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Friday, August 19, 2016

Junk Bonds Yields Are Spiking Up

We have seen many companies tapping the market for fund raising activities in the past couple of years and in a world of low interest rate environment, these yields are enticing to folks who are hungry for yield. 




The recent Swiber case has probably put an alarm on the reality of what is to come, with companies facing more distressed debt that is maturing with no capability of sufficient cashflow to refinance them. 

Kris Energy, an O&G producer, has a debt facility that is maturing in 2017 and they are in a position where they might default on these debt covenants. Looking at the current yield to maturity and the way the price is slammed to below par will probably tell you a telling story of where their financial position is at the moment.




The other junk bonds are also being affected by these news.




Some of the common names we know -  Hyflux Preference Shares, Aspial and Oxley Bonds are all trading at below par and are facing plenty of volatility on a daily basis. The YTM are spiking up substantially since we last seen a year ago. 

Among these few, the shortest duration will be for Hyflux NCS 6% which everyone is obviously flocking to. They are currently trading at 94.5 with an option to call in Aug 2017. 

If we take a look the their interest coverage ratios across the years, they've always been floating above the water trying to swim alive in the water they are producing, no pun intended.

Anything below 3x ratio is bad to me and it gives a false sense of security to investors that the company is doing well. 




In fact, what they've been doing is simply pushing the cans down the road by issuing a new bonds to redeem the earlier one, similar to what Oxley and Aspial are doing as well.

The shorter duration will obviously have an advantage here in such distressed case, as they will most likely get recalled first ahead of the others.

The ability of these companies to tap funds from the market gives them an advantage in a period where liquidity is massively available. However, when the fan hits the road, credits will be dried up and that's when we will know who is swimming naked.




In case anyone thinks bonds is safe, they might now. You might be better off getting some other asset classes at a higher level margin of safety.


15 comments:

  1. B,

    hyflux bonds will get paid first before those holding the mother share.
    would that be considered as a "margin of safety"?

    ReplyDelete
    Replies
    1. Hi FC

      Yes technically speaking preference shares get paid over normal shareholders but thats just a liquidation scenario. They have to pay so much debts first before hand.

      Delete
  2. Hi B,

    I'm getting the same feelings as you about credit these days. Those 3 companies (Hyflyx, Aspial, Oxley) looks to be treading on thin ice with this merry-go-round issuing that they seem to be doing (at least that is what it seems like to me).

    If the SHTF, unfortunately, it would seem like quite a bit of retail investors would get affected due to their retail issues that got gobbled up.

    ReplyDelete
    Replies
    1. Hi GMGH

      I've read your posts and it does seem you too are skeptical about what these bonds and our world are becoming, which is standardly ridiculous despite what the share market tells us.

      We'll see if there are Dominos effect from it, seems like the whole saga is more coming to an end than when we started it so we just have to watch show.

      Delete
  3. Hi B,

    Do you think Perennial Bonds are also considered Junk Bonds?

    ReplyDelete
    Replies
    1. Hi Anonymous

      I can't exactly recall if perennial is under bb- but if they are not rated then yes technically they are rated as junk bonds.

      Delete
  4. bonds carry the same absolute risk as stocks. just different volatility.

    agreed with the last sentence too.

    "In case anyone thinks bonds is safe, they might now. You might be better off getting some other asset classes at a higher level margin of safety."

    ReplyDelete
    Replies
    1. so what about treasuries? ;)

      Delete
    2. Hi SMK

      Thanks for commenting.

      Treasuries bond for grade A are safe but the yield is so much lower that it is virtualy non existence. The higher yield is what we get out of these junk bonds. Tough choice really between risk and reward.

      Delete
    3. i don't really hold bonds to maturity and not really trade listed bonds.

      I do however trade fixed income derivatives and they don't look pretty enough to me at the moment.

      Delete
  5. Hi B

    The real game starts when bond traders short ?

    ReplyDelete
    Replies
    1. Hi STI

      Woah, I can't imagine that :) it will be epic!!

      Delete
  6. Singapore Savings Bond should be stable but yield right now is very much lower than initial launch.

    ReplyDelete
    Replies
    1. how about the price? can ssbs be traded on secondary market?
      if not, then how?

      link

      Delete
    2. Hi SR

      Yes SSB is safe and guaranteed for the first 50k on that tranche but the latest yield is at 1.7% per annum over 10 years, not exactly appealing.

      Hi SMK

      They are traded on the market but can be redeemable without penalty on the first day of each month. The interest received will then be accrued.

      Delete

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