Bond Deal Requiring Caution, Completed
David Merkel | Mar 24, 2013 01:49AM ET
A friend of mine told me the price talk for the Fidelity & Guaranty Life Holdings, Inc. bonds was 6.5%, but yield lust must have prevailed, because the coupon was 6.375% when the deal closed.
Almost all corporate bonds are priced at a slight discount, so the actual deal yield may have been lower.
recently issued subordinated bonds of The Hanover Insurance Group .
The Hanover Insurance Group, Inc. (THG) announced that it has priced a registered offering of $175 million of subordinated debentures due March 30, 2053 with a coupon of 6.35%, and redeemable in whole or in part after March 30, 2018 at a redemption price equal to their principal amount. The debentures are also redeemable in whole, and not in part, before March 30, 2018 in case of specified changes in the tax or rating agency treatment of the debentures. The Hanover plans to use the net proceeds from this offering for general corporate and working capital purposes, which may include repurchases of its common stock.
The yields are almost the same but the risks are far lower on The Hanover Insurance Group’s subordinated debt. There is no complexity here. The structure is simple. It’s a short duration P&C company that has not lost money for the last seven years. FGLHI may be improved from the past, but it had a really bad past. Improvement might not be enough for FGLHI.
Risk Summary: Sell complexity, buy simplicity. Pick up rating. Add duration, drop convexity. Take on the risks of a smaller deal.
I would do this trade in a heartbeat. It’s not perfect, but I prefer simpler bonds to more complex bonds, unless I am one of the few that understands the complexity.
Full disclosure: I am long the common stock of THG
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