If you've read many of my articles over the past several months, it would have been hard to avoid coming across an article discussing fixed income in some fashion. In general, I like to write about asset classes, individual securities, and investment strategies that I think are underserved, misunderstood, and/or overlooked by investors. I also like to occasionally challenge conventional wisdom to get people to think in different ways than they might be used to. Among other things, like precious metals and options, I like to write about individual corporate bonds. I think buying individual bonds is an area that is quite underserved (although that is beginning to change), incredibly misunderstood, and absolutely overlooked by many investors.
For those readers who have signed up to follow me on Seeking Alpha, you might have noticed that I've been pretty quiet over the past few weeks. Part of the reason is that I haven't come across many bonds or stocks trading at prices that really excite me. Despite the fact that since April 13 I've made just one purchase, in the early part of April I did purchase several corporate bonds and a few stocks. Below, I'd like to share my five most recent corporate bond purchases:
Peabody Energy's (BTU) senior unsecured note (CUSIP: 704549AH7) maturing 9/15/2020 has a 6.50% coupon and is asking 105.00 cents on the dollar (5.738% yield-to-maturity before commissions). It has a make whole call and pays interest semi-annually. Moody's currently rates the note Ba1; S&P rates it BB+. I purchased this note on April 9, 2012 at 98.85 cents on the dollar after commissions (6.68% yield- to-maturity).
Chesapeake Energy's (CHK) senior unsecured note (CUSIP: 165167BU0) maturing 11/15/2020 has a 6.875% coupon and is asking 100.00 cents on the dollar (6.875% yield-to-maturity before commissions). It has a make whole call and pays interest semi-annually. Moody's currently rates the note Ba3; S&P rates it BB. I purchased this note on April 20, 2012 at 97.10 cents on the dollar after commissions (7.336% yield-to-maturity).
CONSOL Energy's (CNX) senior unsecured note (CUSIP: 20854PAH2) maturing 3/1/2021 has a 6.375% coupon and is asking 95.48 cents on the dollar (7.07% yield-to-maturity before commissions). It pays interest semi-annually and has the following call schedule: make whole until 3/1/2016, callable at 103.188 beginning 3/1/2016, callable at 102.125 beginning 3/1/2017, callable at 101.062 beginning 3/1/2018, and callable at 100 beginning 3/1/2019. Moody's rates CONSOL's senior unsecured notes B1; S&P rates this note BB. I purchased this note on April 13, 2012 at 94.70 cents on the dollar after commissions (7.192% yield-to-maturity).
Ball Corp.'s (BLL) senior unsecured note (CUSIP: 058498AR7) maturing 3/15/2022 has a 5.00% coupon and is asking 102.158 cents on the dollar (4.723% yield-to-maturity before commissions). It has a make whole call and pays interest semi-annually. Moody's currently rates the note Ba1; S&P rates it BB+. I purchased this note on April 10, 2012 at 99.99 cents on the dollar after commissions (5.001% yield-to-maturity).
Bank of America's (BAC) senior unsecured note (CUSIP: 06051GEN5) maturing 2/7/2042 has a 5.875% coupon and is asking 100.46 cents on the dollar (5.841% yield-to-maturity before commissions). It is non-callable and pays interest semi-annually. Moody's currently rates the note Baa1; S&P rates it A-. I purchased this note on April 9, 2012 at 98.065 cents on the dollar after commissions (6.01% yield-to-maturity). If you decide to purchase this long-term bond, be especially prepared for wild, sometimes gut-wrenching swings in price.
As you can see from this list, four of the five bonds are rated non-investment grade, and the only investment grade bond (Bank of America) trades like it's non-investment grade. All five notes are subject to large swings in price for similar reasons as why a stock might move: investors price in problems specific to the business or industry, investors sell based on larger macro concerns (everything getting sold off), or investors rotate out of an asset class (fixed income, for instance) into something else. With that said, if you just focus on high-yield exchange-traded funds such as HYG or JNK, you might not realize that the bonds of certain companies or certain industries are selling off for reasons non-macro, non-asset class rotation related. In other words, the overall market is not selling off with the individual securities. Peabody Energy, Chesapeake Energy, and CONSOL Energy's bonds were examples of this when I purchased them.
Since the time of purchase, Peabody's bond has gone up significantly in price, dropping nearly 100 basis points in yield. At today's price, it no longer interests me. However, if the yield and credit risk does still interest you, before purchasing it, think through the risk of the make whole call being exercised versus the price over par you would be paying for it.
Chesapeake's bond is still at a price I consider satisfactory, and I consider CONSOL Energy's bond an acceptable risk for the high-yield investor who already has built a diversified corporate bond portfolio with plenty of other holdings. Considering that I purchased Ball Corp. and Bank of America's bonds at what I perceived to be fair value (by no means cheap), at current prices, I would not be interested in adding to the positions. With that said, given the reality of Bank of America being considered a too-big-to-fail institution, at roughly 275 basis points over a corresponding Treasury, I can understand if investors view its 5.841% yielding bond as "risk free" and worth a shot. I'm also quite certain many investors disagree with this notion.
In closing, it should be noted that my corporate bond portfolio currently consists of 39 different companies and more than 39 different CUSIPs. Only 10 of those companies have at least one non-investment grade rating. When purchasing individual bonds, I find it extremely important to diversify. And, especially when looking to purchase non-investment grade rated bonds, I find it particularly important to exercise patience and to have the willingness to hold the bond to maturity. I am currently not finding any opportunities in the high-yield bond market that I find wildly exciting at this time. However, there are a few bonds here and there I find to be modestly enticing (some mentioned above), and if you have a little patience, I'm sure more opportunities will present themselves as the year progresses.
Finally, please be aware that prices in the over-the-counter U.S. bond market may vary depending on the broker you use. I discuss this in my article, "Are You Paying Too Much For Your Bonds?" The current prices may also differ greatly from those listed at the time this article was written. For more information on any of these notes, including additional call or put features, please contact your broker or read the indenture.
Also, please do your own due diligence on the financial profiles of the companies mentioned in this article. Only you can determine if taking the counterparty risk of purchasing individual bonds is suitable for you.
Disclosure: I am long BTU. I am long all five of the CUSIPs mentioned in this article.