How about an idea that might get our equity-focused readers a bit more worked up?
JB: One offering a much higher yield to maturity, but with a different risk profile, is NII Holdings (NIHD), which used to be known as Nextel International. It’s a publicly traded company that provides cellular telephone service in Central and South America. In 2007 they issued 3.125%-coupon convertible bonds maturing in 2012. At the time there was some option value in the bond because the stock was trading at $80 and the conversion price was $118. But with the stock now at $15, this is essentially just a bond.
These converts now trade at 68 cents on the dollar, offering a yield to maturity at par of 16%. The issue then comes down to an assessment of the default risk. Over the last 12 months, the company earned EBITDA of $1.2 billion, versus total debt of $2.3 billion. That makes the ratio of total debt to EBITDA – the bond equivalent of a P/E – 1.9x. Could we imagine them selling the business for at least 1.9x EBITDA and making us whole as a debt holder? Absolutely.
Other big positives for bond holders are the company’s $1.3 billion in cash and $2.5 billion in current equity value, which would have to get burned through before our yield was impaired. The risk of the business collapsing enough for that to happen over the next five years is not zero, but we believe that a wellestablished telecom business like this shouldn’t be subject to anywhere near the cyclical downturn that would imply. Given that, we think people would be hard pressed to find elsewhere a 16% annual return in securities carrying comparable risk to these.
Is currency risk an issue here?
JB: Yes. While most of the company’s operating expenses are in the same currencies as its revenues, it could be an issue because the interest costs are in dollars. That’s particularly a concern when the dollar has appreciated as aggressively as it has against Latin American currencies in recent months. Based on our analysis, though, the company would still be able to pay its interest in dollars out of cash flow even if the value of the currencies in which they earn deteriorated at twice the rate of the most recent quarter. Given that that’s unlikely to happen over an extended period of time – and that they have that $1.3 billion in cash – we don’t consider the currency situation overly problematic.