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US steel bonds yield near 20%
Old 11-18-2015, 07:32 AM   #1
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US steel bonds yield near 20%

Any one have an opinion?


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Old 11-18-2015, 07:39 AM   #2
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I would guess that they are extremely high risk...

Commodities are going down in price, including steel. The economy is slowing again. They just shut down some iron mines here in MN and will have a bunch of layoffs.

Do you feel lucky?
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Old 11-18-2015, 07:56 AM   #3
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No I don't feel lucky. I read some research and they are burning a little cash but not too much. My question is this. Will the US allow a company as significant as this to fail. I could see the equity going lower but the debt seems like a decent risk reward given the fact that everything is still perceived as bad and can just get better. But really I don't know the industry.


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Old 11-18-2015, 08:23 AM   #4
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Only 20%? I have some gold/copper mining company bonds which are paying 29%. I just got a $1875 payment a week ago.
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Old 11-18-2015, 08:28 AM   #5
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I had some GM bonds like that. I would have come out OK, except that the administration decided to put the unions ahead of the bond holders in the distribution of GM's remains.
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Old 11-18-2015, 08:45 AM   #6
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My question is this. Will the US allow a company as significant as this to fail.
Do some research on the coal industry...

China can meet all of out steel needs, and not ruin our environment. It's a win-win situation. But may not be for the bonds...
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Old 11-18-2015, 11:39 AM   #7
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Do some research on the coal industry...

China can meet all of out steel needs, and not ruin our environment. It's a win-win situation. But may not be for the bonds...

That would not be a promising precedent. Buy the bonds and next thing you know, being a peon bondholder, you get squeezed taking pennies on the dollar in a "restructuring" or X amount all converted into lovely common shares on a "recapitalization".


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Old 11-18-2015, 02:44 PM   #8
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I have shares of ArcelorMittal (and lost >50% on them), the European equivalent (but 5 times bigger), so I have a vague notion of the steel industry.

Long story short: it is not been good since 2009, and been getting worse with Chinese steel dumping their wares below cost. Governments are expected to react, but slowly. In addition the industry is CO2 intensive. Lots of dark clouds.

ArcelorMittal's debt got downgraded again recently.

Looking at US Steel's numbers they seem to be in even direr straits than MT, with much less equity.

Nevertheless 20% is a nice yield. I'd only buy in a diversified manner., and double check on the seniority. Net 30% equity is not a lot to absorb losses in case of bankruptcy.

ArcelorMittal keeps saying the apparent steel consumption is going up so recovery will happen in the end (high fixed cost business). But nobody really knows. A few players might as well go bankrupt. It's still a highly fragmented industry.
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Old 11-18-2015, 03:00 PM   #9
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If you do not know how to evaluate what your likely recovery is in a bankruptcy situation, keep walking.
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Old 11-18-2015, 03:11 PM   #10
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In the case of steel bankruptcy valuation it's quite simple:
  • Inventories, receivables, cash 80% (valued at cost or market, whichever is lower)
  • Intangibles 0%
  • Deferred income taxes: 0%
  • PPE: anywhere from 0% to 50%
Using those numbers you end up with roughly 0.35 up to 0.55 of book value. Incidently, market value is 0.4 price to book so Mr. Market agrees.



Equity is 30% of book value, so a haircut of 20% to 50% can be expected if they do go under. Much has to do whether plants will shutdown (makes em worthless) or can be kept going.
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Old 11-18-2015, 03:43 PM   #11
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Do some research on the coal industry...

China can meet all of out steel needs, and not ruin our environment. It's a win-win situation. But may not be for the bonds...
Well, first of all I don't think Chinese manufacturing will be more "earth-friendly" than US manufacturing. Second of all, "offshoring" industries seems fine and good (except for those families affected by layoffs) until we hit some sort of world crisis where an essential commodity isn't being produced by your own nation or a *very* trusted ally. Finally, given the legendary horror stories about the quality and toxicity of so much Chinese manufacturing, it doesn't exactly give me a warm fuzzy.
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Old 11-18-2015, 04:32 PM   #12
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Personally I'm scared of high yield corporate bonds... Especially if they are adjustable. I think when interest rates start to rise the huge run up on cheap corporate debt over the last few years combined with investors chasing yield (you know... Fund managers and pensions who have to get 7% but be 50% bonds) has made that asset class pretty scary. If interest rates are low and a corporate bond yield is very high and investors are chasing them my guess is they must be overpriced and will eventually fall back to earth.

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Old 11-18-2015, 06:03 PM   #13
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Personally I'm scared of high yield corporate bonds... Especially if they are adjustable. I think when interest rates start to rise the huge run up on cheap corporate debt over the last few years combined with investors chasing yield (you know... Fund managers and pensions who have to get 7% but be 50% bonds) has made that asset class pretty scary. If interest rates are low and a corporate bond yield is very high and investors are chasing them my guess is they must be overpriced and will eventually fall back to earth.

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If you think high yield corporate debt is scary, try even higher yielding junk preferred stocks. And yet people buy them, and actually complain about the haircuts their getting on investment forums. Investment grade, 6%-7% and safe is my sandbox I play in.


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Old 11-18-2015, 06:37 PM   #14
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Chinese steel?

The oil & gas industry gave up on buying their well casing and pump rods....too many failures and downhole failures are VERY expensive to fix.

Now sheet metal may be a different story if all you do with it is make car fenders and washing machine housings. As long as the paint don't fall off and it doesn't rust out within the warranty period, all is good!
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Old 11-18-2015, 07:31 PM   #15
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No I don't feel lucky. I read some research and they are burning a little cash but not too much. My question is this. Will the US allow a company as significant as this to fail. I could see the equity going lower but the debt seems like a decent risk reward given the fact that everything is still perceived as bad and can just get better. But really I don't know the industry.
The let Lucent go... and later wondered what had happened to the US telcom company when a Chinese one wanted to sell communication systems. I think it is more of a lobbyist question... can the lobbyist convince the government.
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Old 11-18-2015, 07:42 PM   #16
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Any one have an opinion?

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When do they mature?
What are other maturities yielding?
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Old 11-18-2015, 07:48 PM   #17
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US Steel has a market cap of less than 1.5 billion... Twitter has a market cap of over 17 Billion. Andrew Carnegie would be turning over in his grave if he knew todays world....


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Old 11-18-2015, 07:59 PM   #18
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Well, first of all I don't think Chinese manufacturing will be more "earth-friendly" than US manufacturing. Second of all, "offshoring" industries seems fine and good (except for those families affected by layoffs) until we hit some sort of world crisis where an essential commodity isn't being produced by your own nation or a *very* trusted ally. Finally, given the legendary horror stories about the quality and toxicity of so much Chinese manufacturing, it doesn't exactly give me a warm fuzzy.
A bit off topic, but when people see open pit mines digging taconite for making steel, they see an environmental disaster. When it's in China, no one from the USA sees it. Like a slaughter house. It's OK when it's made in China, and the US Steel industry doesn't matter.

We have many agreements in place to keep the Chinese from disrupting our supply of goods, or even counterfeiting items. So no worries about being a trusted partner.
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Old 11-18-2015, 08:06 PM   #19
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In the case of steel bankruptcy valuation it's quite simple:
  • Inventories, receivables, cash 80% (valued at cost or market, whichever is lower)
  • Intangibles 0%
  • Deferred income taxes: 0%
  • PPE: anywhere from 0% to 50%
Using those numbers you end up with roughly 0.35 up to 0.55 of book value. Incidently, market value is 0.4 price to book so Mr. Market agrees.



Equity is 30% of book value, so a haircut of 20% to 50% can be expected if they do go under. Much has to do whether plants will shutdown (makes em worthless) or can be kept going.
I'd probably approach this from an EV/EBITDA angle, but triangulation is best.
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Old 11-19-2015, 03:03 AM   #20
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seems to me they can borrow on prosper for less .
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