Why these two bonds trade differently ?
Hello everyone,
I am a student trying to start in capstack arbitrage (and it's not going well lol). I have been looking at a company's capital structure and I spotted two bonds, one senior to another, trading at very different prices. Here are their characteristics:
- Unsecured Bond maturing 2028: Price 71, Coupon 0,25%, Yield 11,44
- Unsecured Bond maturing 2029: Price 86, coupon 9,75%, Yield 14,72
Both prices are clean prices so the accrued coupon is not accounted for.
- Assuming no covenant difference, why is there a 15pts difference between the two bonds? If there are liquidity concerns, wouldn't the time subordinated bond trade at a lower price ?
- I know one bond was issued in Covid (2020) so a zero-rate environment and hence at the current high rates, the price will fall, while the second bond was issued in 2024. But shouldn't the bond trading at 71 appreciate by now (if no liquidity/refinancing risk)? Is there any arbitrage here ? (Not like I think I am smarter than the market, I am just asking)
Thank you very much
Different coupon, different maturity, different investor base/chunky, and different tranche sizes which can pose liquidity issues
one is likely leftover from low-rate days (tiny coupon, matures 2028) giving it more convexity, and the other was issued more recently in a high-rate environment (bigger coupon, matures 2029). The older, super-low-coupon bond trades cheaper but is shorter and more sensitive to interest rates, while the newer bond has to offer a juicier yield because it extends a year longer, carries more call and credit risk, and was born under tighter conditions. Basically, that’s why there’s a big price gap - no free lunch, just different risks and coupons changing the risk:return profile
So a few things:
Assuming this is a distressed/stressed issuer, the most obvious reasons are the lower price (more principal protection) and nearer-term maturity (temporal seniority). Think of it this way: the more uncertain it is that an issuer can pay off its debt, the more you'd rather own the lower price, nearer-term maturities (maybe they have enough liquidity or levers to get through the first but not the second).
Current yield will also play a role as the 29 bonds are higher coupon so if you think a default happens in x years you are lowering your basis by collecting 9+pts excess per year. i.e. if a default happens in 3 years when those 28s mature, you've effectively paid only ~56c for the 29s.
You could've just said this was Eutelsat.
Anyway, this is just bond math. The issuer has a normal yield curve (upward sloping).
The reason for the low dollar price on the 2028 bond is due to the low coupon. Since you don't really get much return from the coupon (its actually 1.25%) your return needs to come from the par discount, in this case, the 71 trading price. As the bond nears maturity the price will trade up as you will amortize the discount over time.
As someone else has said, you shouldn't really be focused on prices, but yield. The 2028 bond yields less than the 2029 (11% vs 14%), which you would expect given it is a nearer dated maturity.
If the issuer fell into distress and restructured, which is possible, then the bond price between the two issues would converge as, assuming they are truly pari passu, they would have the same recovery price.
Just saw the thread. Would you mind PMing me, I have a thesis on this company that I wrote last week and I want your input if you don’t mind. Thank you !
Different duration profiles
2029 bond has a way lower duration
Yes, so different
Can you please explain the bond math piece and how the return for the 2028 bond comes from the discounted price? So as it nears maturity the price of bond goes to FV?
yes, you literally have an contractual agreement to be repaid par (100) at maturity date (yes some bonds not issued at 100 but you get the idea). Of course it won't "pull to par" if the fundamentals don't support it being repaid
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