Fixed-Income Opportunity Of The Week

Each Friday, I explore opportunities in the fixed income space.  Today, I’m going with my favorite strategy of buying discounted but money good corporate bonds.  On tap is L Brands (LB).  LB is the company behind the infamous Victoria’s Secret brand as well as Bath and Body Works.  The company gushes free cash flow but the stock is a little beaten up after taking on debt to return cash to shareholders.

The longer dated bonds have declined in price as the market sours on Victoria’s Secret as it struggles to adjust to declining mall traffic.  A turnaround is in play and I think the bonds are super safe.  Free cash flow is four and half times interest coverage.  Cash flow could fall by half and the bonds would still be money good with room to spare.  And while Victoria’s Secret is struggling with flat sales, Bath and Body Works has modest top line growth and excellent bottom line growth.  I think the less glamorous brand could support the bonds by itself.

As a result, I have put in a good till canceled bid for the LB 6.875 coupon bond with 01NOV2035 maturity (CUSIP: 501797AL8) at 83.4000 which was Wednesday’s closing price.  The bond has perked up a little to just over 85 but I expect to get filled within a couple weeks.  A fill today would result in an annualized yield to maturity of 9.4%.  That assumes holding the bond to maturity.  The last time LB bonds declined below par in the 2008 financial crisis, they returned to par within two years.  I expect between 15 and 25% annualized yield on my likely holding period.  All this with less risk than holding equity as I am senior in the capital structure.

As far as updates on my other bonds goes, the following results are as of Wednesday’s close.  REV (CUSIP: 761519BD8) is showing unrealized P&L of 916 dollars and an expected YTM of 20.005%.  MONINT (CUSIP: 609453AG0) is showing unrealized P&L of 1,119 dollars and an expected YTM of 44.796%.  CCFI (CUSIP: 20367QAB3) is showing unrealized P&L of 300 dollars and an expected YTM of 53.454%.

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