Hi Bernie, I go to the Library and look at the S&P Bond book there. It's about 5" high by 8" long - same as the S&P Stock Guide. Look at about the last 10 pages for the listings of the convertible debentures.
My strategy has been to look first for the current yield column and check for double digit current returns. When you find them, you are usually looking at a bond that's been severely discounted by the market, for whatever reason. Let's assume you find a 12% yield.
You next check the current Bid/Ask and find that it's selling at $50/unit. Well, since these things are priced at $100/unit at face value, it means that it's selling at half price. Also, then you look and find it's maturity date of 2005 and see that it's a 6% bond. This now all makes sense. It was a 6% bond that's now selling at half price, so 6%/0.50 = 12%.
So, if you were to buy this bond (remember that bonds are sold in groups of 100 units, so at $50/unit, it's a $5000 commitment), you would get 12% on your money until 2005. Then the company owes you $10,000 to buy back the bond! So, you double your capital gain and get a second double from the yield.
I've done this strategy with VLSI, DIGI, MXTR and ICA in the past. I still own the MXTR and ICA bonds. The DIGI and VLSI bonds were redeemed before maturity.
The conversion parity is a little confusing at first. Usually the conversion rate is a bit optimistic, to say the very least. We're really not buying these things for the common conversion price, but for the yield. It can, however, sweeten the pot quite a bit if the stock happens to become a "darling" of Wall Street.
Now, how do I handle these? First I select a company whose common stock has some interest to me long term and whose bond looks attractive as an income producer. Using the above example, let's assume that I like the company and bond yield and decide to make a commitment. Let's assume I buy two bonds. That means I've spent 2 X $5000 for the bonds. I now go to the common stock and buy $10,000 of the common stock as well. Total commitment is $20,000.
The effective yield is $1200/year from the bonds spread over the total of the two investments or 6%. I use AIM to manage the common stock investment while collecting the yield from now to 2005. While AIM is doing its thing, the bond will eventually recover to its full face value at maturity.
What's the down side? For a bond to be discounted 50% it means there's severe stress on the company. In fact, when I first bought DIGI's bonds and VLSI's both companies were having bad years and both the common and the bond were depressed. When I bought ICA's bonds and common, it was right after the Mexican Peso devaluation. So, if the bad news is really as bad as the market believes, there's a good chance of default on the bonds and of course, the failure of the company through bankruptcy.
So, this isn't something to do without some study. First we want to find companies in which we have some interest. Next we want to understand the duress that brought about the deep discounts. Further, we want to have some confidence that the company's fortunes can be rebuilt. Then we cautiously take a position, collect the yield, AIM the common and live happily ever after!!
ICA's bonds, for instance were at about $0.30 on the dollar when I bought them. Effective yield was 15%. Now they're worth about $0.65/$ and are still happily paying me (semi-annually). The stock has made one complete round trip from about $4 to $20 and back to $3.50. Now it's starting back up and is at about $6.50. I'm making nice AIM money on the common and collecting "rent" on the bonds.
Please feel free to ask about any you find and I'll do my best to answer any questions. What's been nice about this activity has been that I've improved the overall income of my portfolio while finding some interesting AIM stocks as well.
Best regards, Tom |
