Saturday, June 26, 2010 1 comments ++[ CLICK TO COMMENT ]++

Interesting APC and RIG bonds to watch

This is more of a note for myself but others may find it insightful. Since bonds of BP, Anadarko Petroleum, and Transocean may be worth considering in the future—potential still not good enough for me—I have been researching them. For amateur investors without access to bond information, a good site is the freely available FINRA site.

In my opinion, assuming you are not buying them when overvalued, the ideal bonds for amateurs are convertible bonds. Some may not agree with that, especially since convertibles tend to pay very low interest, but if convertibles convert, they can be highly profitable. During bull markets, convertibles look like one of the worst securities around but they provide safety during bear markets or in distress situations. If you look at Warren Buffett's history, many of the distress investments he made have involved convertible bonds or convertible preferred shares.

Another type of bond that can be useful in distress situations, depending on the solvency of the company, is puttable bonds. These are bonds that you can put back to the issuer at specific prices at particular dates.

The strategy with puttable bonds is to buy them with the expectation of putting them back to the company within the next few years. If you buy the bond below par, say $90, and can put it back to the company at $100 in an year, you can earn roughly 10% in addition to the yield. If the put date is further off then the annual return would be lower. I would seriously consider this strategy if the price drops below $80 (for a $100 par value bond.)

We needs to keep two things in mind. First of all, interest income is taxed at higher rates so bonds are not tax-friendly. However, the puttable bond that is bought below par value will mostly result in capital gains so it isn't that bad. Secondly, the company must be solvent and able to buy back the bond. Since the market is betting that the companies involved in the Gulf oil disaster have a higher likelihood of failing sooner rather than later, you need to be sure that the companies don't fail before you put the bond. And if you are confident the companies will survive for a few years, or at least you put back your bond, then it begs the question whether you should be investing in these bonds instead of the equity. Equity would have far more upside if these companies survive***.

Here are some bonds that fit the categories I described above.

(key: bond_symbol, issuer, coupon, maturity_date)

Transocean puttable & convertible bonds:
* RIG.GK TRANSOCEAN INCORPORATED 7.45 04/15/2027 (??)
RIG.HC TRANSOCEAN INCORPORATED 1.50 12/15/2037
RIG.HB TRANSOCEAN INCORPORATED 1.63 12/15/2037
RIG.HA TRANSOCEAN INCORPORATED 1.50 12/15/2037

* RIG.GK shows up when I search for puttable bonds but future put dates aren't listed. It's either a mistake or the put date has passed already.


Anadarko puttable & convertible bonds:
APC.GL ANADARKO PETROLEUM CORPORATION 0% 03/13/2021
** APC.GE ANADARKO PETROLEUM CORPORATION 7.73 09/15/2096

** Put date really far off (in the year 2026) so not useful for our purposes


Footnote:

*** Even if you believe the companies will survive, there are scenarios where the equity may not beat the bonds. If the company survives but lingers on, then the stock may go nowhere for years. Also, the bonds won't be as sensitive to the macro environment. If oil prices drop to $40, chances are that the equity will either not recover (from the current 50% decline) or possibly collapse even further. I don't follow the oil & gas industry but my impression is that the market is pricing stocks as if oil prices will be $70 or higher in the long run so any oil price decline is going to kill these companies (especially E&Ps like Andarko and oil service companies like Transocean; integrateds like BP will be hit less by oil price declines.)

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1 Response to Interesting APC and RIG bonds to watch

February 23, 2013 at 1:47 AM

Oil stocks still look great.

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