Fixed Income Investing II

[beachfire]

The ratings are just normal “slottings”. I doubt you find any A rated subordinated debt. That is the nature of “cap stacks”. Short version, a corporation can issue senior secured, senior unsecured, subordinated, and junior subordinated. Preferreds land on other side of ledger into equity though are often treated as “debt like”.
They generally drop 2 slots per cap stack lowering. That is how rating agencies do it. So if you have a BBB senior unsecured, you pretty much know, if they issued subordinated debt its going to slot BB+. etc. etc. Many times companies will issue subordinated debt because rating agencies will give it 50% “equity credit” for the debt. Conversely preferreds often are given 50% “debt credit”. One gets higher yield here, but the trade off is, if company goes bankrupt you will almost always have your nose pressing against the window on the outside looking in…Along with the preferred and common stock holders.
Added clarity, rating agencies tend to lump preferreds, and subordinated debt together. Thus their 50% debt or equity “credit” given to them. Sometimes they slot a subordinated issue a tick higher. And Fitch sometimes slots a non cumulative preferred a tick lower than a preferred.

Is each bond labeled to designate where it falls in the “Cap Stack” in a consistent and EASY to find way. Or is this something I need to dig out of the prospectus? Thanks

 

[Montecfo]

Is each bond labeled to designate where it falls in the “Cap Stack” in a consistent and EASY to find way. Or is this something I need to dig out of the prospectus? Thanks

Each issue is categorized and labelled as Milligan suggests. You can see right when you buy it whether it is senior, etc.

 

[Mulligan]

Is each bond labeled to designate where it falls in the “Cap Stack” in a consistent and EASY to find way. Or is this something I need to dig out of the prospectus? Thanks

FINRA used to label them. Then they very recently revised their layout and its finding needles in a haystack now. When you pull up a bond from cusip from your brokerage it should have it labeled there correctly. But the prospectus is where the primary source accurate info comes from. For example this ComEd issue. Both brokerages and FINRA have this issue as noncallable. And that is 100% wrong, because I read the prospectus.

 

[Gumby]

Determining where you actually are in priority of payment is not always straightforward. The bond indenture is the first place to look, but there can also be intercompany guarantees and intercreditor subordination agreements. Additionally, precisely where the debt lies in the corporate structure is important. Generally, in a bankruptcy, the debt of the operating company is structurally senior to the debt of the holding company absent a guarantee or subordination agreement. And remember that you are not just competing with the other bondholders; there likely is also bank debt, which could be syndicated or not.

 

[Mulligan]

Is each bond labeled to designate where it falls in the “Cap Stack” in a consistent and EASY to find way. Or is this something I need to dig out of the prospectus? Thanks

Beach, do you ever use your bond screener from brokerage? For example with ComEd it pops up on my TD, but Vanguard doesnt offer it. For example if you screen BBB- above, 6%, utilities, and maturity range of 2029-2035 this issue would pop up if your brokerage offers it online. I tend to buy only utility bonds, so this is how I do it. Over 6% and that duration is pretty thin. Only PCG bonds show up with that yield (not counting gas and KMI affiliate type debt quasi regulated stuff). And technically the PCG preferreds are higher in stack because they are from operating subsidairy, while the debt is from the holding company.

 

[Mulligan]

Determining where you actually are in priority of payment is not always straightforward. The bond indenture is the first place to look, but there can also be intercompany guarantees and intercreditor subordination agreements. Additionally, precisely where the debt lies in the corporate structure is important. Generally, in a bankruptcy, the debt of the operating company is structurally senior to the debt of the holding company absent a guarantee or subordination agreement. And remember that you are not just competing with the other bondholders; there likely is also bank debt, which could be syndicated or not.

That is why one is wise to assume anything below senior unsecured gets wiped out. Because in times of stress cap stack above you suddenly pops up out of the blue. Senior secured, bank, and then lastly DIP.
Take NuStar. A fairly leveraged company but doing fine cash flow wise presently. They have a floating subordinated note NSS (which I own) that is frankly mentioned by Fitch in having a most likely 0-10% recovery in a receivership situation. Its just the reality of the situation even if that situation is not an immediate threat.
Added thought from Gumby. Take the Comed referenced issue. Its parent is Exelon. Exelon will be subordinated to operating debt, so ComEd is going to be rated higher. But additionally my preference is operating co debt and preferreds. As it is closer to the bosom of protection from the state regulators. The plight of the hold co is not a priority to them.
People get operating and subsidiary confused often. They are not the same. Take my preferred HAWLM recently purchased at 6.02% present yield in $17.40s range. The common stock ticker is HE (Hawaii Electric Industries). The preferred is coming from Hawaii Electric. You cant buy Hawaii Electric common stock because HE owns it all. But you can buy the preferreds which are at the subsidary level.

 

[beachfire]

Beach, do you ever use your bond screener from brokerage? For example with ComEd it pops up on my TD, but Vanguard doesnt offer it. For example if you screen BBB- above, 6%, utilities, and maturity range of 2029-2035 this issue would pop up if your brokerage offers it online. I tend to buy only utility bonds, so this is how I do it. Over 6% and that duration is pretty thin. Only PCG bonds show up with that yield (not counting gas and KMI affiliate type debt quasi regulated stuff). And technically the PCG preferreds are higher in stack because they are from operating subsidairy, while the debt is from the holding company.

Thanks for all the info. Yes, I do all my investing through Merrill. I will go into the screener and see what I can find. I do have access to fidelity and Schwab as well, so I can see if they make this info more readily available.

 

[Mulligan]

Thanks for all the info. Yes, I do all my investing through Merrill. I will go into the screener and see what I can find. I do have access to fidelity and Schwab as well, so I can see if hey make this info more readily available.

It may depend, but you probably have to do this while bond market is open to get all inventory available at current pricing. On my brokerages anyways, most of the available bonds disappear after market closes.

 

[imbatman]

I don't see 20035AAA2 in Fido screener search results today but a lot of stuff missing from results when market is closed due to no quantity available (I can look up the CUSIP no problem). I really wish Fido allowed you to screen for Ask MINIMUM Quantity, that would reduce a lot of noise for me (unfortunately not in the market for 250 minimums ha ha). I had noticed PCG and Pacific Corp issues but the Western utilities with wildfires and lawsuits and bankruptcy doesn't make for good sleeping for me.

 

[youbet]

I went beyond 2032 today, with a smaller add on purchase of the 2033 Commonwealth Edison (ComEd) Illinois’s largest utility. Issued in 2003 as a 6.35%
par subordinate trust debt issue. Got it a smidge over par. Bought more last fall after bond rout. I think 2035 is the furthest out bond debt I have that being an Empire District Electric senior unsecured issue.

I found it selling on Schwab but unavailable to legal residents of Illinois. Huh?

Blue Sky Restrictions: This bond is not available to the legal residents of the following states/territories: Arkansas, American Samoa, Federated States of Micronesia, Florida, Illinois, North Dakota, North Marianas, Ohio, Texas.

 

[Texas Proud]

Wow... a long thread already... and I missed the first thread....


I have started to buy some bonds recently... before I was buying the preferred but since I am now putting in a larger amount want to get some safety... this is from moving my 401(k) and now not having an allocation in a bond fund... lucky short term rates have gone up...



Still trying to get a game plan together... maturity, coupon etc etc...

 

[Mulligan]

I found it selling on Schwab but unavailable to legal residents of Illinois. Huh?

Thats damn peculiar assuming they dont have something screwed up on their website. I have seen that message with CDs, not bonds though. TD doesnt have that message associated with the bond.

 

[COcheesehead]

Blue Sky laws.

 

[rkser]

ishares ibonds defined maturity bond etfs

Does anyone invest in these ibonds etfs, which I need help in understanding.

I am reading up on them, seem like a collection of defined maturity bonds which can be tapered to short term govt. treasuries, to avoid the duration risk in a rising Fed Rate environment.

Thankyou in advance

 

[pb4uski]

Yes, that's it. You own a share of an ETF. The ETF owns a portfolio of bonds that mature in a stated year. When the stated year arrives the bonds mature and the ETF reinvests the maturity proceeds in short term paper. In late December of the maturity year the ETF makes a terminal distribution to the shareholders and the ETF is closed.

So it slots between individual bonds and bond ETFs and provides convenience of a bond ETF and diversification for the corporate bond varieties. (You don't really need diversification for full faith and credit bonds).

 

[COcheesehead]

There was talk on the old thread of rising yields. So far the reality is the opposite.

 

[Montecfo]

Yes. There was also some talk of not not rising yields but seemed to get drowned out.

We had a brief opportunity after the June ADP report.

Really have to move on these spikes when they happen.

 

[imbatman]

Yup, rising prices / lower yields and few new issues the last 2-3 weeks............will be curious to see what happens with the Fed meeting next week

 

[COcheesehead]

The short term bonds have risen, but they don’t give me reliable income, only short term returns. All my best longer term holdings were bought in June ‘22 for munis and last Fall for everything else. So what does that tell me? The Fed continues to raise rates and the fear of recession as told by the bond market, increases.
My next significant amount of maturing bonds occurs late this year. We’ll see what the market gives me then.

 

[Montecfo]

I thought we might see an uptick on the GDP report but I did not see much to buy.

Now with PCE coming in soft and wage inflation rate declining not sure we will see much improvement absent some external event.

Continuing to watch.

 

[Mulligan]

I thought we might see an uptick on the GDP report but I did not see much to buy.

Now with PCE coming in soft and wage inflation rate declining not sure we will see much improvement absent some external event.

Continuing to watch.

I toed in a bit more today. I really will only own utility debt, so my range is narrow with lower yields. That being said a random 10 stray noncallable 2033 PECO 5.75% par (issued 2003) IG subordinated bonds became available at $94.35 for a 6.55% ish YTM so I added to my collection and bought them.

 

[COcheesehead]

I toed in a bit more today. I really will only own utility debt, so my range is narrow with lower yields. That being said a random 10 stray noncallable 2033 PECO 5.75% par (issued 2003) IG subordinated bonds became available at $94.35 for a 6.55% ish YTM so I added to my collection and bought them.

Dependability of income in my mind is just as important as higher yields. You need to capture both. Sitting in short term stuff can dangerous when the music stops and there are no more chairs or the enlarged lady starts to sing. I think you made a good choice.

 

[Montecfo]

I toed in a bit more today. I really will only own utility debt, so my range is narrow with lower yields. That being said a random 10 stray noncallable 2033 PECO 5.75% par (issued 2003) IG subordinated bonds became available at $94.35 for a 6.55% ish YTM so I added to my collection and bought them.

Sounds like they needed a good home and found one.

 

[Mulligan]

Dependability of income in my mind is just as important as higher yields. You need to capture both. Sitting in short term stuff can dangerous when the music stops and there are no more chairs or the enlarged lady starts to sing. I think you made a good choice.

Now if you like income with a bit more risk, Consider researching KMPB at $17.30 with a present straight up 8.35% yield and will go exD for interest payment .3672 next month too. Its a subordinated baby bond note from Kemper Insurance. BB+ (high junk). The common stock is actually up a little both YTD and 1 year despite this being a horrible losing year for the P&C insurers. Their 2032 BBB- senior unsecured are also trading market strong in lower 6% YTM range.
Anyhow, its a reset note that resets in 2027 with a 4.14% adjustment plus 5 year Tbill yield. But the payment yield is based off par $25. So one can see how much yield one could get at reset. One can make their own future assumptions but if it reset today it would be a 11.95% yield for following 5 years. If the company stays viable it should be compelled to drift back towards par.

 

[COcheesehead]

Now if you like income with a bit more risk, Consider researching KMPB at $17.30 with a present straight up 8.35% yield and will go exD for interest payment .3672 next month too. Its a subordinated baby bond note from Kemper Insurance. BB+ (high junk). The common stock is actually up a little both YTD and 1 year despite this being a horrible losing year for the P&C insurers. Their 2032 BBB- senior unsecured are also trading market strong in lower 6% YTM range.
Anyhow, its a reset note that resets in 2027 with a 4.14% adjustment plus 5 year Tbill yield. But the payment yield is based off par $25. So one can see how much yield one could get at reset. One can make their own future assumptions but if it reset today it would be a 11.95% yield for following 5 years. If the company stays viable it should be compelled to drift back towards par.

I have my high yield covered in a pretty substantial position paying about 12% yield. It’s about 4.5% of my portfolio. That’s about all I want to devote to that type of investment.