- Back in November, I recommended to buy Nyrstar bonds at 86 cents on the dollar after a panic-induced fire-sale.
- Now the dust has settled, the bonds are trading above par again.
- I recommend to hold the bonds until the maturity date in April 2015.
Approximately 5 months ago I wrote an article on Seeking Alpha explaining why I thought it was a good idea to buy some Nyrstar (OTCPK:NYRSY) bonds on the secondary market, as a lot of retail investors were dumping the bonds after Nystar released some bad news. In this article I'll look back at my decision back then to see whether or not it was a good decision to buy the bonds when everybody else was dumping them and what my game plan now is.
What happened in November of last year?
As I explained in the earlier article, Nyrstar released a series of negative press releases as Talvivaara announced severe problems at its mine. The problem was that Nyrstar advanced Talvivaara $335M in 2010 as an advance payment to purchase zinc concentrate from the company. Unfortunately, as Talvivaara encountered significant problems and even planned to go into bankruptcy, it became very unlikely Nyrstar would see either its $335M or the corresponding value in zinc concentrate back. The market didn't seem to realize that even IF Nyrstar would have to record a $300M impairment charge, this would have been a non-cash charge and would NOT have impacted either the company's cash balance or its operating cash flow. Additionally, Nyrstar expected to invest in excess of $350M in its smelting activities and a further capital raise or debt issue seemed very likely as the vertical integration wasn't going according to plan.
Investors were just sick of the bad news, and the shares initiated a sharp nose dive. Strangely enough, the bond prices also started to go south resulting in an increasing yield. Investors didn't seem to realize that the bonds they were holding are actually senior bonds and would be repaid before the shareholders would see a dime. As most bondholders were retail investors (with weak hearts and a high blood pressure, in hindsight) (Nyrstar did a good job to market its bonds to smaller retail investors, as the minimum size of the bonds was just 1,000EUR), a lot of bondholders started to dump the Nyrstar bonds in what was a very illiquid market.
As the bond sellers strongly outweighed the buyers of the respective bonds, there suddenly was a huge price drop in the Nyrstar bonds, and even the senior unsecured bond which would mature just 18 months later was trading at less than 80 cents on the dollar for a moment.
Buying the bonds
I bought some of the 2015 bonds (I preferred the 5.5% 2015 bond over the 5.375% 2016 bond as there's a 'seniority by maturity' on the 2015 bonds), and haven't regret my decision yet. After trading a few days at a surrealistic discount of almost 20%, the larger market parties grabbed themselves together and started to buy the bonds.
Size of Issue
Back in November I recommended to buy the bonds at 85.8 cents on the dollar, and as of today, that bond has gained back a lot of ground and is actually trading ABOVE par at 100.3 as of this moment. This means that someone who dared to dip his/her toes into this bond is already sitting on a 17% gain and approximately 2% in interest payments (with the annual interest payment expected to happen next week).
What to do now?
Well, the company will pay its 5.5% (gross) coupon next week, so I'm expecting a nice cash inflow in my portfolio. As the maturity date is just one year from now I will continue to hold the bonds. There will be some additional pressure on Nyrstar to re-finance this bond but I don't really expect huge problems as in Europe the corporate bond market is still on fire.
I also talked in my previous article about the possibility to offer bondholders to swap their bonds for a new bond with a longer maturity date (often with a higher coupon as well), and I think this still is a possibility even though the company hasn't hinted at a bond swap yet. But even if a swap offer would be made, I think I would not tender my bonds as I'd prefer to be paid out in cash in April 2015 instead of extending the maturity into the next decade
I'm glad I was able to pick up some bonds when retail investors were panicking and dumping the Nyrstar bonds. Market efficiency took care of it, and the bond prices are now once again comfortably trading around par. As the maturity date of the 2015 bonds which I recommended is in the first half of April next year, I will continue to hold the bonds until the maturity date to collect the 5.5% interest for another year and to avoid the transaction costs I'd incur if I'd sell the bonds now.
Additional disclosure: I have no position in the common shares of Nyrstar, but I do own Nyrstar-bonds.