3 High-Risk, High-Reward, High-Yielding Corporate Bonds

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For some investors, cash is king.  For others, income-producing assets are king.  If you are a member of the latter group, you may be interested in the following three high-risk, high-reward, high-yielding corporate bonds.

Safeway’s flirtations with private equity, and its likely exit from the public markets, has worried bond investors in those Safeway notes without change of control provisions.  I can understand why.  A company’s going private and potentially leveraging up the balance sheet shouldn’t be a thrill for those bond investors who continue to own Safeway debt after the buyout.  But it also doesn’t mean the company is destined to default on its debt.

To see a list of high yielding CDs go here.

With that in mind, take a look at Safeway’s 2031 maturing notes, CUSIP 786514BA6.  The senior unsecured notes have a 7.25% coupon, pay interest semiannually, and were recently asking 96.99 cents-on-the-dollar, a 7.573% yield-to-worst.  After Safeway initially acknowledged buyout interest in February, the 2031 maturing notes dropped to approximately 94 cents-on-the-dollar on a closing basis.  The notes have since rallied but are still offered at an enticing yield, reflecting some of the concerns among investors.

Additionally, the notes have a make whole call but do not have a conditional put for a change of control.  For more information, consult the prospectus supplement.

In late June, Transocean’s 2038 maturing notes closed near 117 cents-on-the-dollar.  Three months later, I was able to pick some up for 95.28, after commissions.  The plunge in the 6.80% coupon, 2038 maturing senior unsecured notes, CUSIP 893830AT6, began with its spinoff of Transocean Partners.  The late June peak in the price of the notes is well correlated with Transocean Partners’ filing for an IPO.

The 2038 notes have a make whole call but do not have a conditional put for a change of control.  Other important details can be found in the prospectus supplement.  At the time this article was written, CUSIP 893830AT6 was being offered for 99.90 cents-on-the-dollar, a 6.808% yield-to-worst.

For investors interested in Transocean’s 2038 maturing notes, as part of your due diligence, the S-1 Registration Statement for Transocean Partners, LLC may contain additional valuable information.  This includes but is not limited to the following post-spinoff organizational diagram of Transocean Ltd and its affiliates.

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Coal companies have certainly been going through challenging times.  And Peabody Energy is no exception.  If you think a coal company with the size and scale of Peabody Energy can weather the storm, its 7.875% coupon, 2026 maturing senior unsecured notes, CUSIP 704549AF1, may be of interest.  The notes were recently offered for 97.499 cents-on-the-dollar, an 8.204% yield-to-worst.  Additional details regarding the 2026 notes can be found in the prospectus supplement.

Investors interested in conducting due diligence on Peabody Energy, might find the following of interest (from a July 23, 2014 Moody’s Rating Action):

“The stress to Peabody’s metrics is predominantly rooted in the company’s Australian platform, which does not utilize long term commitments for most of its production (with most metallurgical coal sales made on spot basis or under quarterly contracts), and has suffered the impact of the low pricing environment in the seaborne metallurgical and thermal markets. While generating almost 40% of the company’s revenues, the Australian division generated negligible EBITDA in the first two quarters of 2014 . . .

The Ba3 corporate family rating reflects Peabody’s significant size and scale, broadly diversified reserves and production base, efficient surface mining operations, and a solid portfolio of long-term coal supply agreements with electric utilities. The rating also reflects its competitive cost structure compared to other US-based producers and organic growth opportunities. Challenges for the rating include regulatory and other pressures facing the US coal industry, volatility of the company’s Australian operations due to its exposure to metallurgical coal, foreign currency fluctuations, and operational risks inherent in the coal industry.

The company’s Speculative Grade Liquidity Rating of SGL-2 reflects Peabody’s cash on hand and substantial revolver capacity. At June 30, 2014, Peabody had almost $500 million in cash and cash equivalents, and almost full availability of its $1.65 billion revolving credit facility, which matures in 2018. Peabody’s next significant maturity will be $650 million in senior notes coming due in 2016.”

In today’s yield-starved world, it is tempting to jump the gun and buy whatever high-yielding asset looks modestly tempting.  I’d like to remind investors of the importance of conducting your own due diligence prior to purchasing any financial securities, including the ones mentioned above.

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