Defaulting On Bond Covenants

Windstream Holdings, a rural telecom company, is expected to file for bankruptcy after the company recently lost a lawsuit filed by Aurelius Capital. The lawsuit stems from Windstream's 2015 spinoff of the company's Uniti Group. Aurelius filed the lawsuit arguing that the spinoff violated protective covenants in the company's bond indentures. Windstream was forced to pay Aurelius $310 million. Since the ruling legally means the company has defaulted in its debt, other bondholders can now force immediate repayment on the bonds they hold.

China's Perpetual Bonds

In the textbook, we mentioned several perpetual bonds issues. In January, The People's Bank of China joined the fold when it issued $5.9 billion of perpetual bonds with a yield of 4.5 percent. Other Chinese commercial banks appear to be ready to issue perpetual bonds as well. The slowing economy and rising defaults are forcing Chinese banks to recapitalize balance sheets. The Chinese government is also easing policies that will allow primary dealers to exchange the perpetual bonds for central bank bills. This will increase the liquidity of the perpetual bonds.

Airbus Abandons The A380

In an option to abandon, Airbus announced that it would discontinue delivery of the A380 in 2021. The giant plane first flew 14 years ago. Airbus spent about $25 billion in developing the 853 passenger plane, but has only delivered 234 planes to date, well short of the 1,200 the company had projected. The demise of the plane is in large part due to the decision by airlines to fly lighter, more fuel efficient planes that reduced the need to fly a large number of passengers to hub airports. Boeing still manufactures its own jumbo jet, the 747, but delivered only six 747s in 2018. Of course, Boeing may get a pick up in orders for the 747 without competition from Airbus in the jumbo jet market.

Trading Royalties

If you are interested in an entertaining evening with Finance, we would recommend you curl up on the couch with popcorn and watch the classic movie Trading Places. And now you can own a piece of this movie as the royalties from the movie are up for sale. The producer died in 2007 and the current owner of the royalties is selling the future royalty stream. Last year, royalties from the movie generated $7,988. The current bid is $74,700. Royalties generally extend 70 years past death, so there are 58 years left. Assuming the royalty payments stay constant, see if you don't agree that the buyer will earn a 10.66 percent rate of return.

Stock buybacks have been in the news recently as Bernie Sanders and Chuck Schumer proposed that a company should only be allowed to buy back its own stock if certain conditions were met, such as an employee wage of $15 per hour. And today, Marco Rubio announced he would propose a tax on buybacks that would be similar to the tax on dividends for investors. Of course, as these suggestions have come from politicians, they may have a misunderstanding about stock repurchases. A recent CNBC video discusses some of these misconceptions.

AT&T Bond Sale

AT&T announced that it was issuing $5 billion in senior unsecured bonds to be used to repay maturing debt. The bonds will carry a BBB rating. AT&T plans to pay off up to $20 billion in debt this year, which has made investors happy as the company's total debt has reached $180 billion in recent years. In an interesting tidbit, the article notes that one-half of the $5 trillion corporate bond market carries a BBB rating. This is due in large part to the recent historic low interest rates and low default-risk premiums. Companies have been willing to sacrifice a high credit rating since the cost, carried in a higher YTM, has been low in recent years. Only two U.S. non-financial companies, Microsoft and Johnson & Johnson currently have a AAA credit rating.

What Is Green?

Environmental, social, and governance (ESG) investing has become popular in recent years as investors have become interested in social concerns. And although ESG investing often relates to stocks, green bonds have also become more prevalent. Green bonds are intended to support sustainability and climate-related projects such as wind turbines or solar panels. Generally, these bonds are approved as green bonds by an outside agency such as the International Capital Markets Association. So what exactly is green? As a recent Verizon green bond issue shows, the definition can be somewhat murky. Verizon's $1 billion bond issue was classified as a green bond, with any green investments from 2017 to 2029 counting toward the target. What is interesting is that Verizon can count deployment of 5G technology and/or legacy network technology replacement toward green investing. Obviously, Verizon was planning on the 5G upgrade, but now it is a green upgrade.

Puerto Rico’s Bankruptcy

Bond covenants are generally inviolable, but bankruptcy can change that. Recently, Puerto Rico’s bankruptcy allowed the country to restructure sales-tax backed bonds. Owners of these bonds will receive 93 cents on the dollar, more than the bonds were recently trading for, but will give up half of the promised sales tax that was backing the bonds. This is better than Detroit’s general tax obligation bonds, who only received 75 cents on the dollar. However, other holders of debt of Puerto Rican debt received much lower payouts, an indication of the priority of claims in a municipal bankruptcy.

Dumb Money

A common belief among professional Wall Street traders is that dumb money, better known as retail investors, will flock to the market when stock prices are rising, then get out of the market after the stock has fallen. This sort of trading strategy will create a lot of losses, hence the term dumb money. During the stock market downturn in December, professional investors had a very low level of sentiment toward the market and left the stock market. And dumb investors poured $22 billion into passive index funds, reaping the reward from the recent market upturn. One possibility is that retail investors have become  believers in efficient markets, resulting in the money flowing into index funds, or at least they have been conditioned to understand that a market downturn can mean that stocks are on sale.