“Protected Certificates: Mandated Gains, Guaranteed” — True Income

By Travis Johnson, Stock Gumshoe, June 22, 2009

“U.S. Gov’t Mandates Texas Media Giant To Pay You 127% Gain By Sep. 15, 2010

“Right now, a little-known Federal Law requires certain U.S. companies pay investors 100% gains or more – WITHOUT touching the stock market.

“Already in 2009, these investments have crushed the S&P 500 by more than 500%, according to The Washington Post.”

That’s how this latest version of the ads for the True Income service from Stansberry begins — the letter is edited by Mike Williams, and I’ve written about similar ads several times … but they’ve invented yet another name for the product they’re obfuscating, and are teasing some more specific picks, so I thought we might just want to take another quick gander at this one.

The core argument of the ad, as it has been for a while now, is that you need to invest in something with a secured return, where you know exactly how much you’ll be paid, and when, and have a guarantee that it will really happen.

Oh, and in addition to the guarantee, you need a massive return — 100% or more in the span of just a year or two, in many cases. If this doesn’t ring a bell you might have missed the teaser ads last year for “Secured Investment Contracts” (that one was almost exactly a year ago) or “Scheduled Distributions“, as they were renamed back in November.

Here’s a bit more of the ad, which explains the current example they’re using (that “Texas Media Giant,” which, as they explain later, is Clear Channel Communications)

“No one knows what will happen to the U.S. stock market over the next 12 months…

“But right now, thanks to a little-known government mandate, you can take almost all the guesswork out of investing.

“In short, a Federal law has required a Texas-based media conglomerate to pay out a secure 127% return…

“Regardless of whether the stock market goes up or down.

“What’s more, if you get in on this deal, the company is required by law to pay you on this exact date:

“September 15, 2010.

“In other words, if you take a $10,000 stake in this company today, you are legally entitled to collect a $20,300 return… precisely 15 months from now.

“And in addition to your $20,300 return, you’re also legally entitled to collect 3 interest payments along the way…

“Bringing your total return to $22,700.”

So of course, Mike Williams is still pitching corporate bonds — he did for a while start to tout convertible bonds, which are more levered to the stock market, but now it looks like he’s back to plain ‘ol corporate debt — you lend a company money, you collect interest payments, and you get your principal back in the end. The real returns come, if you’re buying distressed debt like this on the secondary market, when you get your principal back, because often these bonds trade at a steep discount to the principal … which, though the risk doesn’t get talked about much in the ads, implies that most investors don’t think you’re getting all that principal back.

Yes, the law says that if you borrow money, you have to pay it back — and most corporate bonds do perform, and do repay you your principal at the end. But of course, “most” is not a great solace during times like these, when bankruptcies are up and some creditors are getting squeezed. The biggest example in recent months are the auto companies — GM and Chrysler actually went bankrupt and the bondholders got back far less than the principal of their bonds (and in shares of the new company, not necessarily in cash); and Ford didn’t go bankrupt, but did negotiate with some bondholders to convert their debt to equity, which, again, is not exactly the same as getting all your principal cash back.

Bondholders can get stuck, too, despite the fact that they have more claim to the company’s assets than do stockholders — if a bond is trading for 50 cents on the dollar, it means that a lot of people don’t think the principal will be returned, either because the company goes bankrupt and may not have enough assets to pay back bondholders, or because bondholders will be afraid of losing their full principal and will, en masse, negotiate a deal with the company to dilute their position or reduce the principal due.

But enough of my high horse — we know that when Mike Williams talks “Protected Certificates” he means “corporate bonds.” So what bonds is he looking at now?

Well, we know they gave that Clear Channel example in the start of the ad — that one is indeed a bond that’s due on September 15 of next year, and it’s trading at about $60 per $100 of principal plus pays interest at a rate of 7%+ (off the $100, so more than 10% based on the current principal). With a distressed price like that, you would have to assume that it’s a frightening bond — and indeed, the latest rating issued was from S&P, which put them at CC.

What does CC mean, you ask? Their ratings are explained pretty well here, but it places this bond clearly in “junk” territory, if you couldn’t already guess that by the hugely discounted price (“Junk” is just a term popularized in the 1980s for low-grade, high-interest-rate corporate debt — as distinguished from “Investment grade” debt which is much more reliable and pays lower interest rates). Here’s the quote:

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“Debt rated ‘CCC’ has a currently identifiable vulnerability to default, and is dependent on favorable business, financial, and economic conditions to meet timely payment of interest and repayment of principal. In the event of adverse business, financial, or economic conditions, it is not likely to have the capacity to pay interest and repay principal. The rating ‘CC’ is typically applied to debt subordinated to senior debt which is assigned an actual or implied ‘CCC-‘ rating.

So what are the actual “protected certificates” that Williams is currently hawking?

“I recently identified 3 American companies offering “Protected Certificates” with the biggest and safest gains.

“They include a popular drugstore company… an East Coast supermarket chain… and a semiconductor manufacturer.

“If you’re interested, I’ll send you the CUSIP codes within the next 30 minutes. All you have to do is follow my step-by-step instructions and relay these codes to your broker.

“Your scheduled returns could be 95%, 282%, and 90% within the next few years.

“Not only that, you’ll be set to receive 12 separate interest checks from these companies over the next 3 years, while you wait for your final payout:

“* June 15, 2009
“* August 15, 2009
“* December 15, 2009
“* June 15, 2010
“* August 15, 2010
“* December 15, 2010
“* June 15, 2011
“* August 15, 2011
“* December 15, 2011
“* June 15, 2012
“* August 15, 2012
“* December 15, 2012”

I can’t tell you for sure what these are, but here are my best guesses:

Supermarket chain: Great Atlantic and Pacific Tea (more familiarly known as A&P). Their bond matures on December 15, 2012, implied annual yield of better than 22% because it trades at close to a 40% discount to maturity. CUSIP 390064AK9, details here from FINRA. Rated CCC+ by S&P. By point of comparison, Safeway, a financially stronger firm, has bonds that trade at a premium to principal and yield less than 3.5%.

Semiconductor company: AMD. Their bond matures on August 15, 2012, and it’s trading at a pretty comparable yield to A&P, around 23% (also close to a 40% discount to maturity) — rated only by Fitch, which gives them a “CC”. Details from FINRA here, the CUSIP is 007903AN7.

Drugstore? I didn’t find one that precisely matches those maturities, but I’ll throw out a guess for you that’s along these same lines: Rite Aid, which just goes to show you that “popular” need not mean “profitable.” Rite Aid has about $6 billion in debt and only a $1 billion market cap, and they’re still losing money. The maturities don’t match up to the teaser precisely, so it could be a different troubled drugstore chain, but if you’re curious about Rite Aid you can buy a bond due in less than a year that is supposed to yield over 40%, or one due on 8/15/2013 that is expected