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Bond/Stock Yield Arbitrage


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Has anyone run into situations where the bonds and stocks of firms have large differences in yields or FCF yields for stocks?  The following are current situations that I have found:


Firm                    Bond Yield                Coverage Ratio              Equity FCF yield


TVL                          5.3%                            4.5                                  33%

GTN                        6.3%                            2.5                                  53%

AIQ                          6.6%                            3.0                                  61%

NXST                        6.7%                            2.9                                  34%

SALM*                      6.5%                          2.8                                  28%


* Refi assuming current yield on bonds


Now either the bond market is wrong or the stock market is wrong.  I have tendency to believe the bond market.  Any other observations would be appreciated.  TIA.



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You are right about how these can be value traps in a declinig market (as the FCF will decline going forward).  However, each of these firms has had incerases in cash flows ove the past 5 to 10 years (except AIQ, which a bargain for other reasons).  Another trap could be capital intensive businesses where the FCF will decline going forward.  Given the coverage ratios at this point, I am not concered about restructing.  For some of the firms with lower coverage ratios this can be an issue (CMLS is an example).



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In the opposite direction, Hovnanian (HOV) has bonds trading at 44, 56 and 82 cents on the dollar, yet shareholders are comparatively very enthusiastic.


LDK, RDN, RDDC, VRS, GTIV, BONT, etc. are also possible suspects. They have comparable prices/yields to many companies in bankruptcy. The equity market may be right about a few of those though.

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