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A.M. Castle Junk Bonds Not Worth the Risk

Metals wholesaler A.M. Castle (CAS) has a series of bonds (Cusip 148411ae1), yielding over 6%, with less than a three year maturity. All things being equal, they would probably be a pretty good deal. However, upon viewing the details of the bond's prospectus, the risks involved are not worth it.

A.M. Castle was founded in 1890 and distributes metals and plastics to various industries. It does not produce but merely wholesales. The stock price has been down, sales are down, and expenses are up. This article for Seeking Alpha Pro subscribers make a bullish case despite these failings.

Castle issued $225 million in a new series of debt to replace an older series in December 2011. The debt carries a coupon of 12.75% and matures December 2016. The last trade was in December 2012 at a price of 111.75 for a 6.382% yield.

A look at the balance sheet from the most recent quarter shows $41 million in cash, $158 in receivables, $243 in inventory--well enough to handle $225 in debt and $132 million in accounts payable. Plus, the Annual Report shows the value of its buildings at only $14.485 million. If its warehouses, at 1,452, 800 square feet, averaged $40 per square foot, they alone would equal $58 million in current market value. That's a nice hidden asset for bond holders.

It's the covenants in the prospectus that scare us off. After December 15, 2014, Castle has the right to recall bonds at 106.375. That's a loss of almost $54 off the current trade, not counting coupons. From December 2015 onward, the bonds can be called at par--$100! That's a $112 loss!

If you were management, wouldn't you try anything you could to keep from paying a coupon of almost 13%? You would be talking to any banker or hedge fund to loan you money to take out this debt.

When looking at fixed income, always read the prospectus. It will shed a little more light on the five c's of credit evaluation: covenants, character, capacity to repay, capital, and collateral. Actually, this bond almost meets all of them. There is plenty of capital. This issue is high in seniority relative to other debtors. It's the details in the prospectus that preclude this as a good investment. Bond buyers are probably better off moving on down the road and looking for something with less risk.

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