If anyone has experience buying distressed bonds, please PM me. I need a crash course in understanding the outlandish spreads being quoted to me and how to deal with them.
I'm replying here in case any others are interested. PM me if you wish, but let's try to keep most of the discussion public, OK?
I wouldn't say that I have "experience", but I have done it. Frankly, the area intrigues me, and I'm a bit surprised that there isn't more interest amongst value investors in this. The analysis of distressed bonds seems (to me anyhow) to dovetail neatly with the analysis one does for value stocks, bankruptcy-candidate shorts, and fraud shorts (hey, one out of three on topic ain't bad, eh? ;-)
What bonds are you interested in, and what spreads have you been quoted? I could check with my broker (a major US one that most here ought to have access to) to see what they can get.
One thing I have found is that, contrary to what most bond columnists seem to suggest, one does not need to place an order in the hundreds of thousands of dollars in order to get a decent price (i.e., if your investment idea is good, and it works, then the spread/commission is quite bearable).
I believe I've mentioned Loewen here before. After following it for years as a short candidate, I finally shorted the common at $C3 (boy, I sure wasn't "early" on this short!), and at the same time i bought a much, larger position in their '02 CAD bonds. I've since covered my short, but will likely short again, and probably a much bigger position, if the stock does one of those spastic doubles or triples that bankruptcies often seem to do in their twilight days.
I bought the bonds at 50 -- at the time I think the spread was 50-52. Since my intention was to hold the bonds to either maturity (about a 30% YTM) or restructuring, I found that to be a (more-than) acceptable spread. FWIW, I rode that position up to the low 70s, down to the low 40s, and back to 54, which is where they've been quoted for several months. Perhaps I should have been trading them??? ;-)
My original estimate was that the bonds were worth at least 70, under a reasonably adverse break-up or re-org, and conceivably worth nearly 100, if some things went reasonably right). Chief in establishing this margin of safety was my estimate (to which I would really, really appreciate anyone challenging or commenting on!) that so long as they did not overpay for their properties by more than 3X fair value (during their many years debt-and-equity-funded acquisition binges), then the bonds should be good for 70.
- Daniel |
