Cash Giveaway: 66% More Than Expected

Steve McDonald By Steve McDonald, Bond Strategist, The Oxford Club

Bond Investing

Last month, an Advanced Micro Devices (NYSE: AMD) bond delivered investors 66% more annually than they were expecting in just 14 months.

The same performance can’t be said of its stock. It’s had a rough ride since the advent of tablets and what most believed was the death of the PC market.

From its glory days in the early 2000s, Advanced Micro Devices has dropped from more than $40 to about $4.40 a share.

So how does a company dealing with such horrible market conditions pay its bondholders 66% more than it has to?

It’s called a tender offer.

Unconventional Advice

A tender offer is when a company offers to buy back a bond before maturity. It does this to reduce its interest costs. It is no different than refinancing your mortgage to reduce your costs.

Most brokers will tell you tenders are bad deals because you can make a higher total return by collecting all the interest payments to maturity than what can be made on a tender offer.

In some cases, the brokers are correct… but not usually. In my 30 years of experience, I have taken almost all tender offers. Call me crazy, but if my annual return is 66% higher than what I expected to earn, I take the money and run.

Here’s how the numbers worked out for this cash giveaway.

A 66% Increase in Expected Return

In January 2013, I alerted my Oxford Bond Advantage subscribers to purchase an Advanced Micro Devices bond at about 93.5, or $935 per bond. The coupon, or the amount the bond holder is paid annually in interest, was 8.125%, or $81.25 per bond per year.

If they held this bond to maturity, they would have received 10 interest payments of $40.62 every June and December until maturity on December 15, 2017, for a total of $406.20.

Since bonds have to pay $1,000 at maturity, and my subscribers only paid 93.5, $935 per bond, they would pocket another $65 per bond as a capital gain.

The annual return to maturity would have been about 10.2%.

(Here’s the math: 10 payments x $40.62 interest + $65 capital gain / $935 cost / 59 months to maturity x 12 months = 10.2% annually.)

But, and this is where its gets good, Advanced Micro Devices just made a tender offer to buy back the bond at 104.58, or $1,045.80.

My subscribers paid $935 and the tender offer will pay them $1,048 per bond now, instead of $1,000 at maturity in three years. Plus, subscribers will also get $115 in earned interest for buying the bond back in January 2013.

(Here’s the calculation for the tender offer: $115 interest + $110.80 capital gain / $935 cost / 17-month holding period x 12 months = 17.05%.)

All told, the annual return on this bond is now 17.05% compared  to 10.2% a year.

There is no question here for me. Take the money and run.

A Positive Signal

You may be asking why anyone would buy a bond in a company that has had as many problems in the past few years as Advanced Micro Devices. You’d be right to do so. It does not look like something a conservative income investor would hold.

But remember this… When a bond owner is looking at a potential investment, he or she is only concerned with whether the company will be able to pay its bills until the bond matures.

That’s it. We don’t need the company to grow or even do well. We just need it to keep its head above water and meet its minimum obligations.

Advanced Micro Devices did that and a lot more. That’s why the bond shot up in price.

And even though many brokers will disagree with me, calls, tenders and sales before maturity can make bonds one of the biggest and most consistent payers.