-price, which might be $0.30-40 cents on the dollar, at best).

Frankly, I think the deal sucks majorly. Or as Jack would say (and could back up by better fundamental work than I can do):

“A favorable reward/risk ratio doesn’t exist at the current price.” (IMHO, ‘natch)

Charlie
Print the post Back To Top
No. of Recommendations: 1
I don't see any immediate obvious hazards on the bond or equity end. Fundamentals suggest a "A" rating or tick below. I get estimated fair value of their debt at 6.95% - 7.45%. Ignoring the trading price the yield is trading at a premium for what it is. Which is common across much of the debt market.

Looking at the balance sheet it looks like a large chunk comes due this year. Q/Q long term debt dropped by 296mil, Q/Q short term increased 424mil. Assuming they roll the debt it could "dilute" the longer end pool pushing the price down. Just guessing. Rolling the debt should benefit the company in the long run with current rates being so low. Longer history of accounts payable/accounts receivable did not look upside down to me.

SLE has also been doing some buying and selling of assets which can change investor opinions. Selling of assets can unnerve debt holders.

The reward is most likely on the equity side. 2.34% dividend possible value of $40+. (just spit balling a number working capital can be volatile for some companies and I have looked at SLE's WC history to know if it is volatile and would require some smoothing)

just kicking tires.

jack
Print the post Back To Top
No. of Recommendations: 0
SLE has also been doing some buying and selling of assets which can change investor opinions. Selling of assets can unnerve debt holders.

Jack,

That’s a shrewd observation, and it might be a sufficient explanation of the bond-price wobbles. But I’d disagree with your estimate that “Fundamentals suggest an "A" rating, or tick below”. Or, better, even the briefest comparative work suggests that Sara Lee’s debt should be rated lower than where it is. At every step in its yield-curve, it offers a few more basis points than its industry peers.

Something’s going on. I don’t know what. But a would-be buyer ought to be worried, because the situation is the worst of both worlds, as is often the case with triple-BBBs. They carry an investment-grade rating, but they really aren’t invest-grade debt. They are junk bonds in disguise that don’t offer a proportionate reward. I HATE triple-BBBs compared with the honesty and much fatter yields of an honest double-BB.

There is hidden risk somewhere in Sara Lee, but not (yet) enough basis points of reward to accept the risks of its debt. (IMHO, 'natch)


Due YTM Issue
Baa2 BBB- 11/01/11 0.10% Kraft Foods Inc
Baa2 BBB 03/15/12 0.13% Heinz H J Fin Co
Baa2 BBB- 06/01/12 0.38% Kraft Foods Inc
A3 BBB+ 12/03/12 0.65% Kellogg Co
A2 A 12/03/12 0.41% Campbell Soup Co
Baa2 BBB- 02/11/13 0.91% Kraft Foods Inc
A3 BBB+ 03/06/13 0.71% Kellogg Co
Baa1 BBB 06/15/13 1.35% Sara Lee Corp
Baa2 BBB 07/15/13 0.79% Heinz H J Co
Baa2 BBB- 10/01/13 1.09% Kraft Foods Inc
A2 A 10/01/13 0.74% Campbell Soup Co
A1 A+ 02/15/14 0.91% Unilever Capital Corp
Baa2 BBB- 02/19/14 1.33% Kraft Foods Inc
Baa1 BBB 09/15/15 2.50% Sara Lee Corp
Baa2 BBB- 02/09/16 2.32% Kraft Foods Inc
A1 A+ 02/10/16 1.84% Unilever Capital
A3 BBB+ 05/30/16 2.27% Kellogg Company
Baa1 BBB+ 02/15/17 2.55% General Mills Inc
A2 A 07/15/17 2.27% Campbell Soup Co
Baa2 BBB- 08/11/17 3.00% Kraft Foods Inc
A3 BBB+ 05/21/18 2.93% Kellogg Co
Baa2 BBB- 08/23/18 3.50% Kraft Foods Inc
A3 BBB+ 11/15/19 3.50% Kellogg Co
Baa2 BBB- 02/10/20 3.86% Kraft Foods Inc
Baa1 BBB 09/15/20 4.49% Sara Lee Corp
A3 BBB+ 12/15/20 3.81% Kellogg Co
A1 A+ 02/10/21 3.53% Unilever Capital Corp
A2 A 04/15/21 3.74% Campbell Soup Co
A3 BBB+ 04/01/31 5.10% Kellogg Co
Baa2 BBB- 11/01/31 5.20% Kraft Foods Inc
Baa2 BBB 03/15/32 5.42% Heinz H J Fin Co
Baa1 BBB 11/01/32 6.48% Sara Lee Corp
A1 A+ 11/15/32 4.57% Unilever Cap Corp
Baa2 BBB- 08/11/37 5.53% Kraft Foods Inc
Baa2 BBB- 02/01/38 5.55% Kraft Foods Inc
Baa2 BBB- 01/26/39 5.55% Kraft Foods Inc
Baa2 BBB- 02/09/40 5.48% Kraft Foods Inc
Baa1 BBB+ 06/15/40 5.10% General Mills Inc
Print the post Back To Top
No. of Recommendations: 1
The following is a press release from Standard & Poor's:

NEW YORK (Standard & Poor's) June 14, 2011--Standard & Poor's Ratings Services
said today that its ratings and outlook on Sara Lee Corp. (BBB/Stable/A-2) are
not affected by the company's announcement that it intends to spin off its
international coffee and tea business, instead of its North America retail and
foodservice business as previously indicated. The remaining North America
retail and foodservice business includes a variety of packaged meat and frozen
bakery products under brand names including Hillshire Farm, Jimmy Dean, Ball
Park, and Sara Lee, as well as other foodservice labels.

Our assumptions include:

-- We believe the North America Retail entity will continue to have a
satisfactory business risk profile, albeit somewhat weaker than the
consolidated Sara Lee's current business risk profile due to our belief that
the remaining entity will have a more narrow business and geographic focus.
However, it is our opinion that stronger expected credit measures and a more
conservative financial profile will offset the weaker business profile.
-- Following the planned spin-off, we expect the North America Retail
entity to maintain adjusted leverage near 2x or below, and forgo share
repurchases. We believe Sara Lee will need to make significant debt reduction
to achieve its stated goal of 2x leverage at the remaining North America
Retail entity.
-- We assume the company will maintain adequate liquidity, as defined in
our Criteria (See "Methodology And Assumptions: Standard & Poor's Standardizes
Liquidity Descriptors For Global Corporate Issuers," published July 2, 2010,
on RatingsDirect.)
-- We could revise the outlook to negative if the company is unable to
achieve and sustain leverage of 2x or below and/or if financial policies
become more aggressive. If we revise the outlook to negative at the current
'BBB' rating level, we would lower the 'A-2' short-term corporate credit and
commercial paper ratings to 'A-3'.

Prior to the spin-off, we expect consolidated Sara Lee to maintain credit
measures close to our 'BBB' rating category medians, including a ratio of
total debt to EBITDA approaching 2.5x, despite the expectations that
commodities will remain volatile. We estimate the ratio of consolidated total
debt to EBITDA was high at about 3x for the 12 months ending April 2, 2011,
but expect leverage to decline close to 2.5x at fiscal year end June 2011 from
anticipated debt repayment.

The company's senior unsecured notes remain on CreditWatch, where they were
placed with negative implications on Jan. 28, 2011, reflecting our concern
that this debt may be structurally subordinated to obligations at the
operating company. In accordance with our criteria, a downgrade would be
limited to one notch below the company's current investment-grade corporate
credit rating. We currently do not have sufficient information to conduct our
notching analysis related to structural subordination for issue-level ratings.
Sara Lee has stated that it is developing detailed implementation plans for
the spin-off and will continue to evaluate a variety of methods to enhance the
efficiency of the operating structure of the two companies. We will complete
our analysis based on where assets, liabilities, and cash flow reside within
the final legal organizational structure at the remaining entity.


http://www.morningstar.co.uk/uk/markets/newsfeeditem.aspx?id...
Print the post Back To Top
No. of Recommendations: 1
Jack,

The more I poke around, the more I agree with your earlier comment that Sara Lee is a better stock than a bond. Below is a snippet from a Barron's article. I didn't attempt to grind though their Q3 numbers. I just grabbed what seems to be the story:

"We are making great progress toward the creation of two solid, stand-alone companies," said Sara Lee Executive Chairman, Jan Bennink. "We are focused on preparing both the Coffee company and the Meat company for strong and vibrant futures. Looking ahead, in North America we are pleased to announce that we signed an agreement to acquire Aidells Sausage Company. Aidells premium, high-potential products will enhance our North American meat portfolio. Also within North America, we will be evaluating our strategic options regarding the North American refrigerated dough business. Within the Coffee business, we are working on the strategic role and options relating to our International Bakery segment. These initial steps are part of the preparatory phase which will give each company the best platform for a strong and independent future."

In reviewing third quarter results, Chief Executive Officer Marcel Smits commented, "On the operational side, our strategy is to cover commodity inflation through price increases and cost savings, and meanwhile continue to build our brands with superior marketing and innovation. We remain committed to this approach despite some short-term volume risk. Mainly due to this volume risk in our core businesses, as well as intense competition in our International Bakery segment, we are reducing our guidance by six cents. That said, we are optimistic about the long term prospects of our businesses. In North America, for the first time in four quarters, we were able to offset commodity costs increases through pricing actions and productivity gains. In International Beverage, we are still lagging the rapid increases in commodity cost, but we saw price increases accelerate as the third quarter progressed. In total, on a year-to-date basis, MAP spending is significantly higher, SG&A costs are significantly lower and we are confident in our ability to manage commodity cost inflation over time. In addition, as work on our spin-off progresses, we expect to gain further visibility on additional cost reduction opportunities."


http://online.barrons.com/article/PR-CO-20110505-906130.html...
Print the post Back To Top
No. of Recommendations: 2
Charlie,

Or, better, even the briefest comparative work suggests that Sara Lee’s debt should be rated lower than where it is. At every step in its yield-curve, it offers a few more basis points than its industry peers.

Using relative valuation that is the correct assessment of the data. A broader look at fundamentals suggests the credit rating is sufficient or low. From the fundy side they manage their debt well and they carry a bit more than the ratings models are pleased with. Now, if they have directionless management or one of those bloody axe wielders just took the thrown there could be different issues wandering about.

Heinz and Kellogg are pretty good peer representatives by size and industry. We see between 70 and 100ish basis point difference. CLE is possibly a classic value play. Relative to its peers its cheap while fundamentally it appears sound. What do we actually get for a 70 basis bonus? Is 70 basis enough? Is the total return enough?

Which numbers do you trust? I know Charlie's answer he is a ticker reader and this is the type of outlier that makes him fret. Years of buying has taught him to heed certain warnings. He doesn't care when he is wrong and misses out on a profitable buy because within his methods he is likely to lose more often than he wins when he bends these rules within his system.

At this point I would leave open the possibility that SLE is under-priced for what it is. I view this pricing anomaly as a potential opportunity that would require further DD and risk/reward analysis before yea or nay is declared. (all of which sounds really highfaluting but is really $10 words for a $.10 process).

Companies go in and out of fashion often for no other reason then herd/crowd mentality. I have been looking at ticker lrcx as a possible equity value play because a bunch of folks don't like it near term. I think the market has over reacted but I haven't turned over all the rocks I ought to before money leaves my account.

just kickin' tires

jack
Print the post Back To Top
No. of Recommendations: 0
Looking at your last two posts I'm guessing the market is nervous because change is not the same and not the same is unpredictable and unpredictable makes the market nervous.

I'm forehead slapping myself,somewhere in the back of my head I knew they were planning a spin off.

jack
Print the post Back To Top
No. of Recommendations: 3
Which numbers do you trust? I know Charlie's answer he is a ticker reader and this is the type of outlier that makes him fret. Years of buying has taught him to heed certain warnings. He doesn't care when he is wrong and misses out on a profitable buy because within his methods he is likely to lose more often than he wins when he bends these rules within his system.

Jack,

You’re right. I look at ‘technicals” and then try to explain them with ‘fundmentals’. When I can’t confirm the former with the latter in two to five minutes, then I back away and look for easier money. The 1-year price chart for Sara Lee’s bond was enough to warn me away from looking any further. The action was anomalous. Buyers had to be reacting to events of a company-specific, non-interest-rate nature. So what I saw was a bet with limited upside (a sub 7% YTM) and lots of downside.

But in this case, because I had argued publicly against buying the bond, I felt duty-bound to try to refute myself. (If I couldn’t, then my guesswork was correct. But If I could discover where and how my quick analysis was wrong, then I would gain a cheap lesson.) So I dug further, hoping to suck you into looking at them as well, because you are a very superior analyst whose work I have a lot of respect for. I would never buy on the basis of your work (for preferring to trust my own numbers and methods). But I love it when we reach the same conclusion about something, and your suggestion that Sara Lee might be a better stock than a bond seems to be the best fit of the facts.

Why is ytm interested the bond? Because he finds the YTM created by an entry at 93.500 attractive. I don't. This isn't a top-tier credit that just happens to offer an anomalously high yield. The agencies have Sara Lee on negative credit watch for reasons that ought to worry a bond buyer. But if I have to accept worry, I want to be paid to do so. So I would look elsewhere.

Charlie
Print the post Back To Top
No. of Recommendations: 2
more grist for the mill

Sara Lee Corp.'s change of heart over which division to spin off is shaking the confidence of debt investors.

Credit-default swaps tied to the bonds of the maker of Jimmy Dean breakfast foods and Douwe Egberts coffee have jumped to the highest since Feb. 23 and prices of its debt fell after the company said June 14 it will spin off its beverage business, reversing an earlier plan to divest its meat operations.


snip

Sara Lee has $2.2 billion of long-term debt, including a $300 million euro ($425.1 million) bond that matures in March, according to data compiled by Bloomberg.

snip

The two separated businesses will aim for debt levels of no more than two times earnings before interest, taxes, depreciation and amortization, “consistent with a strong investment-grade company,” according to Brian Weddington, a New York-based analyst at Moody's.

http://www.dailyherald.com/article/20110616/business/1106195...

jack
Print the post Back To Top