Fixed income purchase

As alluded to in my last quarterly report, I have been looking for some fixed income securities that have relatively short durations, marginability, and with a credit risk profile of next to nothing, yet maximizing yield.

Late last month I purchased a secured corporate bond. The debt is the only issue outstanding of the issuer and it was purchased at a mild discount to par. The underlying issuer obtained a credit rating for the debt and it is in the B’s. The issuer itself has a cash balance that is about 40% higher than the amount of debt outstanding. It is also profitable, generating cash flows, and has been doing so for quite some time. There is no good reason to believe that these cash flows will materially change between now and maturity. The debt is covenant restricted, only enabling the issuer to repurchase equity linked to the amount of income it produces. Not surprisingly, the company in question has been repurchasing their debt on the open market at a discount to par.

Yield to maturity that I received on my purchase: 10.0%.

I am not sure who was asleep at the switch as I did get the bonds at the bid, in a size that was sufficient to make me happy. Quite frankly I was surprised to see the trade executing.

The funny thing here is that the capital that I am required to lock up for the next few years (the maintenance margin is approximately 50%) will actually decrease my long-term performance figures, but in terms of the risk/reward ratio, this investment is a slam dunk. I am not aiming for the best returns, I am aiming for the best risk/return ratio.