Anyone have experience with 'baby bonds'

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TonyDAntonio
Posts: 425
Joined: Thu Mar 03, 2016 8:32 pm

Anyone have experience with 'baby bonds'

Post by TonyDAntonio » Tue May 15, 2018 10:38 am

Has anyone invested in baby bonds? I just learned about them today and the one I stumbled upon seems like a good investment for someone looking for income, VZA (Verizon)

It trades like an ETF.
Price starts at $25 and seems to hover around there but will certainly go down as interest rates rise.
Pays 5.9% interest so probably needs to be in a retirement account.
Is callable for $25.
Baby bonds are right behind regular company bond and ahead of stock in the bankruptcy hierarchy.

I'd be interested in hearing any real life experiences folks might have with these. The only individual bonds I've ever bought are EE and I bonds so I'm a complete beginner withe this.

Thank you.

alex_686
Posts: 3830
Joined: Mon Feb 09, 2015 2:39 pm

Re: Anyone have experience with 'baby bonds'

Post by alex_686 » Tue May 15, 2018 10:54 am

Are you talking about Prefered Stock?

Yes, I own index mutual funds that invest in prefered stock. My AA allocates 20% of my bonds to higher risk bonds, such as junk and prefered. Higher risk and returns than conventional bonds. They tend to be concentrated in the banking sector. Not for everybody, not a substitute for bonds.

not4me
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Joined: Thu May 25, 2017 3:08 pm

Re: Anyone have experience with 'baby bonds'

Post by not4me » Tue May 15, 2018 12:55 pm

'Baby bonds' are sometimes called "exchange traded debt", I think I've seen "preferred debt", but definitely not preferred stock. I don't know if there is an official name or set characteristics. I'll talk around what I think is the "typical" case, but am confident it is really easy to find an exception to these.

This is usually unsecured debt & subordinate to most (if not all) other debts in capital structure. Generally issued with a long maturity (say 40 or 50 years), but callable after a short time (maybe 3-5 years) at (usually) $25. You'd need to read the prospectus as most will have some different wrinkle. Most of the time the payments do NOT qualify as qualified, but sometimes they do. The tension between long maturity & short callable period causes the price to stay reasonably near the redemption price of $25. More often than not, when you see it trading below $25, the issuer is having some trouble.

I didn't look extensively into the example you gave, just a couple of sites. It is trading (snapshot) at $25.64 -- which means if I bought today it would "yield" about 5.75. One site said it is callable already (although another had a date in early 2019). Meaning that if they chose to call tomorrow, I'd be paid $25 for what I bought at $25.64 today...eats into my return! This isn't uncommon in these cases as apparently "the market" isn't expecting Verizon to call at this point. But, the trading volume is low enough you would likely have a hard time getting out quickly.

Companies issue these for a variety of reasons & investors have use for them in a variety of cases. However, I don't think they fit the BH approach & would not recommend for someone such as your self just starting. They require both thorough review & attentiveness, not to mention carry some risk greater than a index bond fund might. I'd also encourage you to avoid anything you don't understand first & these aren't excessively easy to understand.

Hope this helps.

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Pajamas
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Re: Anyone have experience with 'baby bonds'

Post by Pajamas » Tue May 15, 2018 2:34 pm

With exchange traded debt, preferred shares, etc. it is important to review the prospectus and pay attention to the details. They may have quirks such as not having a privileged position in the capital structure in case of bankruptcy as you seem to think they always would. Might be able to be called or have interest payments deferred, for instance. Wouldn't recommend investing in them casually. They can also be thinly traded and relatively volatile and everything that goes along with that.

TonyDAntonio
Posts: 425
Joined: Thu Mar 03, 2016 8:32 pm

Re: Anyone have experience with 'baby bonds'

Post by TonyDAntonio » Tue May 15, 2018 3:31 pm

Thank you all who replied. Try as I might I'm just not up to becoming a sophisticated enough investor to dable in these.

Tanelorn
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Joined: Thu May 01, 2014 9:35 pm

Re: Anyone have experience with 'baby bonds'

Post by Tanelorn » Tue May 15, 2018 6:32 pm

Verizon 35-40 year bonds are paying around 5-5.5%, so this only pays a modest premium to that. Unlike many of these longer term bonds, if rates fall, this baby bond can be redeemed by the company and reissued with a lower rate. If rates rise however, you will be stuck with this bond paying 5.9% and waiting decades for your money back even if interest rates have risen to 5% or even higher. Here is the prospectus with all the terms.

https://www.sec.gov/Archives/edgar/data ... d424b2.htm

I would probably pass on this one.

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