Bonds: The Best Risk-Reward When Playing Best Buy

best buy bondsIn my recent article, “Unconventional Thoughts On Best Buy,” I noted that the two safest ways to make money on Best Buy are to use short-term trades or to accept the currently-attractive yield on Best Buy’s 7-year debt.  My take on the company is that Best Buy will be around seven years from now, but that there is far too much uncertainty to own a buy-and-hold position in the stock.  From a risk-reward perspective, I think it makes a lot of sense to simply buy Best Buy’s senior unsecured debt and hold it to maturity.

  To see a list of high yielding CDs go here.  

Presently, there are three Best Buy CUSIPs representing senior unsecured bonds available for trading on the secondary market.  This includes the March 15, 2016 maturing, 3.75% coupon notes (CUSIP 086516AK7), currently yielding 2.347%, the August 1, 2018 maturing, 5.00% coupon notes (CUSIP 086516AM3), currently yielding 4.259%, and the March 15, 2021 maturing, 5.50% coupon notes (CUSIP 086516AL5), currently yielding 5.704%.

Investors interested in the 2016 maturing notescan find the prospectus supplementhere.  If the 2018 maturing notes spark you interest, you may want to read my article, “Best Buy’s New 5-Year Bond Yields 5%.”  For the purposes of this article, I would like to focus on the 2021 maturing notes.

In Q4 2012, when Best Buy’s stock was reaching its nadir, the company’s senior unsecured notes were also in the process of bottoming.  As the chart below illustrates, the notes quickly rallied back topar, as concerns about Best Buy’s future dissipated.

Best Buy 2021 maturing notes

Fast forward to today, and Best Buy’s stock is once again going through a difficult period, down nearly 50% in less than three months.  But are bond investors showing the type of concern about Best Buy’s future prospects that they showed in late 2012?  As the chart below indicates, the answer is “No.”

3m chart of Best Buy's 2021 notes

Over the past three months, a time during which the stock cratered in price, the bonds have generally traded in a fairly narrow range.  The one exception was the dip to 96 cents-on-the-dollar, which was more of a price anomaly than a real dip.  On January 27, 2014, an unfortunate investor got absolutely screwed on the sale of 15 bonds.  With bids available in the 98 to 99 cents-on-the-dollar range, one particular investor sold at a ridiculously low price of 96.  I suspect the “customer sale” of 15 bonds at 96 is linked to the trade that immediately preceded it, a “dealer to dealer” swap of 15 bonds at 98.625.  If so, it was a large mark down, rather than the market actually bidding 96, that caused the dip on the chart above.

Where are the 7-year notes trading at this time?  As of January 31, 2014, the best bid is 98.625 and the best offer is 98.812.  The offer price translates to a yield-to-worst of 5.704%.  The prospectus supplement includes numerous important details about the notes, including, but not limited to the following:

  1. Interest is paid semiannually
  2. There is a make whole call at the Treasury rate plus 30 basis points until December 14, 2020.  Thereafter, the notes are callable at par.
  3. There is a conditional put at 101, in the event a “Change of Control Triggering Event” occurs.  See the prospectus for more details.
  4. The notes are not guaranteed by any of Best Buy’s subsidiaries and are structurally subordinated to the secured and unsecured debt of Best Buy’s subsidiaries.

If you are a buy-and-hold-to-maturity bond investor who finds the yield and credit risk attractive, there is no shame in buying the 2021 notes now, even if the price may drop in the future.  With seven years still remaining until maturity, there could certainly be some volatility in the price of the notes.  Whether the opportunity cost of waiting for a potentially higher yield is worth it, is something each of us must contemplate on our own.

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