Turnaround Experts Eyes Convertible Trio

12/04/2019 5:00 am EST

Focus: DIVIDEND

George Putnam

Editor, The Turnaround Letter

Convertible bonds, which have been ignored by investors and Wall Street for years, may be worth a fresh look, asserts George Putnam, editor of The Turnaround Letter.

A convertible bond is an unusual security in that it carries a fixed coupon and matures at par like a bond, but can also be converted into common stock.

Convertible bond investors get the downside protection that a bond offers, yet also participate in the upside should the common stock appreciate meaningfully.

A few caveats: convertible bonds are often “junior” to straight bonds, meaning they have lower priority claims, and so in a bankruptcy convertible bondholders may not receive much recovery (although they would come ahead of stockholders).

Also, most convertible bonds are usually callable by the company which could limit their upside potential. Below are three interesting convertible bonds with relatively high yields that also trade reasonably close to their conversion value.

Blackstone Mortgage Trust 4.75% due 2023

Blackstone Mortgage Trust (BXMT) is a real estate investment trust that provides secured senior loans to high quality office buildings, hotels and other properties in major gateway cities.

Conservative and well-managed by the eponymous and highly regarded private equity firm, the Blackstone convertibles offer investors the ability to participate in the stock while receiving a generous coupon. Investors may also want to look into the underlying stock as an investment in its own right.

Eagle Bulk Shipping 5.0% due 2024

U.S.-based Eagle Shipping (EGLE) is one of the world’s largest owner/operators of drybulk commodity cargo ships. The 5% bond was recently issued in July to help finance vessel acquisitions.

Industry conditions have been weak, but the company could be well-positioned for new emissions restrictions that go into effect next year. Notably, highly-regarded private equity firm Oaktree Capital owns 38.5% of the common stock.

U.S. Steel 5.0% due 2026

U.S. Steel (X) is struggling with weak steel prices due to slowing demand in China, relentless capacity increases in the United States and the demand-reducing effects of the General Motors (GM) labor strike.

However, any recovery in prices would boost the profits of the high fixed-cost U.S. Steel operations. The company has considerable debt, and so the risks are elevated, but the 5% coupon helps buffer the volatility while offering participation in any sharp increases in the share price.

(Disclosure: An employee of the publisher of The Turnaround Letter owns Blackstone Mortgage Trust common.)

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