Through my recent experiences with junk bond trading, I've started to realise there can be a whole lot of fine print associated with bonds. It is definitely becoming more complex than I'd intended. My broker does not offer a very advanced bond trading platform, so I've had to scour the Internet for whatever's publicly available on bond issues I might be interested in.
I sometimes find this information on the SEC Web site, but more often than not, a search on the specific CUSIP of the particular issue will show you which hedge funds or mutual funds are bondholders.
I urge anyone who is interested in junk bond trading to do further research to find out what are the terms and conditions associated with the indenture. Probably the best way to do this is to contact the bond issuer and request a copy of all the indenture terms as well as find out who the Indenture Trustee is.
Many of this fine print will preclude certain aspects of the Trust Indenture Act of 1939. I do believe that all this fine print is a bit like a back door exit, which then enables the bond issuer to take at times unfair and coercive action against minority bondholders in debt restructuring initiatives that do not take into consideration the best interests of all bondholders.
I have noticed that with certain debt restructuring initiatives, such as the Metaldyne bond tender offer, a certain percentage of bondholders is required to agree to the bond tender offer terms in order for it to go through. Technically a bondholder is a creditor to the bond issuer. What right does one bondholder have to vote on the rights of another bondholder? What right does one bondholder have to effectively say to another bondholder: Well I lent this company $1000, but I'm willing to accept $270.018 to cash out these bonds and so should you!'? But this is exactly what is happening with these bond tender offers. These bond issuers are setting us up to accept less than what we are owed.
Suppose we are both bondholders of Metaldyne. If I agree to Metaldyne's bond tender offer and vote accordingly, my vote actually indirectly affects the terms of the bonds that you hold if you do not agree with the bond tender offer. Now is this fair? Bondholders are not shareholders. We are simply separate creditors to the same company. We have no further relationship. It should remain like that. This means if I would like to do something as stupid as cashing out my bonds at 72.982% below par, I should be the only one to live with such a mistake.
My goal with this post is to get minority bondholders to unite and become self-activists - which means basically to look after your own best interests when purchasing a bond. Under the current economic conditions, it is my philosophy to treat even all investment grade bonds as junk bonds regardless of their ratings - especially since we have imperfect information transparency here.
For anyone wishing to do more about reforming regulation related to debt restructuring initiatives, please post a comment to get in touch.
Mind you, there's still time to refuse the Metaldyne bond tender offer at this time. If you are one of the few bondholders bold enough to do this, please feel free to post a comment to get in touch.
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