High Yield opportunities

[Phaceliacapital]

Guys (and girls?),

 

My boss asked me to do some research concerning high yield debt opportunities, since I am not (yet) really familiar with this part of the market I was wondering if there is anyone here who can point me in the right direction in terms of research, articles, books etc..

 

I know its not a typical value investor kind of question but given the high level of wisdom available here I thought it was worth the shot  :)

 

Thanks!

[Guest wellmont]

I don't know if I can help much. But your boss may have just rung a bell. :)

[anders]

I dont want to be offensive, but when a boss asks an employee to search for high yield debt and the employee goes to a forum to get info, then I know we are probably at the top of the cycle..

 

When High Yield yields less then the 10yr treasury five years ago, we need to score out the word "high".. investors have never been paid less to own high yield debt which makes the instrument very expensive... 

 

Advice from the oracle: “We’re not buying corporate bonds of any kind now,”

Buffett, 82, said May 4 during an interview with Bloomberg Television’s Betty Liu in Omaha, Nebraska, where Berkshire held its annual meeting. “Not at those yields.”

 

Best Regards,

 

[giofranchi]

I dont want to be offensive, but when a boss asks an employee to search for high yield debt and the employee goes to a forum to get info, then I know we are probably at the top of the cycle..

 

anders,

I don’t want to be offensive, but I simply don’t agree.

Like Parsad has pointed out, on this board you are in the company of at least a couple dozen people who have achieved results during the last 10 years that have handily beaten 99.99% of investment managers in the world.

And I would be very glad to hear from them on any subject, in any part of the market cycle! I might agree high yield bonds are to be shunned at these prices, but to build knowledge is always a worthwhile endeavor. And this board is a wonderful school, in which you could always learn a lot! ;)

 

giofranchi

[Green King]

Ask him if he needs a loan get him over the short term.

If not tell him stocks are the same as bonds.

They are all cash flow.  ;D

(no offence intended just trying to show the situation)

[mcliu]

Spread is decent if you match the high yield with a short in treasuries. So high yields are fine as long as you get your principal back.

[fenris]

Spread is decent if you match the high yield with a short in treasuries. So high yields are fine as long as you get your principal back.

Or buy levered loans instead and get almost the same spread with less credit headache and inherent protection against rising rates?

[jay21]

OP, from my limited knowledge of high yield, I would say there aren't many good corporates out there (maybe some loans in the B range so you get IR protection).  Some structured credit may be attractive, but you have to pick your spots.  Some mezz RMBS might be attractive, some CLO equity, and some Euros as spreads are higher but have been narrowing since late 2011.

 

Ask him if he needs a loan get him over the short term.

If not tell him stocks are the same as bonds.

They are all cash flow.  ;D

(no offence intended just trying to show the situation)

 

Contractual cash flows are much different than equity cash flows.

 

 

[DTEJD1997]

OP:

 

High yield debt is a different game than equity investing.

 

With that being said, there are some opportunities out there, but the only way you are going to earn above average returns is to go to obscure stuff that is mispriced.  Kind of like with stocks.

 

With that being said, some interesting opportunities have been posted over at VIC:

 

For example:

 

A). MTR Gaming 11.5% bonds @ 104

 

there was another gaming bond that was trading at like .80 on the dollar.  It was issued by an Indian Tribe and they were current with all payments.  high risk, but very likely mis-priced.

 

Not a lot of opportunity in this sector...

[anders]

Giofranchi,

 

If it was offensive, it was not what i wanted. I appreciate your input and apologize to the author if s/he feels that I went over the line.

 

The author asked for advise on how to find junk bond opportunities at present time.. I just tried to illustrate that junk bonds are very expensive. For me, the initial post is like someone that never bought a share asks for advise how to find opportunities in a tech company during the IT-bubble.. Hence, that would give a signal that last wave of buyers are approaching... and I tried to give that picture..

 

Junk bonds are part of the capital structure and in my experience the best way to find good opportunities is to do a dd on the comps that are issuing them and to read the prospect on terms - page by page.

 

Just remember this, High yield is a sales term, it was previously called junk for a reason.

 

BR,

 

 

[Packer16]

High yield has slim pickings now.  In addition to the MTR Gaming bond there is the broken ALSK telecom convert that is yielding 12%.  I have found much better picking in common or preferred stocks.  The preferred for either SSW or SD have good yields.

 

Packer

[LC]

SD has preferreds? Per Morningstar I only see bonds.

 

Edit: found one issuance, SDRXP...I wonder why Morningstar does not list these.

[Packer16]

Yes they do and Fairfax owns a nice block of some the high yielding converts.  Symbol - SDRXP  If I was to put more money into SD it would be via these preferreds.

 

Packer

[giofranchi]

Giofranchi,

 

If it was offensive, it was not what i wanted. I appreciate your input and apologize to the author if s/he feels that I went over the line.

 

The author asked for advise on how to find junk bond opportunities at present time.. I just tried to illustrate that junk bonds are very expensive. For me, the initial post is like someone that never bought a share asks for advise how to find opportunities in a tech company during the IT-bubble.. Hence, that would give a signal that last wave of buyers are approaching... and I tried to give that picture..

 

Junk bonds are part of the capital structure and in my experience the best way to find good opportunities is to do a dd on the comps that are issuing them and to read the prospect on terms - page by page.

 

Just remember this, High yield is a sales term, it was previously called junk for a reason.

 

BR,

 

anders,

I don’t know if it was offensive… I think we should ask Phaceliacapital… to me it sounded like he were compared to the legendary shoeshine boy, who gave stock tips to Mr. Baruch in 1929… and I guess I wouldn’t enjoy the comparison, if it were directed to me…

More important, I don’t think the comparison is due at all:

It's not what you don't know that kills you, it's what you know for sure that ain't true.

Phaceliacapital recognized he lacks knowledge about high yield, junk, distressed debt opportunities, and asked for help to people who he thinks might be more knowledgeable than he is. To me that is as far from the shoeshine boy as it could be. Phaceliacapital seems to know when he is venturing outside his “circle of competence”, and this alone imo will keep him out of trouble. And, if you know how to avoid trouble, you are among the best investors out there. :)

 

giofranchi

 

[Phaceliacapital]

Thanks for all the responses!

 

@ anders: No offense taken whatsoever. To me, looking for advice on COBF is something different than Mila Kunis offering FX trading advice on the Yahoo Boards. Like Giofranchi mentioned, there is this vast amount of knowledge available here (I think we all agree that COBF members/readers are able to benefit from some very interesting insights of people that have been in the industry for quite long and indeed have managed to perform relatively (pun intended) well).

 

With the opening of the thread I wasn't hoping to get "buy xx" or "sell zz" and blindly follow the advice given, but was rather looking for the sources and other information that could prove useful to create my own judgement of how bad/good current HY investments are.

 

The thing is, I work in the equity department so HY is currently not really up my sleeve, and, as you mentioned, in this kind of interest rate environment my first thoughts were also that HY instruments are not very attractive.

 

However, with our current company policy/culture (mind you I am not very senior) we are not able to just say "no" when our clients ask to look at this kind of option (which they probably heard of during one of their golf sundays from a dentist who lost it all in the dot com bubble). Instead, we try to create a good extensive and objective report why we are/are not doing certain things.

 

I am also scared that with this kind of instrument we are running a little behind the facts, so when my boss (actually not direct boss but a senior guy from the fixed income department) asked to do some research (I have done distressed/junk research from an equity POV) I considered COBF to be the perfect barometer to gauge the attractiveness of HY debt.

 

@ gf: I fully agree and thanks for the kind words!

 

@ GK: It are the clients that are asking for it so..

 

@ mcliu & fenris & jay21: Thanks

 

@ DTEJD1997: Thanks, will look into that, and obscure is not a problem!

 

So yeah, thanks for all the posts already, I will take your comments with me when doing my research throughout the weekend.

 

 

[WhoIsWarren]

OP,

 

A subset of HY is distressed debt and if you're interested in this you could probably start by reading a book like this:

http://www.amazon.com/Distressed-Debt-Analysis-Strategies-Speculative/dp/1932159185

 

Around two years ago or so I had an idea that I could study and eventually know enough about distressed debt to begin investing in it.  My background is in equities and I figured, well, a lot of the same skills must be applicable. 

 

I never got very far because I realised quite early the huge amount of work that would be involved.  It seems to me that distressed debt is a full time role -- not a tag on to an already full day.  The front cover of the book linked above has a picture of a chess board -- an illustration of the complexity involved.  Without proper experience or knowledgable contacts I reckon I would make many, many, expensive mistakes.

 

While the intricacies of distressed debt are far more complex than high yield in general, I still think you need to do dedicate a lot of time and effort and gain experience of a lot of different situations.  Else you'll surely play the role of the patsy?

 

Just some random thoughts of caution.

 

And where we may or may not be in the 'cycle', well that's some more for you chew on  ;D

 

 

[Packer16]

A good primer on high yield debt is "How to Make Money with Junk Bonds" by Robert Levine.  It is written in the style of Greenblatt's "You Can Be a Stock Market Genius" so it is a easy read and provides some great insights and top level theory into a value investing approach to high yield bonds.

 

Packer

[matjone]

There's a blog called "distressed debt investing"  that you could try reading as well.  I can't understand a single post on the whole blog but maybe you'll have better luck.

[constructive]

You can screen for high yield bonds and preferreds.

 

http://reports.finance.yahoo.com/z1?b=1&cpl=3.000000&cpu=-1.000000&mtl=-1&mtu=-1&pr=3&rl=-1&ru=-1&sf=y&so=d&stt=-&tc=1&yl=6.000000&ytl=6.000000&ytu=-1.000000&yu=-1.000000

 

http://quantumonline.com/

 

I don't think the high yield asset class is attractively priced right now, but there are always some opportunities here and there.

[Green King]

OP, from my limited knowledge of high yield, I would say there aren't many good corporates out there (maybe some loans in the B range so you get IR protection).  Some structured credit may be attractive, but you have to pick your spots.  Some mezz RMBS might be attractive, some CLO equity, and some Euros as spreads are higher but have been narrowing since late 2011.

 

Ask him if he needs a loan get him over the short term.

If not tell him stocks are the same as bonds.

They are all cash flow.  ;D

(no offence intended just trying to show the situation)

 

Contractual cash flows are much different than equity cash flows.

 

The key to investing is get more birds from the bush with the one in the hand. So the way you are getting it should not matter.

For that to work one should have a 5 to 10 year  investing period.

If you invest in something that will grow stronger over time.

The company can reinvest and higher than their cost of capital.

 

Why would you want them to pay money out ?

The interest payment only serve physiological  purpose.

If you are not in need of a loan now.

 

There is no difference in terms of pricing i am confident that the market will get the prices right in 5 to 10 years.