After a very expensive 2007, during which I saw the value of my entire stock portfolio decline by over 30% and my forex account basically self destruct, I decided to get into bonds at the start of 2008. Bonds seem easy enough to trade and corporate bond yields have been temptingly competitive with equities. They seemed like such a good buy and every forex diva likes a good bargain.
So in late August 2008, I purchased Metaldyne’s senior bonds (CUSIP 591160AD8) at a major discount. If this position worked out, I would gain over 79% annually because the bonds were trading at such a huge discount. Plus, there would be a constant stream of interest income that I would be able to go on minor shopping sprees with.
I was so proud of myself really and occasionally giving myself a pat on the back just thinking about this deal.
However, when Metaldyne recently issued an ultimatum that basically told their senior bondholders to either accept $0.27018 on the dollar or a prepackaged reorganization, I finally understood why junk bonds are called junk bonds. To add insult to injury, they even cancelled their latest interest payment.
To accept or not accept this ridiculous tender offer? That is the question.
Well, one could actually play this announcement a few ways.
Option 1: Purchase Metaldyne Senior Bonds On the Secondary Market If the Price is Below What Is Being Offered by Metaldyne
One would then gain the price differential when the Metaldyne tender offer goes through. While this may seem like a good play, the risk is that not every bondholder will accept the tender offer (95% of each bondholder group – both senior and subordinated – would be required for the tender offer to go through).
Moreover, I should think that Metaldyne would be looking to buy out any remaining bonds on the secondary market if they could purchase the bonds for less than the $0.27018 on offer.
Option 2: Sell Your Bonds on the Secondary Market
Remember one needs to pay a $30 processing fee to accept the tender, so if you bought your bonds at a good price and the commission on your bond trade is less than $30, it may be a good idea for you to sell on the secondary market. However, will you find any buyers?
Option 3: Refuse the Offer
If I were to accept the offer, I would be losing about 12% on the deal, including transaction fees. This isn’t too bad.
However, the idea of Metaldyne giving bondholders an ultimatum has me very suspicious indeed. Do not march in here and give bondholders an ultimatum for failing to properly manage your business. If you’re going to give an ultimatum, make it a fair one.
While every bankruptcy is different, $0.27018 is below the norm expected of bondholder recoveries in bankruptcy filings. Remember that WorldCom and Enron bondholders were able to recover above what is being offered by Metaldyne. And Metaldyne has quite an asset base.
Based on a conservative estimate of Metaldyne’s most recently published balance sheet, it is my opinion that senior bondholders should expect no less than $0.66 on the dollar based on Metaldyne’s recent balance sheet. Senior bondholders should be taking a more aggressive stance and protecting their own interests in this tender offer.
Disclaimer: Do your own homework. Do not in any way take this to be investment advice. You are responsible for your own portfolio.
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