Secured bonds (distressed)

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What are the risks associated with buying the secured bonds of distressed companies as an individual investor (fidelity, etc.)?

I’m not referring to recovery related risks, but rather trading risks. Will I be able to sell the bonds through these platforms easily - is it a liquid market? Are there hidden fees involved? Is $5-20k enough to get started without getting buried with fees?

Thanks.

Comments (7)

 
Jul 21, 2020 - 12:41pm

The market for trading is pretty dull obviously. But however you can approach an IB in a Market making role as the last resort. Taking into account the fact that The aging penalty structure varies for holding distressed securities even for MM, I have my reservations on confirming this. If the normal aging policy is 120, the one for distressed can be 45-90 days. So, pretty risky even from liquidity POV

 
Jul 21, 2020 - 4:28pm

What specifically are you looking at? I've never seen a true distressed bond on a retail investor platform; even the more liquid, big-name opportunities seem to get delisted when they get downgraded to a certain level (which is why I'm asking-- looking to see if you've had the same experience). They also generally trade in $1M+ slices.

 
Jul 21, 2020 - 10:32pm

I'd say don't bother. The bid-ask is generally already wider on distressed securities- can be as wide as 3-5+pts in some distressed HY- for institutional buyers. I'd imagine it's at least a point or two worse for you in a retail channel if it's available at all. Remember- you're going to need to pay that to get in and to get out.

Now, even if you could buy them, the administrative headaches of dealing with penny warrants, new unlisted equity, two different tranches of takeback debt for a total of $1879 (hypothetical) if they end up going through a restructuring make this more of a headache than it is worth. This doesn't make a lot of sense until you can buy $50-100k. You can definitely buy odd lots but with $5-20k I'd just stay with more liquid products.

 
Jul 22, 2020 - 6:18am
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