# Distressed bonds (junk debt)



## james4beach (Nov 15, 2012)

Before I start, a warning that these are extremely speculative and risky investments. However, if one is betting on a turnaround of a company, investing in highly depressed bonds can be a safer way to play a recovery than investing in equity. Bonds can survive restructuring. While certainly not a guarantee for a bankrupt company, bondholders have superior claims to stock holders.

What do you see at your Canadian brokerage? Given how many imminent collapses are happening (energy companies) I'm surprised I don't see much in inventory.

One of them I see at iTrade is, as of Feb 5
*Bombardier 2026/12/22 with 7.350 coupon, ask $69.900, yield 12.48%*

That's a 12.48% yield for 10.9 years. That still strikes me as too expensive -- it seems inevitable to me these bonds will get cheaper still -- but I'm curious what other people think.


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## james4beach (Nov 15, 2012)

Another question: has anyone tried phoning their discount brokerage and bidding lower on junk bonds like these? The broker has this in their inventory so they must be desperate to get rid of the crap. There's no way I'm accepting the broker's asking price on debt that's crashing this hard when I know they're desperate to get rid of it.

Wondering what would happen if I phoned them up and bid $50 or $55 on the debt.


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## james4beach (Nov 15, 2012)

Perhaps more importantly: what are the laws in Canada, once an issuer defaults, and how smoothly would I get my piece in bankruptcy proceedings?

Let's say I hold their debt at my discount brokerage. Do I have to go and file a claim in court as one of their creditors? Or does this happen automatically due to holding the bond electronically?


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## humble_pie (Jun 7, 2009)

james4beach said:


> What do you see at your Canadian brokerage? Given how many imminent collapses are happening (energy companies) I'm surprised I don't see much in inventory.
> 
> One of them I see at iTrade is, as of Feb 5
> *Bombardier 2026/12/22 with 7.350 coupon, ask $69.900, yield 12.48%*
> ...



for $69, an issuer company is still paying on the bonds, has not defaulted.

i believe to get down below the $50 watermark, a bond must be in default. Plus i never heard of anybody who actually bought distressed bonds because they believed they'd end up with compensation in a creditor distribution. 

there are legendary analysts who've made fortunes. One of them - in the US - is a woman, i recall. Her key metric was to determine whether the company's remaining assets were enough to cover the bonds - sometimes it's a case of "which" bonds since not all are secured - but she never followed through with any trustee in bankruptcy. Rather her bond picks would eventually soar in value as the companies recovered ... voilà


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## Eclectic12 (Oct 20, 2010)

james4beach said:


> ... if one is betting on a turnaround of a company, investing in highly depressed bonds can be a safer way to play a recovery than investing in equity. Bonds can survive restructuring.


Really?
Would an OldCo GM bond holder who ended up with NewCo GM stock and warrants agree about how safe it was?

I am not so sure but would need to dig into the details of what the conversion rate was.




james4beach said:


> Wondering what would happen if I phoned them up and bid $50 or $55 on the debt.


You will have to update us ... being conservative, I have no interest. Since you prefer other asset classes as they outperform, I am surprised you sound like you are interested.




james4beach said:


> Perhaps more importantly: what are the laws in Canada, once an issuer defaults, and how smoothly would I get my piece in bankruptcy proceedings?


Don't the news articles about Nortel bond holders fighting with the pensioners dated in 2014 or 2015 tell you that some bankruptcies aren't quick and smooth for the bond holder (or anyone else)?

It is after all, 2009 when the bankruptcy was declared. 


From the articles I recall profiling those who buy such bonds for a living, I recall there being comments about the price floating as the slow process churned through to have a trustee declared, have the trustee determine what was viable to sell, get bids, file the appropriate gov't paperwork, respond to any lawsuits filed etc. It sounded to like an estate ... far more slow moving than most people expect.




james4beach said:


> Let's say I hold their debt at my discount brokerage. Do I have to go and file a claim in court as one of their creditors? Or does this happen automatically due to holding the bond electronically?


I expect that like stock is held in the street name, the bonds would be too. So electronic or not, unless there's some sort of separate lawsuit on behalf of bond holders, I expect one wouldn't have to do anything.


Cheers


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## james4beach (Nov 15, 2012)

I have cooled off on the idea. As you said about Nortel, the court cases are not necessarily smooth.

I think institutions and hedge funds are best positioned to speculate on bonds like this. They can take legal actions to defend their bond claims. I can't (as retail) so I'd just be "along for the ride" -- not good enough.

I think it's a bad idea, though there's a price for everything


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## The_Tosser (Oct 20, 2015)

Eclectic12 said:


> Really?
> ..........Cheers


Well said! Every point of it. 

The part where 'Boogie-man' Jimmy makes (as you quoted him i can read it because i block retards on first or second sight) about 'offering' $50-$55 is laughable as f*ck and proves how little this kids knows about anything trading related and tells me he's never done anything like this at all.. rofl. Like no clue whatsoever but boy oh boy can this kid doom like no other rofl.

But of course i'm always far more willing to help than clowns like jimmy are to learn, so i'll do my best to help him get the lay of the land so he doesn't look so dumb when/if he makes that call. (He never will anyway).

Check the bid-ask spread. If you can get it! lol. If you can it's likely $5 wide or less. You won't get ANY discount whatsoever here. It's naive and wishful thinking to think otherwise. Look, even if you offered to buy $1M or hell $5M you'd likely get zero discount. The bond market is far more nasty to you than any stock market wide bid-ask ever would be and with at $5M you're still a total chump. The bond desk will hang up on your ***. You've not seen anything like it. Its' not the pleasant, ignorant fool you get when you call to buy an odd-lot of stock once everything 2-3 months. You're not negotiating ****, peasant!, welcome to the world of distressed corp debt.

What do they usually do if they want to get **** off the books? Again, go check the bid-ask. If they give it to you this time at all, lol. Is it $25-$35 wide yet? rofl.

Hope that helps.


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## Moneytoo (Mar 26, 2014)

I glanced at BMO Floating Rate High Yield ETF (ZHF) today, after reading Bonds and shares of miners are sending vastly different signals:



> One example: HudBay and First Quantum shares lost about half their value in January, but both surged in recent days. Other base-metal miners have also rebounded and posted big gains in their share prices in response to mild improvements in commodity prices.
> 
> If equity analysts are right, the current bond market is making a major blunder and there is tremendous profit potential in miners’ debt.


But decided that might as well add to ZPR... lol


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## james4beach (Nov 15, 2012)

Tosser get lost, get out of my thread. We're sick of reading your fake posts as you play "hedge fund" and pretend to be a Wall Street derivative trader from your mom's basement in Mississauga. Shouldn't you be tossing a salad or something?

More quotes in junk debt... again extremely risky

*SHERRITT INTERNATIONAL, 2018/11/15, coupon 8.000, $43.750, yield 66.770%*


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## gardner (Feb 13, 2014)

I had a snoop around TDDI and they have a few "high yield" issues available -- HSE, Baytex, NS Power, Loblaw. There's also some reasonable yields on $US. What interests me is the ones trading at a discount, since, I think, that makes part of their yield a capital gain rather than just interest. Isn't that so?

For my part, I would be thinking of a small part of my non-registered fixed-income holdings. Maybe $10G or something.

Although the diversification of things like iSHARES US HIGH YIELD BOND INDEX ETF (TSE:XHY), HORIZONS ACTIVE HIGH YIELD BOND ETF (TSE:HYI) seems to make overall risk lower, these don't seem to have any specific tax efficiency strategy. This will require some investigation.


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## james4beach (Nov 15, 2012)

I think trying to get individual names is too dangerous.

There is *XHB* which is the only Canadian junk-ish bond ETF that I've seen. It holds low grade corporates but not deep into junk. The Canadian junk bond market isn't liquid enough to make a fund out of it.


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## Moneytoo (Mar 26, 2014)

At Quesrade, there's a Daily Bonds Bulletin (with High Yield Bonds section) There're no Bid/Ask spreads, and you have to call in to buy a bond (can't buy online) I think once I was quoted a price a few cents lower that in the bulletin, so saved a few bucks lol After you purchase the bond and it appears in your holdings list, you can figure out how much you "overpaid" (usually less than 1%, but once when I bought a 20 year strip it was 15%! Oh well, "live and learn" )


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## Eclectic12 (Oct 20, 2010)

james4beach said:


> I think trying to get individual names is too dangerous.


Interesting ... I seem to recall those profiled as making money at it as thinking a lack of distraction as well as the ability to mine the individual company for undervalued assets as being important. Along the lines of an analysis of Buffett's moves where five stocks are reported to be seventy three percent of the portfolio.

Of course they had different data feeds and tools than retail folks like us have.


Cheers


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## CPA Candidate (Dec 15, 2013)

If you want to play high yield debt, you need to build a diversified portfolio. I wouldn't touch individual distressed bonds but a an ETF of thousands of them could be worthwhile.


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## Rusty O'Toole (Feb 1, 2012)

Junk bonds have been bid up to unusually high levels in recent years as conservative investors, who once would not have touched them, go looking for yield in a zero interest rate world.

Some are now feeling the pinch from defaulting bonds and falling prices especially in oil company issues.

I don't know if this applies to Canada as much as the US.

I suspect the secret to success is doing your research or due diligence. I have heard of investors who have done really well in this field by finding bonds that are in no danger of defaulting even though they sell at a deep discount.

The first example I heard of was a certain issue of bonds in the then bankrupt Penn Central railroad. The bonds were secured by a mortgage on rolling stock, held by another railroad. One investor found this out, and checked with the railroad holding the mortgage, and found they were gathering up the rolling stock and would pay out 100 cents on the dollar to the bond holders in due course.

It took a year or 2 but investors who bought these bonds made 25% a year in interest payments plus a 40% capital gain.


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## AltaRed (Jun 8, 2009)

CPA Candidate said:


> If you want to play high yield debt, you need to build a diversified portfolio. I wouldn't touch individual distressed bonds but a an ETF of thousands of them could be worthwhile.


I think even an ETF is not as good as a good bond money manager. ETFs simply buy the index, whatever the index happens to be. This is one area where the MERS of actively managed junk bond funds likely pay for themselves. 

Personally, I buy individual corporate bonds BUT they are always investment grade, mostly BBB(high) or higher. Enbridge Income Fund bonds for example are BBB(high). I wouldn't touch anything BBB(low) or lower. Risk of default is all too real.


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## james4beach (Nov 15, 2012)

james4beach said:


> *SHERRITT INTERNATIONAL, 2018/11/15, coupon 8.000, $43.750, yield 66.770%*


As crazy an idea as it is -- and I know it's a bad idea -- I still can't help but wonder about these Sherritt bonds (which today trades at 66.9% yield). You'd have to do way more research to figure out what financial shape it's in, the prospects for surviving bankruptcy, etc. At a bond price of less than half of par, I'm assuming everyone has decided they won't pay coupons and they _will_ go bankrupt.

But if somehow they are able to repay coupons + principal in the next two years, that's an annualized return of 66.9%. Just too many unknowns though.


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## Eclectic12 (Oct 20, 2010)

humble_pie said:


> ... Plus i never heard of anybody who actually bought distressed bonds because they believed they'd end up with compensation in a creditor distribution.


Interesting ... the first article I can recall that didn't fit the "danger Will Robinson .... run away, run away" advice was for someone who figured the market was overly pessimistic about what value the windup assets would be at. 

I've long since recycled the article so I have no way of confirming.





james4beach said:


> As crazy an idea as it is -- and I know it's a bad idea -- I still can't help but wonder about these Sherritt bonds (which today trades at 66.9% yield). You'd have to do way more research to figure out what financial shape it's in, the prospects for surviving bankruptcy, etc. ...


YMMV ... if one thinks one can make money consistently without due diligence or analysis, one is crazy. Where one can dig out enough to have some sort of confidence, then the "crazy" factor drops IMO.

Add in the ability to limit risk by ear marking only a fraction to such an investment ... and it may make sense.


Only the individual can assess these multiple factors IMO.


Cheers


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## humble_pie (Jun 7, 2009)

Eclectic12 said:


> YMMV ... if one thinks one can make money consistently without due diligence or analysis, one is crazy. Where one can dig out enough to have some sort of confidence, then the "crazy" factor drops IMO.
> 
> Add in the ability to limit risk by ear marking only a fraction to such an investment ... and it may make sense.



i didn't post your quoted text, it was james4beach who posted the text in your quote balloon.

won't you please correct your message. Would appreciate. Thankx.


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## Eclectic12 (Oct 20, 2010)

Likely too many pastes and definitely not enough proof-reading ... LOL :frown:


I believe it is now fixed.



Cheers


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## humble_pie (Jun 7, 2009)

speaking of cuts, pastes & links, here is an oldie-but-goldie CMF archived thread about winning on the junk bond circuit.

Christine Daley, who made a fortune for herself & for Lehman when she bet big on Delta Airlines bonds, is the female US bond-trading legend i was trying to reference upthread.

trust cmffer haroldCrump in the archived thread to have the full story & nothing but the story.

Rusty also has some nifty anecdotes here about pre WW 1 defaulted british bonds & other exotic paraphernalia.

james4 please notice how they keep saying research-research-research-research-research. I know so much research might not flummox you, but i'm not sure the rest of us are really up for it.

http://canadianmoneyforum.com/archi...moneyforum.com/archive/index.php/t-33409.html


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## Rusty O'Toole (Feb 1, 2012)

Short answer - there are junk bonds selling at a deep discount that offer excellent returns with very low risk of default. If you are a cross between Sherlock Holmes and a CPA and love doing research but hate risking money, this is for you. The reason so few people take advantage of the opportunity is that it is boring. I recognize the validity of the approach and sort of envy those who can do it but it just isn't for me.


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## Rusty O'Toole (Feb 1, 2012)

Should also warn that the rules are not being followed the way they used to. Look up the GM bankruptcy of a few years ago. Bond holders were confident they would get paid back but the government screwed them over in an illegal maneuver aimed at giving free goodies to the union. Would pay to learn the new 'rules' if there are any rules before you trust the government.


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## james4beach (Nov 15, 2012)

I understand what you're saying Rusty.

It's kind of funny to me that retail investors are much more likely to buy crashing *stocks*. I guess people see it as a lottery ticket and even though they do no research, they somehow feel the odds are on their side.


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## Eclectic12 (Oct 20, 2010)

humble_pie said:


> ... james4 please notice how they keep saying research-research-research-research-research. I know so much research might not flummox you, but i'm not sure the rest of us are really up for it.


I can confirm that the articles I've seen for decades on the subject have generally been "research-research-research" where it is clearly for a few with the interest, time and possibly connections.

To extract and bold key parts of HC's comment that most of the articles outlined as the issue/barrier/challenge with these puppies:


> For you to beat the market, you have to do in-depth analysis of the company and determine whether 15c. is a good deal or not.
> 
> *Simply looking at the balance sheet will not help.*
> You need to estimate the liquidation value i.e. mark-to-market all their assets, goodwill, intangibles, etc.
> ...


It is not impossible but it is far more of a challenge that is well beyond most investors. 
IMO ... this is an area that is the extreme of "Caveat emptor".


Cheers


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## Eclectic12 (Oct 20, 2010)

james4beach said:


> ... It's kind of funny to me that retail investors are much more likely to buy crashing *stocks*. I guess people see it as a lottery ticket and even though they do no research, they somehow feel the odds are on their side.


Depends ... certainly it was a gamble for me to buy Nortel at $3 but I was sure it was going to take longer for a bankruptcy to happen. I did limit by risk by committing a set amount.

Then there's lots of missed value, over estimated bad news and dead cat bounces.


Junk bonds even in good times are risky, never mind looking at the bankrupt company ones so I'd see more "safety" in the crashing stock but YMMV.


Cheers


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## james4beach (Nov 15, 2012)

james4beach said:


> One of them I see at iTrade is, as of Feb 5
> *Bombardier 2026/12/22 with 7.350 coupon, ask $69.900, yield 12.48%*


Interesting, this bond trades today at $65.750 and the yield is up further to 13.44%. This means the good news that helped the stock has had no impact on the debt.

It would appear that bondholders are not any more optimistic about Bombardier's outlook, even after that big order.

OR the broker is trying to rip us off with a bad price on the bond. Canadian corp bonds have poor liquidity so we can't assume this is a good quote.


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## Eclectic12 (Oct 20, 2010)

james4beach said:


> ... It would appear that bondholders are not any more optimistic about Bombardier's outlook, even after that big order.


Why would they be optimistic?

Delivery in 2019 plus an undisclosed discount for AC likely means 2016 and onward are still going to be struggles ... as evidenced by the 10% workforce layoff and continuing "how can the Feds help" discussions.


Or does a letter of intent mean cash is changing hands?


Cheers


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## james4beach (Nov 15, 2012)

I'm just saying that's a big disconnect between the bond and stock price, right? The stock price has gone up tens of % while the bond price fell another few %


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## Eclectic12 (Oct 20, 2010)

Where the stock is trading daily and the bond comes due in 2026, should they moving in similar directions?

I thought one of the attractions for buying a bond was that the valuation moved differently than the stock.


Cheers


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## Value (Jul 31, 2015)

From the other bombardier thread: 



Value said:


> If a few good news could follow, I`ll be very happy... I'm hoping they will not let it go back to the negative status quo...
> I still think there is lots of potential upside to come... Any order, federal aid, upcomming delivery to swiss airline, certification of CS300...
> 
> I'm just hoping it would not drop back to 0,80 till then, which it very well could...
> ...


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