Bill Chepell | Chicago, Illinois
847-345-2652
Bill@CrediGlobe.com

Customer nearing bankruptcy? Use Corp bond pricing…

While rarely covered by the financial press, public bond pricing provides daily insight into professional investors/traders’ views of a company’s credit-worthiness.  When a bond price declines significantly below its $100 par value, it reflects the market’s low confidence level in the bond being repaid.  If you are selling to struggling companies with debt issues, strongly consider daily monitoring of these prices.  While this is not a panacea predictor …, the prices reflect the capital markets current view on a struggling company’s credit quality.  An investment bank’s bond trading desks has access to up to the minute info … use this in your credit monitoring.

  • Bond prices prior to the 2017 bankruptcy of children’s clothing retailer Gymboree serves as a good example.
  • To avoid a loss, the sharp price drop denoted by the red line should be a trigger to significantly reduce or eliminate credit exposure.
(Bond Issue CUSIP: 403777AB1)

Gymboree’s bond was unsecured.  Without a claim on the indebted company’s assets, unsecured bonds decline in value significantly below par value ($100) if the market views a bankruptcy as possible in the near future (especially prior to the bond’s maturity).  This is why prices were in the $40-$60 range for this Gymboree issue.  The steep drop offs ($46 to $32 and then $27 to $11) occurred when traders viewed viewed a bankruptcy as highly likely in the immediate future.

Bear in mind, the exact pricing levels are not important for monitoring purposes.  A bond’s price is dependent on the priority of claims on company assets.  This particular Gymboree issue is unsecured which is subordinated to both secured bank loans and secured bonds.  Hence, the bond prices of this distressed debt issue are dramatically depressed.   

 

Unlike Gymboree, American Apparel’s bond displayed below was secured.  These issues often maintain value despite a company’s serious financial problems due to a claim on company assets. This is why prices were in the $90-$110 range prior to sharply dropping when discouraging news hits the market. Once again, the red line serves as a trigger to eliminate any credit exposure.

(Bond Issue CUSIP: 023850AC4)

If you have additional questions about how corporate bonds are priced, check out this link….