No. of Recommendations: 3
So bottom line is what are your predictions for future demand for iron ore and coal?

CLF will probably continue to hemorrhage until the industry recovers. US auto industry is doing well, but demand in China seems uncertain.


Yes, but in the context of a bond, you need only worry about (A) the probability that the `hemorrhage` will continue until bankruptcy, and (B) the likely amount of recoverable assets (depending on the positioning of the bond on the company's capital ladder) if a bankruptcy does occur.

I have not done any of the due diligence here, as I've long given up on buying individual bonds [*], but the point is that these are pretty different concerns from those of a (potential or actual) investor in the common stock -- bankruptcy is always a disaster for the latter (shareholders are invariably wiped away -- no recovery from assets, as common stock is the most vulnerable part of the capital ladder), but there are many other issues.

For example, CLF currently pays 5.8% in common-stock dividend yield -- but it only does so by paying 0.60 yearly of dividend per share and today's EPS are just 0.19; this is clearly not sustainable so a dividend cut (or outright suspension, which would be great for bond-holders but dire for share-holders:-) looks like it will soon be inevitable.

Yet (again, w/o any due diligence) CLF's financials don't seem too horrible -- current ratio a bit stretched at 1.44, but debt/equity just 50%. I'm sure there must be other issues or the bonds wouldn't be selling below half of par -- maybe the covenants are too light-weight and won't constrain company management from wasting assets in "Hail Mary passes" of dubious worth, maybe there's something poisonous in the provisions about change of control (as CLF might be quite an appetizing morsel at a current EV below $2.5B for a patient strategic acquirer)... the need to clarify a million such niggling details, especially when considering `distressed` bonds which is where big potential gains exist if you judge things just right, is part of why, as I mentioned, I don't buy individual bonds any more (together with issues of liquidity, appropriate diversification, and so forth).

[*] What I happily do instead is to delegate all such tasks to experts in the field -- actively managing closed-end funds (CEFs) or ETFs -- so that my only difficulty is in deciding how much I trust a fund's management and whether their added value is worth the expense ratio I'm paying for their decision-making and trading activities.

In particular, all of my portfolio exposure to US junk and distressed (generically `high yield`:-) corporates is now through HYLD -- and I'm quite confident they're assessing (among other opportunities) the "fallen angel" CLF, and will position some money there if it looks more appetizing than other current opportunities...
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