This stuff is all out of my wheel house but I was reading a story about this one "expert" talking about how it is a great time to be buying senior debt (I guess it has top priority if a company goes bankrupt?).I'm guessing those type of investments are not available to "normal" investors?It was a story on yahoo, and I detest the current state of yahoo (non-stop videos/audios and other security concerns IMO) so I won't link it here.Marc Lasry is the guy running the hedge fund. He claims it is similar to 2008. I assume he means in the debt world since the stock market certainly isn't like 2008.Feel free to google for it if it interests you.
Rich, 'Senior debt' is available to "normal investors", as is 'junior debt' etc. But what makes sense for an institutional (or hedgie) to do in the bond market isn't what generally makes sense for us small fixed-income investors. Arindam
You should be able to find that information in the prospectus for the issue. It should tell you how this debt ranks with other debt of the company.There used to be big books in the reference department of your local library that would list companies, all their debt issues, and relative standing.Personally, I'd trust the bond ratings. Junior debt or not if the issue is investment grade BBB or better its probably ok. Below that, yields are higher but not worth the ulcers.Less than BBB means the rating agency could not find assets to cover the issue. So company has to succeed to be able to repay your bond when it matures.
"You should be able to find that information in the prospectus for the issue. It should tell you how this debt ranks with other debt of the company."Every broker that will sell you bonds offers info on the bond's ranking. There's little need (or use) to track down the prospectus, which is written by lawyers for lawyers."There used to be big books in the reference department of your local library that would list companies, all their debt issues, and relative standing."These days, going to a library is a waste of time compared to using an online bond search engine. "Personally, I'd trust the bond ratings. Junior debt or not if the issue is investment grade BBB or better is probably ok. Below that, yields are higher but not worth the ulcers."Paul, Those two sentences are ignorant bullsh*t and show how little you know about bond investing. And "No", I'm not being nice about this, because of the harm your "advice" is likely to cause. #1, 'agency-assigned' credit-ratings need to be distinguished from 'market-implied' credit-ratings. The former are easily discovered, but not always trustworthy, as the movie The Big Short makes obvious. Inferring the latter requires experience, but isn't hard to do. The trick is to know when which should be trusted. I.e., have the agencies rated the debt correctly? Is the market pricing the debt correctly? That used to be fairly easy to determine. Nowadays, with the Fed all but having totally destroyed price discovery, proper credit analysis has become fairly meaningless. #2, triple BBB debt is a dangerous "investment", especially stuff rated Baa3/BBB-, and is almost never priced to reflect its true risks, whereas any solid Ba/BB used to be worth buying. That's no longer the case, chiefly due to ZIRP.
I probably wouldn’t go this route but do you know any quality mutual funds or ETFs that would specialize in this? I’ve never been a bond person. I have accumulated long term treasury ETF over the last 18 months due to my expectation of continued low rates. Just curious.
Rich, There are dozens of very competent bond managers whose funds are worth buying. "All" that is required to do so responsibly is the usual due-diligence one should always use when buying anyone's financial products, plus a solid plan to manage the risks of the instrument. In other words, forget about the backward-looking ratings of agencies such as Morningstar and, instead, actually read the fund's prospectus, pull their schedule of holdings, dig into what they are buying/selling, and chart the fund to see how it performed in various market environments and how "tradable" it is, meaning, how easily it might be to manage its risks. What a bond fund isn't is a bond. Instead --like a stock fund-- it is a derivative that has an often loose relationship to its underlying. But what those derivatives can offer is exposure to assets that just aren't available to us small retail investors. Seriously, pull the holdings of a bond fund that holds something other than just vanilla Treasuries. What you'll find is that many of the holdings aren't issues that have ever turned up in your bond scans. Why? Because the big boys grabbed all of the issue when it came to market, and none of it trades in the secondary market. One fact about bonds that (almost) no one really understands or takes seriously is this. Stocks --as an asset-class-- typically offer higher return than bonds (as an asset-class) because they are far, far 'riskier' (however that word is defined). But on a risk-adjusted basis, bonds have to offer the same rewards as any other asset-class, or else the arbs step in to make it so. Thus, when conditions are favorable and bonds are being under-priced, some very serious money can be made with them that rivals other asset-class even on an absolute return basis. Not often, and not in our present investing environment. But if you'll look back at market history, you'll see there are years when bonds killed stocks and why they shouldn't be neglected/ignored. E.g., look at the 54% returns offered by long-dated Treasury zeros in '94, which could have been accessed through funds offered by AmCent. And more than once, I've made 100% per year for my holding-period of a "fallen angel". Lastly, when considering a bond fund, build a correlation matrix for it and try to discover exactly what it offers by way of true diversification that a different instrument or tactic wouldn't. Arindam
Rich, Here's a bit of bond gains silliness. On 06/15/20, I bought someone's 4's of '34 at 95.200 on which I'm being marked to marked at par. That's a holding-period of 0.066 years and an absolute gain of 4.8%, but an IRR of 103.4%. WhooHoo! and a reason that trafficking in bonds can be fun. On a more serious side, 10/10 of last year I bought someone's 1.5% converts at 95.200 on which I'm being marked to market at 109.128. That's a holding-period of 0.746 years, an absolute gain of 22.6%, and an IRR of 34.4%. But here's the kicker. Had I bought the common on the same day at its market close of 28.77, I'd currently be up 219% on an absolute basis, which makes my bond gain look pretty paltry.However, I hate stocks with a passion that knows no end and don't want anything to do with the game. For sure, I've done some stock trading and generally pull more money out of markets than I bring to them. But it's a high-stress, follow-up-intensive gig that I don't want --don't need-- to engage in. With bonds, I can have a leisurely breakfast and waltz into the market on my own schedule, run some scans to see what might be available, do my vetting routines, execute (or not) as I'm inclined, and then warehouse the position for as much as the next 30-40 years along with the other 250-300 positions I typically carry.Were those positions stocks, there's no way in hell I could manage that many of them responsibly, nor would I want to be making bigger bets than I do with bonds --typically, 2's, 5's or 10's, depending on my assessment of the issuer's risks. In short, over the years, I've found in the bond market a gig for me that's a good compromise between my aversion to risk and my need to put money to work. My choice and trade-offs aren't recommendations that others do the same. They're what works for me and my life-style. Were I a debt-strapped, young householder who hadn't yet lived through a couple of bear markets, I, too, would be playing in the equity casinos. But that's not the case, and I'm content to clip coupons and to pick up some occasional cap-gains. Arindam
He notes two "good" outcomes ... one, you buy bonds at a discount and eventually get paid in full, and two, the company fails and you then "own the equity". I would argue that number two may not be such a great benefit ... because when you own all the equity, YOU have to come up with all the future investment money to keep the thing running. And impaired businesses always need a bunch of investment to keep moving along.Imagine Hertz (which he happens to mention first). You buy the bonds at 30 cents. The company muddles through BK for a while (and "a while" will be longer than usual due to courts not fully functioning right now) ... company sells 200k out of their 500k cars at impaired values due to the current situation ... then in ~2 years when business recovers, they have a bunch of old crappy cars that all have to be replaced anyway (they aren't buying new cars now because they have way too many already, and have no credit for it anyway). Meanwhile, the upstarts like SilverCar with much nicer cars are going to take all the high-margin business.So owning equity in that? Doesn't seem so great to me ... it'll need billions of new investment ... while the competitors are eating your lunch ... may as well NOT buy the Hertz bonds and instead invest in their competitors that have a higher chance of surviving and eventually thriving.It is indeed quite possible that $300M for $1B Hertz bonds (30 cents) could perform much worse than $300M invested in 3 or 4 of the "new"-style car rental companies.
But what makes sense for an institutional (or hedgie) to do in the bond market isn't what generally makes sense for us small fixed-income investors. This brings up an interesting question. If Lasry, via his hedge fund buys up 99.9% of a specific senior bond, and we (small fixed-income investors) buy the remaining 0.1% of it, what happens in the end? When the company defaults, and he (plus us?) take the entire equity, and then begin rehabbing the company in preparation to foist it on public equity markets again, what happens to our (small investors) share?
Mark, "Deep value" bond investing --aka, "vulture investing", which Marty Whitman was good at-- is a whole 'nother gig that takes better credit analysis skills than most FI investors can bring to bear, as well as much, much, much more capital. (You've gotta be a big enough player to "sit at the table".) But what the small bond investor can do --and can do well-- is take positions in the double BBs, which is also the mainstay of the typical junk bond fund. When you get down to the triple CCCs (and lower), you're buying what almost amounts to lottery tickets *unless* you really know what you're doing *and* you're running a very disciplined campaign in which you're treating the bonds as OTM puts and buying baskets of them --at favorable prices-- such that you can count on achieving the statistical edge that game offers.As for when to buy the common, or the debt (or both) --or when to go long the debt and short the common-- those, too, are interesting games. So, it all depends on each investor's needs, interests, skills, abilities, and goals. In short, there is no one right way to do any of this bond stuff. But most investors find bonds "boring" and avoid them altogether, for the very good reasons that spreads are atrocious, commissions abusive, and historical data is tough to find, etc, etc. It's an institutionally-dominated market that takes persistence to break into and a lot of capital to pursue if bonds are to be one's principal (or sole) focus.But to each, his own, right? Or as the Chinese proverb goes,"Never try to convince someone that something is impossible who is already doing it". I bought my first stock when I was ten. But I didn't start making serious money until I stumbled my way into the bond market some twenty years ago. It's been a good ride, and will be again once markets blow up again. Right now, pickings are slim. But it's the game I prefer. Arindam
But what makes sense for an institutional (or hedgie) to do in the bond market isn't what generally makes sense for us small fixed-income investors.----------------------------------------------This brings up an interesting question. If Lasry, via his hedge fund buys up 99.9% of a specific senior bond, and we (small fixed-income investors) buy the remaining 0.1% of it, what happens in the end? When the company defaults, and he (plus us?) take the entire equity, and then begin rehabbing the company in preparation to foist it on public equity markets again, what happens to our (small investors) share? -----------------------------------------------It seems to me that's exactly what's happened with Sears Holdings, and the Chapter 11 is still a work in progress. So the answer is - we'll see.Bill
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