Calling CCCs

February 17, 2012

Junk bonds have enjoyed a rally since the start of the year but investors are facing a dilemma.

Should you buy larger, more liquid bonds that have already risen significantly, or buy smaller, illiquid bonds that have an attractive price?

Barclays Capital says triple-C rated bonds — the riskier segment of the junk space — are beginning to catch up with less risky issues because higher rated bonds have increasingly run into “call constraints”.

(For non bond geeks: Some corporate bonds have an embedded call option that allows the issuer to redeem the debt before its maturity date. )

Barclays says as of Wednesday’s close, 71 percent of callable BBs and 57 percent of callable single Bs were trading above their next call price, compared with just 29 percent of CCCs.


We prefer higher-quality new (CCC) issues as a means of avoiding call constraints, rather than overweighting lower quality.

The recent distribution of CCC returns further underscores our conviction. Since the market low on Nov 25 2011… CCC returns have been strictly ordered by issue size, with smaller issues underperforming dramatically… Simply put, investors require significantly greater spread compensation in exchange for holding smaller, illiquid, lower quality risk. We believe this premium is appropriate and unlikely to dissipate, given the persistent tail risks associated with macro uncertainty.

The verdict seems to be that one should look for CCCs with decent size and liquidity which have lagged the rally and are not call constrained.

Barclays lists AMC Entertainment, Cincinnati Bell, Edgen Murray Corp and Edison Mission Energy as examples of such CCCs.

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