written by reader High Yield Bonds

By anton669, November 19, 2015

Hi Travis,
I see companies like Consol Energy (CNX), that have a bond with a coupon 8,25%, Maturity 2020, and trades about 84 USD. I feel that is a excellent deal, but i dont know the real risks involved.
I know the energy sector is in real pain and short term i don t see a real recovery. However, CNX it´s a good company and i dont see any chance of bankrupt soon. Famous investor David Einhorn bouhght the stock recently. Can y explain me the risks envolved and how it works. For example can they cancel the coupon without deffault? What means unsecured bond? How i see if is senior?
Can anybody explain ?
Regards,
Antonio Tavares

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Travis Johnson, Stock Gumshoe

Good questions! I haven’t invested in bonds recently, but I can give you my quick response that may not be as detailed as you’d like.

Yes, the real risk is that Consol will default on the bond and/or go bankrupt. I haven’t looked at their bonds, but typically they cannot alter the coupon payment or cancel or delay it without defaulting or entering into a restructuring agreement with bondholders, either voluntarily or through the courts. Bankruptcy doesn’t mean they go out of business necessarily, it just means they can’t pay their debts — so even if the company is fundamentally OK, they can still go bankrupt if they have too much debt and they’re unable to refinance it on terms that fit with the company’s cash flow. Or bondholders could get bullied into accepting something less than par to avoid a bankruptcy where they may not get far less than 100 cents on the dollar or may be forced to accept equity instead of cash (like the A&P bankruptcy a few years back, for example).

Unsecured means it’s not backed by a particular asset (like a mortgage is backed by a specific property), so there’s no one asset connected to that particular bond. It should say in the bond or the bond description or offering whether it’s senior debt or subordinated to something, if you’re curious it’s probably worth asking the company what the seniority of a particular bond is, particularly if they have a bunch of different bonds or other debt outstanding.

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