Understanding Baby Bonds – Exchange Traded Debt

bonds-letters_large

Most investors know how to invest in stocks, this is buying “Equity” in a company. You own a “piece” of the company. Few investors, other than institutions, know that you can also invest in a company’s debt. Investing in debt is much more secure than equity. Investing in a company’s debt is through buying its “bonds”. Most corporate bonds are sold in $1,000 increments in the Bond Market, a very unfriendly place as compared to buying stock on the stock exchange.  There is however another alternative, they are called Baby Bonds.

Exchange Traded Debt issues are known as ‘Baby Bonds‘. They are a safe and conservative investment that can pay you 5-8% interest. They are called Baby Bonds because most of the issues have a face value (par) of $25.00/share and generally are callable at $25.00 plus accrued interest 5 years from the date of issue.

Summary

  1. Baby Bonds are notes and bonds that trade on the stock exchanges just like regular stocks, instead of the bond market like regular Corporate Bonds. They have “ticker symbols” for easy look-up vs. CUSIP #’ that are unique to buying bonds in the Bonds Market.
  2. Most Baby Bonds are issued and callable at $25/share vs. $1,000/share for most Corporate Bonds
  3. Baby Bonds usually pay interest quarterly vs. semi-annually for Corporate Bonds
  4. Most exchange traded debt issues are ‘junior’ to the company’s secured debt and senior to preferred and common shares dividends. If there is a disruption in dividends Baby Bonds get paid before regular and preferred stock dividends.
  5. Baby Bonds have lower risk than common stock or preferred stock in the same company.
  6. Most preferred stocks are offered by banks, insurers, utilities and real estate companies. However Baby Bonds extend your choices to companies like Comcast, and Ford.
  7. A good share of the exchange traded debt issues are investment grade issues. This makes these issues a safer and more conservative investment by those that like preferred shares.
  8. As usual with bond investments, the issues pay you interest, which means that all quarterly payments are taxed as ordinary income rates, versus a “qualified” payment taxed at lower capital gains rates.
  9. A few Baby Bonds have a “survivor’s option” that may allow your beneficiaries to cash the shares in at par in the event of your death (example: IKJ from Bank of America).
  10. Some investors will like the Baby Bonds issues by BDC’s, Business Development Companies, These companies are required to maintain a 2 to 1 asset coverage ratio (determines a company’s ability to cover debt obligations with its assets after all liabilities have been satisfied). Furthermore no BDC has ever defaulted on a bond obligation.
  11. When buying any low volume stock, you must use a limit order and just wait for the sale to take place.

Here is an example:

Hercules Capital (HTGC), is a BSD, you can buy their stock today at $12.58/share and get a 10.50% yield. While 10.5% is a very nice yield, the stock like all other BDC’s is volatile. However, the same company has a series of Baby Bonds, one of them is HTGX. Its IPO date was 4/2012 at $25, it is a 7% yield, due 4/2019, and callable as early as 4/2015.

Here is a chart that shows the difference between buying the “Equity” as in HTGC stock or the “Debt” HTGZ Baby Bond. Note the big difference in volatility. The Baby Bond is a very “dull” investment, it just pays 7% interest each quarter.

Hercules Capital (HTGC) Stock vs Hercules (HTGZ) Baby Bond

HTGC

Here is an excellent resource to find Exchange Traded Debt

http://www.quantumonline.com/, Go to Income Tables —  Exchange Traded Debt

Also check out Dividend Yield Hunter; http://www.dividendyieldhunter.com/

Articles can be found in http://seekingalpha.com/

Here is a sample list of Baby Bonds

example

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s