Cliff Natural Resources Bond tender offer-What would you do?

[Golden sunsets]

Abbreviated story-we bought a Cliff Natural Resources bond just above par, 4.8% due 10/1/2020, a few years ago. Yield is 4.66%. The bond was investment grade when purchased but slipped to junk shortly afterward. Cliff's primary product is domestic iron ore, but they expanded into other areas geographically as well as product wise and got caught by the recession, bad management and Chinese steel dumping. They retrenched, hired new management, did a cram down to debtholders of bonds due in 2018 and limped along until about a year ago. The bond price dipped to as low as 28 at one point. Then everything turned around, the result of of their downsizing and cost cutting and economic reversal.

Q4 2016 showed a decent profit. The bond value had come back to the mid 90's in the last few months. The day after filing their earnings last week, Cliff issued a tender offer for all of their debt due in 20 and 21, based on raising a capital offering of common stock. The tender offer is for 100.10 and the paperwork must must be filed by March 9th. Subsequent to the tender offer on the 9th, the bond quote as of Friday the 10th is 99.10. Commentary on Seeking Alpha reflects confidence that the company is no longer in any danger of failing. The bond is part of our bond ladder and represents the approximate value of an RMD in 2020 in one of our IRA's, so the maturity is matched to a specific cash need. If we redeem early we should replace the bond with another of similar maturity, which would yield around 2%, a significant decrease in income.

What would you folks do if you were in our shoes-keep it until maturity along with the juicier yield or take the bird in the hand and invest in a lower yield bond and take less income for the next 4 years. The bond represents approximately 1.5% of our investment portfolio.


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[Texas Proud]

If it is matched to a cash need and you are fine with holding, I would hold... you had not mentioned that you wanted to sell it, so why would a tender offer change your mind... especially for only a $1 gain over par...



But, I would not worry what you paid for it.... it really matters what it was selling for before the offer... it was $99 and they are offering $100... so they are offering more than people on the street...

 

[Golden sunsets]

If it is matched to a cash need and you are fine with holding, I would hold... you had not mentioned that you wanted to sell it, so why would a tender offer change your mind... especially for only a $1 gain over par...



But, I would not worry what you paid for it.... it really matters what it was selling for before the offer... it was $99 and they are offering $100... so they are offering more than people on the street...

Well we did of course regret the purchase when it was down around 28. As it rose we were relieved and did in fact wonder if we should sell quite recently when it hit 95. But the tender offer and the subsequent discussion surrounding health of the company has made us question why we would sell it and give up several thousand dollars of income over the next three and a half years.


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[NW-Bound]

I would hold the bond. Why get $1 above street value if that's just 1 quarter's worth of interest?

By the way, I did not know of the bond, but bought CLF shares on the way down, and just now about breaking even. When you buy too early, it hurts like crazy.

 

[Texas Proud]

Well, I will throw in a completely different thought process.... opposite of what I posted above

Is there some other bond that you see that might pay a bit more?

It might be worthwhile to take the tender, book the loss (if it is in a taxable account) and then buy the new bond and get a little bit more juice...

 

[DrRoy]

You could always split the difference and sell half.

 

[Running_Man]

My question is what are you basing the desire to hold a bond with Cliffs natural Resource on? If it is Seeking Alpha posts you should sell and hold index funds. It is a company that sank on the common from 85 in 2011 to low single digits in 2015 and has recovered to about 12 as the price of iron ore has recovered. Another downturn and your bonds are worthless, an upturn and the common stock will do very well and your bonds will hold their value. Value Line applies a safety rating of “5” to this stock, meaning it is one of the 5 percent least safe stocks to own in the Value Line universe of 1700 stocks, not surprising since shareholder equity is actually at a very large deficit. Moody’s rates this as what Caa2? I cannot fathom holding this debt if the 2 percent of interest meant that much to me as the 50 times greater value of the capital I find far more important.

 

[NW-Bound]

The bond is due in 2020. So, it's not that far away. The company prospect is improving, and if the OP held on through much tougher times, why the worry now? On the other hand, the potential reward on the bond at this point is low relative to its stock which I hold.

By the way, Cliffs has some bonds out to 2040 paying 6.25%! And they have a whole lot more with the maturity date of 2020, but of varying coupon rates from 4.8% to 8.25%. I am not a bond investor, so never follow this market.

 

[Golden sunsets]

RM and NW. Both good points of view. I am leaning toward selling and investing in a similar maturity bond with a much lower interest rate. This is the fixed income portion of our portfolio. We do invest in index funds for the equity portion of our portfolio, but for the FI portion we hold individual bonds with maturities tied to our RMD schedule. We don´t like bond funds and seeing that we have specific needs tied to RMD´s so we have constructed a ladder and add a year at the end of the ladder each year. The remainder of our FI portfolio is in our after tax accounts and is in either CD's, I bonds or Tax exempt intermediate vanguard funds (the one exception we have made to our aversion to bond funds as we don´t see ever needing those funds and so don't worry about rising rates). We never intended to purchase a junk bond. This bond was downgraded subsequent to our purchase. It was admittedly a poor choice and I was probably reaching for yield to a certain extent. Lesson learned. Thanks for your perspective