The Curious Case of Clear Channel

I've written frequently about bonds and risk.  I've highlighted the vast differences between bond holders and stock owners with respect to risk.  Time and again, the skittish nature of bond investors leads to enticing opportunities.  Most recently, I've highlighted some lovely opportunities in fixed income due to the Euro crisis.

Today, I thought it would be useful to look at my failure.  Of all the bond positions I bought from 2008 to the present, I have banked a loss on only one:  Clear Channel Communication 7.25%  of 10/15/27.  My position in these bonds ($10,000 face amount) was one of the very first I made in 2008.  The financial crisis was looming, and I was already scared.  I had raised $50,000 in cash, anticipating the crisis.  I already sensed that the sweet spot would be in bonds.  So, I established four positions: Capital One 7.865% of 8/1/66,   Limited Brands 6.95% of 3/1/33, and National City Corp 6.875%  of 5/15/19, and the infamous Clear Channel notes.  All were weakly rated as investment grade, and three proceeded to plunge into junk range.  Three of the four issues subsequently rallied smartly, and all now trade at or above par.

Clear Channel is the dog.  It descended precipitously into near-default, and is still rated at Moody's Ca, as close to actual default as you can get.  The bonds that I purchased at 68 now trade at 50.  During the depths of the 2009 panic, though, they traded as low as 8!  I eventually pulled the plug on these bonds when they failed to rise above the Cc rating in the couple of years following the trough.  I sold at 37, banking a nasty $3100 loss.  So, why did I chicken out?  Because the darn things violate the very principles I've been expounding, and I couldn't justify the continued risk.  Moody's is basically telling the world that they will fail, and probably soon.  Who am I to disagree?

Still, there is a whole lot to be learned from this shabby company.    Clear Channel Communications went public in 2005 at $18.55, rose to $29.71 at the end of 2007, sank to $2.52 in 2008, and has rallied $5.34.  So, a double off the bottom, but a 71% drop from the time the stock debuted. And, the stock's recent action is sickly indeed, down from $14.22 earlier this year, another nasty 64% drop.

A few comparisons between the stock and bond performance are in order.  The stock is down 71% from the public start, the bond 50%.  Along the way, though, the bond has paid 15 years (it was issued in 1997) of uninterrupted interest, a total that exceeds the initial offering price.  Add in the present value of 50, and the bond has still returned 59% over that 15 year period.  Not great, but it's still about 3% compounded annually.

Conclusions?  Well, this narrative is a tribute to the extreme reluctance of publicly-held companies to default on their debts.  Clear Channel is a sick puppy, and will likely fold eventually.  But the bond holders have received every penny owed them to date.  And in liquidation?  Of course, all bets are off.  But those bond holders will be in line head of the stock holders.  They may still get their money back.  The stock holders will almost certainly be out in the cold.  So, would I buy these bonds with their present 16% yield?  No way.  Investing in sewer junk and bankruptcies is a lot like buying stocks: too many variables and imponderables.  Lacking insider information and/or industry expertise, I can't gauge whether it's worth the risk.

Mainly, though, the lesson relates to issues higher up on the food chain.  Investment grade bonds, particularly at the BAA levels, are the sweet spot of bond investing (hell, of all investing I would argue).  They get a massive boost in yield from the ultra-cautious, and yet considerable support from the folks running the companies, who need to be able to keep borrowing.  These folks in the management trenches fight heroically to keep their companies afloat, even as blue-bloods get woozy worrying about ... everything.

UPDATE, May 2013:  these puppies now trade at $79, above the price I originally paid.  So, even here, patience would have paid off, though they might still go glub!

UPDATE: October 2015.  Took another peek.  To my amazement, these sick sick dogs are still alive, trading at 63.75.  Still rated CA/CCC-, utter crap.  But still alive after all these years!  Conclusion, as above, a tribute to the tenacity of companies in protecting their access to the credit markets.  If an when they pay off at par (no, I'm absolutely not predicting this), I'll have a good laugh.

December 2018.  Took a final peek. Yes, finally, these sick bonds imploded.  TEN years after they sank into deep malaise.  And even now the defaulted bonds are selling for 20 cents on the dollar.  Now I'm not going to argue that they were ever a good investment, but you'd be surprised how much they would have yielded to an intrepid investor before they took their fatal dive.  Worth the stress?  No.  But a total catastrophe?  Not necessarily.

Update to the End of the World

Two blogs ago, I ruminated about events that make people fear the end of the world.  I also observed that truly catastrophic events are very rare, and that planning for them is wasted effort.

In the world of bonds, such head fakes can be exceptionally lucrative.  The failure of the Western world to implode in 2008-9 led to historic buying opportunities in bonds. More recently, panic among the Chickens Little of the bond world led to some juicy opportunities in a number of dollar denominated European entities.   And, I'm pleased to report, reports of the death of the Euro zone are beginning to look premature as well.

Here is a tally of purchases I made earlier this year in response to the crisis:

Abbey National PLC 7.95% bonds of 10/26/29.  I bought $50,000 face amount at an average discounted price of 92.  They are presently trading around 110, for a paper profit of $9,000, or a 19% capital gain.

AXA SA 8.6% of 2/15/30.  I bent my rule of buying at a discount, because of the very high coupon, and bought $45,000 face amount for 1.08, or $48,600.  The yield to maturity of these bonds was still  over 7.75%.  They now trade at  118.5, a 9.5% capital gain on paper ($4,500).

Telefonica Europe B V,  8.25% of  9/15/30.  Again, due to the high coupon, I bought 25,000 face amount above part at 103.  They now trade at 106 for a small gain.

Telecom Italia 7.2% 7/18/36.  Recently bought a $40,000 face amount at 87.25.  These now trade at 97, for a $4000 paper profit, or 11%.

Telecom Italia 7.721% 06/04/38, face amount of $15,000 was bought very recently at 98.  The position is essentially unchanged.

What's next?  Again, who knows?  However, the price action of these bonds is telling me that the terror is receding, and these relatively juicy yields will sink further, resulting in larger capital gains.  So, will I cash out?  By now, you should know my answer.  In this day and age, yields pushing 8% are rare indeed, and I intend to hold onto these newer purchases.  Remember, my portfolio's yields are enhanced by maintaining roughly 25% margin.  With my margin cost at 1.25%,  these most recent bonds have an effective yield of 10%!  With interest payments arriving twice a year, that 10% compounds a bit.

Bottom line: as long as Ben B. keeps offering money for nearly free, this ride will go on.

Update: 5/13/13.  The ride continued, both as to rock-bottom margin costs and favorable price movement.

Abbey 7.95% of 2029 are now at $121.
AXA SA 8.6% of 2/15/30 are $129.51.
Telefonica Europe B V,  8.25% of  9/15/30 are $123.74.
Telecom Italia 7.2% 7/18/36 are $105.43.
Telecom Italia 7.721% 06/04/38 are $110.58.

In retrospect, the Euro-zone bond opportunity seems clear and easy.  I can attest that it  wasn't.  Folks, it's very hard to take action WHILE the end of the world is threatening.