What are “Payment On Demand” Certificates?

by Travis Johnson, Stock Gumshoe | June 11, 2009 9:49 am

“This is the only buy-and-hold strategy that REALLY WORKS. If you’ve lost money in the stock market, and want a safe way to rebuild your portfolio, then these “payment-on-demand” certificates might be exactly what you need.”

That’s the promise behind the latest offer from The Bond Trader[1] … which will tell you, even if you don’t go on to read the whole thing, that they’re talking about, well, bonds. They persist in using the silly name “Payment on Demand Certificate” to make it sound like something confusing that you couldn’t possibly handle, but, as in the past from this service, they’re selling you the idea of investing in corporate bonds[2].

This isn’t the only bond trading newsletter out there, but it’s certainly a smaller universe than the stock newsletters — this one comes from Steve McDonald[3] and the Investors Daily Edge[4] folks, the other bond newsletter that gets marketed fairly heavily is the True Income[5] service from Stansberry & Associates (haven’t seen that one advertised very heavily lately, though subscribers say it had an awful year last year[6]). True Income focuses more on “junk bonds” with very high yields, The Bond Trader says it stays away from junk bonds … though as we’ll see, that doesn’t mean they don’t go fairly low on the credit scale in the search for high yields.

I won’t copy over much else from this teaser, since it’s quite similar to the last two ads that I looked at from Steve McDonald — if you want a little more info about this stuff, you can see my article about some similar offerings when they were calling these kinds of bonds “TD Circ 570s[7],” or more recently healthcare[8]-cash-machines.html">the Rabbi’s Secret article from when Steve delved into Healthcare REITs[9].

I’ll just get straight to the actual investments — apparently there’s a special report, as there always is, and McDonald has three bonds we should look at. Here’s how he teases them:

“A leasing company with a scheduled return of 62.6% return payable on March 25, 2013”

That’s International Lease Finance, CUSIP 45974VB72 (should you be interested in researching or trading this bond, the CUSIP is the identifying number you would use — sort of like a ticker for a stock).

This bond last traded for $82.50 (off a $100 principal), and the current coupon is just under 6.5% a year (computed from the principal of $100, not from the current secondary market price of $82), for a yield to maturity of a bit over 12% a year, so the total (potential) return of 62% is close to being accurate. The return from a bond is equal to the coupon payments you get (the interest), plus the repayment of principal at the end — bonds that are trading for less than the principal amount allow for a possible nice capital gain at the end, since your $82 loan would be repaid by $100 in principal at the maturity date … assuming, of course, that the company is healthy enough to pay you back and doesn’t need to file for bankruptcy, or negotiate different terms with bondholders to avoid bankruptcy.

The information about the bond from FINRA (the financial regulator — they have a good bond data search website) is here[10], and the company’s filings are available here (they’re not publicly traded, but they have a lot of public debt, so they file with the SEC). This is an aircraft leasing company, and the bond is rated Baa2 by Moody’s, which is the lowest investment grade before you slip into “junk” territory.

“A Diversified commercial financing company with a scheduled return of 66.91% payable on August 15, 2014”

I’m not at all sure about this one, but if you’re generous with the description “commercial financing company” this could possibly be Duke Realty — CUSIP 26441YAH0. The basic information from FINRA on that one is here[11]. Duke is a commercial real estate[12] partnership. The other basic information fits reasonably well, the current yield is a bit over 10% and it last traded at about $80 (again, for a principal of $100).

It could also conceivably be HSBC[13], LaSalle Funding[14], or even Bank of America[15] or CIT[16] — there are a fair number of banking/finance related bonds maturing on that date with high yields.

And finally …

“A large student loan company with a scheduled return of 101.12% payable on June 15, 2014”

This is, not surprisingly, a Sallie Mae loan — specifically, it looks like CUSIP 78490FBY4. The info from FINRA is here[17]. And as you might expect with a 100% potential gain like this, the rating is quite low — Moody’s actually has them down in the first tier of junk bonds, though S&P has them as barely investment grade, so you can come down on that wherever you like. The last price was in the high-$60s, with a coupon of 5.15% and an effective yield to maturity of better than 14% a year. If you think those student loan dollars will keep pouring in and Sallie Mae will be a survivor (there’s some debate about that, of course), then perhaps this will be a nice money-maker for you.

So what do you think? Interested in picking up some corporate bonds and gaining some predictable income? Do you believe these three companies are good bets as a creditor? Should individual investors be buying corporate bonds, or would we be better off letting fund managers select and trade them for us? Let us know if you’ve got the answers with a comment below.

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