Bonds and capital protection
One reason why I like bonds is the following:
Limited Brands reported a bad (not terrible) quarter, and thus their stock got hit today. However, the overall picture of the business is not bad. They still made plenty of money for the year (about $219 million, after you back out the non-cash goodwill impairment charge), and have substantial liquidity.
The bonds contained within HJR (which is a trust) mature in 2033 (24 years from now), and give off a 6.95% coupon, and they also trade at around 54 cents on the dollar. HJR gives off a 7% coupon, and trades at 40 cents on the dollar (giving it a current yield of about 17.5%).
Eventually when the credit crisis stops, the bonds will trade upward to reflect a higher chance of a return of principal, and when this happens, the trust containing the bonds will also rise – my estimation is that they will go for around 9-10%, which will mean a fair value of roughly 70-78 cents on the dollar, or about a double from present levels. In order for equity to break even with this, you would need to see an LTD share price of about $15/share.
Of course, if LTD does wildly successful in the future, then the equity will go much higher, and investing in equity would have been the proper decision. However, the risk that is taken in order to get such a return is substantially higher, and the retrospective analysis of saying “I should have done that” is about as useful as saying “I should have picked these numbers for the lottery and I would have made a million dollars.”
I suspect the only reason why HJR is trading at such a discount is because it is illiquid, and it is unmarginable (at least at Interactive Brokers). Otherwise you could buy HJR and short the underlying bond and arbitrage the difference.
How does one go about discovering which bonds are traded in trusts?
I have been trying to educate myself on the basics of bonds, and the conclusion I came to was that they are only appropriate if you have a fair bit of money to purchase with.
And Questrade doesn’t seem to offer the purchase of underlying bonds anyway.
It’s funny: I would have expected bonds to be more transparent than stocks, but it seems to be the other way around.
Probably the best exhaustive resource to find out which asset-backed trusts are trading out there is http://www.quantumonline.com – the third party trust preferred securities is the applicable table.
You do have to read the prospectus for each of them, however – most of the language is boilerplate.
Exchange-traded trusts were meant to be traded by retail customers, hence the listing on the exchange.
Questtrade does support bonds, but just debt trading on the TSX.
Thanks – I’ll take a look at that.