Distressed Debt Investing

Hey guys,

Just wanted to update, I've made a few trades in February. Bought two issues of the FCX bonds, bought one at 54 and sold at about 81 this morning and then in my retirement account I bought more of a different issue in the low 60's and I am still holding it for now. I believe it is around 78 currently, so those are doing well.

I bought:

EXXI bonds
CHK Bonds
CHK Preferred Shares


Also looking at US Steel but wish I had acted before it started rallying already.

Anyways, anybody have any good potential plays they are looking at?
 
Wow. Congratulations on actually trading these things (which I have yet to do) and especially for being profitable.

Although you now officially have more experience that I do, I feel compelled to mention three more things that I recall reading on this topic, just because I'd feel a bit guilty if not knowing these things screwed up your trading.

1. I read somewhere on distresseddebtinvesting.com that, on the day a company files for bankruptcy in the US, it is supposed to file a Statement of Financial Affairs ("SoFA") which usually has a ton of information that may be able to help you estimate the recovery value of its debt instruments. I believe you can pay pacer.gov to retrieve this filing for you, or perhaps you could use the paid service that distresseddebtinvesting.com runs if you're doing that enough.

2. I don't recall how I came to believe this, and I'm not 100% sure about it, so you definitely should verify it, but, my understanding is that, by convention, the price quoted for a bond that is not defaulted is a base price to which you need to add a linearly (I think) pro-rated fraction of the next coupon payment. So, for example, if a bond makes a $2 coupon payment every January 1st, and you're trading on April 1st, then you need to pay $0.50 more than the quoted price to buy it. However, defaulted bonds are quoted just as a total price, with any defaulted coupons still attached. I think that this difference can be substantial, because a company will often file for bankruptcy on the day some payment is due.

3. As mentioned in a fictional example in Larry Harris's Trading and Exchanges: Market Microstructure for Practitioners, if you're dealing with a network of traders from whom you have to request quotes, such as the bond trading network that TD Ameritrade uses, always ask for both the bid and the ask prices without indicating whether you intend to buy or sell. Obviously, if you don't own at least one of the bonds, the TDA representative will know you intend to buy (since TDA does not let you short them), but ask the TDA representative not to reveal that but instead to just request quotes for both sides of the market.

Regarding potential plays to consider, I was a bit surprised that I couldn't find bonds for Sports Authority on finra.org.
 
toonerdy said:
Wow. Congratulations on actually trading these things (which I have yet to do) and especially for being profitable.

Although you now officially have more experience that I do, I feel compelled to mention three more things that I recall reading on this topic, just because I'd feel a bit guilty if not knowing these things screwed up your trading.

1. I read somewhere on distresseddebtinvesting.com that, on the day a company files for bankruptcy in the US, it is supposed to file a Statement of Financial Affairs ("SoFA") which usually has a ton of information that may be able to help you estimate the recovery value of its debt instruments. I believe you can pay pacer.gov to retrieve this filing for you, or perhaps you could use the paid service that distresseddebtinvesting.com runs if you're doing that enough.

2. I don't recall how I came to believe this, and I'm not 100% sure about it, so you definitely should verify it, but, my understanding is that, by convention, the price quoted for a bond that is not defaulted is a base price to which you need to add a linearly (I think) pro-rated fraction of the next coupon payment. So, for example, if a bond makes a $2 coupon payment every January 1st, and you're trading on April 1st, then you need to pay $0.50 more than the quoted price to buy it. However, defaulted bonds are quoted just as a total price, with any defaulted coupons still attached. I think that this difference can be substantial, because a company will often file for bankruptcy on the day some payment is due.

3. As mentioned in a fictional example in Larry Harris's Trading and Exchanges: Market Microstructure for Practitioners, if you're dealing with a network of traders from whom you have to request quotes, such as the bond trading network that TD Ameritrade uses, always ask for both the bid and the ask prices without indicating whether you intend to buy or sell. Obviously, if you don't own at least one of the bonds, the TDA representative will know you intend to buy (since TDA does not let you short them), but ask the TDA representative not to reveal that but instead to just request quotes for both sides of the market.

Regarding potential plays to consider, I was a bit surprised that I couldn't find bonds for Sports Authority on finra.org.
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Thanks man! I was excited about it and just decided to jump in feet first. We will see how it goes long term. I am in a lot of junk bonds and preferred shares so quite a bit of risk, but I basically mentally write off the full amount after buying and then if I get more than I paid it is a great day lol.

Thanks for the tip on SoFA, I hadn't ever heard of that before. I've read a bit on that site, but haven't had a chance to dig into it much yet. I definitely will in my free time though.

On your second point, are you talking about paying the accrued interest? I have two different brokers, IB I haven't seen where they list the accrued interest that I pay out, but in an Etrade account, the order screen shows how much you are paying in for the accrued interest.

As far as asking for both side on an unquoted market, do you mean so you can make sure that they aren't screwing you basically with a super wide spread? If so, always a good point. I've only traded ones with quotes on both sides. In a retirement account I did have to request a quote on one through Scwhab, but my other broker had a quote listed, so I could see if they were in line with that or not luckily. Between IB, Etrade, and Scwhab most have some form of quote that I've looked at, but that has kept me in good shape thus far. Good tip though.

Funny you mention Sports Authority, I actually checked them out the other day. I can't remember how I found them though. I'll have to check.

Update on everything I hold now, I left some off earlier:

BBEP Bonds and Preferred shares (very small position)
BTU Bonds (smaller position)
CHK Bonds and Preferred
EXXI Bonds

and then holding some FCX and US Steel in my retirement as well. I should have bought US Steel when it was lower, but i just wasn't that confident on them. I ended up buying because I feel they will pull through ok, but regardless we will see what happens. Just holding everything with no plans to sell unless we get some big rallies. CHK preferred are doing incredible and the bonds are doing decently (I bought too early into their drop, but still positive), but I plan to keep both the bonds and preferred on that position for now. It has a long ways to go still if they can pull through all this.
 
Daal said:
Two interesting bonds to look at
CNX 2022's
HNGR 2018's
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Thanks Daal, what is HNGR? I checked out Consul, but couldn't get HNGR to pull up for some reason. I am not at home so just searched on FINRA and Etrade but will check IB tonight. Schwab has been removing the junk bonds pretty quickly from their lists, so haven't touched them in my retirement accounts. Probably a good idea to leave it as is anyways.

Edit: A quick google says Hanger Inc. I will dig into them as well, thanks!
 
FCXoptions said:
Thanks Daal, what is HNGR? I checked out Consul, but couldn't get HNGR to pull up for some reason. I am not at home so just searched on FINRA and Etrade but will check IB tonight. Schwab has been removing the junk bonds pretty quickly from their lists, so haven't touched them in my retirement accounts. Probably a good idea to leave it as is anyways.

Edit: A quick google says Hanger Inc. I will dig into them as well, thanks!
More...

My thesis there is that BK would be actually good for the bond (chap 11 that is) because you get the new delevered equity with new management and without the accounting costs (which now are high due problems in the past, they eat a lot of their cashflows now). if they solve their problems and pay back the bonds, well that is good too as I make a good returns with a 2year hold. Keep in mind that I'm not a pro at this, I never held a bond in bk so I could be wrong. I got a small position in both these bonds because HY investing is something that I don't have a ton of experience
 
the bond is illiquid the compány has not filled financials for a long-time,makes me think the bond would be mispriced as the funds dont want to get involved in something like this
 
I was holding CHK preferred shares in both my regular account and my retirement account as well as FCX bonds still in my retirement account and briefly put on US Steel bonds.

I've closed out all of FCX and US Steel for a nice gain. Steel was just about 6%, but I only held it for a week or so. FCX I held for longer of course and I think the final result came in at slightly over 30% on the retirement account piece.

CHK preferred I cut my exposure in half. One account I squeezed out about a 85% return on the half I closed and the other was around 45% (bought at different times). Still holding half the initial position in each and more than likely will continue to hold for awhile. After almost doubling I felt it would be prudent to take some off that off the table given their situation. Still holding the CHK bonds also which are up about 50% but it's a small position.

Now, on to the more "distressed" plays:
Breitburn (BBEP) bonds I am down a small amount in and up a small amount in the preferred shares. It's a tiny position on both, but I'm around breakeven to down slightly overall between the two of them.

Peabody (BTU) announced today their interest payment was being delayed and Chp 11 is likely. The bonds rallied on the news I'm assuming because of the expectation of the recovery being greater than the current price they were trading at. Either way that put me up 30% or so on them, which is good of course, but I'm hoping that the recovery will be 2-3x what I put in. We will see.

Energy XXI (EXXI) made their delayed interest payment. I think they are considering bankruptcy, but trying to wait it out for an oil price recovery. If oil moves back up, I think there is still hope for them. Their significantly reduced debt load makes me a bit more optimistic as they've lowered their break even cost by about $6/barrel in a matter of months by buying up their own debt for next to nothing. It's my largest position from a par value standpoint. Anything over about 4-5 cents on the dollar will be a profit. The main hiccup with them is a billion in second lien bonds that would of course get a huge piece of the recovery in a BK.

I think that's everything. I took a look at Logan's Roadhouse (the restaurant) bonds yesterday. I haven't dug into them yet, but they are listed as senior secured. I'm not positive on what the actual security backing them is though. They were trading around 25 cents on the dollar, so obviously whatever it is backing them up is questionable.
 
FCXoptions said:
I was holding CHK preferred shares in both my regular account and my retirement account as well as FCX bonds still in my retirement account and briefly put on US Steel bonds.

I've closed out all of FCX and US Steel for a nice gain. Steel was just about 6%, but I only held it for a week or so. FCX I held for longer of course and I think the final result came in at slightly over 30% on the retirement account piece.

CHK preferred I cut my exposure in half. One account I squeezed out about a 85% return on the half I closed and the other was around 45% (bought at different times). Still holding half the initial position in each and more than likely will continue to hold for awhile. After almost doubling I felt it would be prudent to take some off that off the table given their situation. Still holding the CHK bonds also which are up about 50% but it's a small position.

Now, on to the more "distressed" plays:
Breitburn (BBEP) bonds I am down a small amount in and up a small amount in the preferred shares. It's a tiny position on both, but I'm around breakeven to down slightly overall between the two of them.

Peabody (BTU) announced today their interest payment was being delayed and Chp 11 is likely. The bonds rallied on the news I'm assuming because of the expectation of the recovery being greater than the current price they were trading at. Either way that put me up 30% or so on them, which is good of course, but I'm hoping that the recovery will be 2-3x what I put in. We will see.

Energy XXI (EXXI) made their delayed interest payment. I think they are considering bankruptcy, but trying to wait it out for an oil price recovery. If oil moves back up, I think there is still hope for them. Their significantly reduced debt load makes me a bit more optimistic as they've lowered their break even cost by about $6/barrel in a matter of months by buying up their own debt for next to nothing. It's my largest position from a par value standpoint. Anything over about 4-5 cents on the dollar will be a profit. The main hiccup with them is a billion in second lien bonds that would of course get a huge piece of the recovery in a BK.

I think that's everything. I took a look at Logan's Roadhouse (the restaurant) bonds yesterday. I haven't dug into them yet, but they are listed as senior secured. I'm not positive on what the actual security backing them is though. They were trading around 25 cents on the dollar, so obviously whatever it is backing them up is questionable.
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Sounds like you're gonna need to change your screen name soon!
 
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