Ben, GSTRF shares have always been speculative because of the heavy debt and especially the need to meet semiannual interest payments on the junk bonds. If the company defaults on the bond payments, it could go into receivership. That could mean a very large loss of assets for Loral and all others who hold stock or debt. But in my experience of some 45 years investing, it is very rare that a company is allowed to go broke. Here are some recent examples:
Western Digital, some ten years ago, had a convertible bond, and because of huge losses in its disk drive business, found itself in a position where it lacked sufficient cash flow to cover the bond interest payments. A consortium of banks holding additional debt agreed to waive interest payments temporarily, thereby allowing the company to meet the bond payments and stay out of bankruptcy.
Patten Corp., a real estate vacation property developer, now known as Bluegreen, got a notorious reputation for failing to advise prospective property buyers of the difficulties in getting utility service to some of its remote mountain properties in places like Maine and Vermont. They even were the subject of a CBS 60 Minutes feature (though it was clear that the real problems were caused not by Patten but by deceptive advertising on the part of local realtors who were advertising the properties). At one point, the shares could be purchased for about $0.67, and the convertible bonds sank as low as 18. Again, the banks holding the senior debt agreed to a temporary waiver of interest payments, keeping the company from going into receivership. It later recovered, and the convertible bonds eventually traded above par value.
GSTRF shares may take several years to recover, in view of the large debt. But I doubt whether the company will default on the bonds, now trading at about ten cents on the dollar. Even if the bonds were replaced with a longer maturity, lower interest rate debt instrument, it seems to me that at these prices the junk bonds are still a fairly decent investment--with two provisos. First, the bonds are interesting only for retirement or other accounts where the interest income would be sheltered against taxes. Second, because of the speculative nature of the bonds, they are not suitable for the average individual investor.
If you think buying this kind of stuff is crazy, all I can say is that when things looked really bad for Patten Corp., one of the biggest buyers was none other than Templeton himself (the Templeton funds), who bought so much stock that he ended up having to file with the SEC. |
