NCAA Bonds: A Different Kind Of March Madness
Summary
- NCAA: No Coupon at All.
- There were a number of NCAA bonds in the run-up to the financial meltdown in 2008.
- Few NCAA bonds since--until last week.
- Is NCAA bond return a sign that the stock market is about to swoon?
Whenever you are inclined to doubt the excesses in the securities markets, you need only look as far as NCAA bonds. No, these bonds have nothing to do with college sports. In this case, NCAA stands for "No Coupon At All." These are high yield bonds that default even before it comes time to make their first interest payment, which is usually six months after issuance. (Investment professionals often refer to bond interest payments as "coupons," which is a throwback to the days when paper bonds were issued with interest coupons that you cut off and sent in to get paid.)
We saw a number of NCAA bonds in the run-up to the financial meltdown in 2008, but we have seen few if any since then. Until last week, that is, when American Eagle Energy Corp. (AMZG) announced that it would not make the first interest payment due March 2 on $175 million of bonds issued last August.
Is the return of the NCAA bond a sign that the stock market is about to swoon? We don't know. But at the least, it should be a warning to investors to do their research before buying any security. Just because the market is strong--as it was last August--and a sector is booming--as energy was early last year--that is no guarantee that a particular investment in that sector will do well.
This is especially true when a bull market, such as the one we are in right now, has been going on for a long time. For investment banks to make money, they need to keep coming up with new securities to sell. At times like this, they may have to dig down pretty deep in the quality barrel to come up with new product to sell. Buyer beware!
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