Crypto and meme corporate bonds can go their own way

The author is a pension portfolio manager at Barksdale Investment Management and co-author of "Undiversified: The Big Gender Short in Investment Management".

The crash of some of the flag carriers of the stock bubble in recent years has been painful for investors. We saw how the "Pandemies winner" Netflix broke up by 75 percent compared to the top values ​​of 2021, the crypto stock exchange operator Coinbase by 86 percent and the former meme stock and cinema chain AMC by 80 percent.

The losses of their bonds are less observed

less. The damage caused there is more moderate and is compensated for by cupon payments-a Netflix bond with a due date in 2030 has achieved a minus of 19 percent compared to the latest highs, a coin base bond minus 36 percent and an AMC-2026 bond minus 19 percent. This is partly due to the very different capital structures of the individual companies and risks of bonds compared to shares.

For hedge funds that benefit from arbitrary business transactions across capital structures, such differences offer a playground full of opportunities. But the gaps also illustrate differences in the ownership and return characteristics of shares towards bonds.

Firstly, the basis of the owners of corporate bonds is largely institutional, although most emissions with investment grade rating are publicly registered. The publicly registered junk bond is a way that is threatened with extinction, since stressful disclosure obligations and longer market introduction times are pushing companies to private placements at institutions. While institutional investors can act frequently, the DayTrader concept and the associated increased volatility in shares are largely a retail phenomenon.

Secondly, it is obvious that the chances of return for non -necessary bonds and stocks are different, but mathematics is a bit more nuanced.

The downward risk of the bond lovers, like that of the shareholders, is unlimited when a company fails (although unsecured believers get an average of 35 cents for everyone invested in an unusual company). But our advantage is limited. Dealing documents usually contain a provision that states that a company can pay back (or terminate) bond before due date and can issue new debt on a lower interest rate, which means that the investor will not necessarily benefit much from an improved balance.

This means that the sky -high growth forecasts that have driven the shares of Netflix, Coinbase and AMC to their highs cannot be priced in their bonds. Creditors still suffer from misjudgments, but the tyranny of the limited upward potential saves us from ourselves when growth seems endless.

After all, the performance of corporate bonds must be broken down into overall and surplus returns. The latter refers to the return of the bond after a comparison with what investors could earn with "risk -free" government bonds similar.

What story do the bonds of Netflix, Coinbase and AMC tell? The "surplus return" of the Netflix bond with due date in 2030 is about minus 7 percent compared to its high in November. This means that more than half of the negative return has to do with the bear market for US state bonds. The 2031 bond of Coinbase, on the other hand, had a negative over the 28 percent over the end of November, compared to a negative over the 5 percent overriding on its index benchmark. The excess return of AMC compared to the maximum state in June 2021 was 14 percent.

The bond market seems to feel relatively comfortable with the financial strength of Netflix. The 2031 bond of Coinbase, on the other hand, reflects the skepticism that has been in last September since its emission. Unusually, the bond was acted almost immediately - although the stock and Bloomberg Bitcoin Index only reached its highs in November. It is not necessarily the case that the creditors were ahead of the game in the forecast of the recent sale of crypto-rather we do not have the shares-like way of thinking that is required for the crypto housese that is embedded in the peak values ​​of Coinbase.

Finally, AMC has strengthened its financial position through capital increases when its shares rose sharply. But his bonds with a first lien or entitlement to corporate assets are acted with a large surcharge on debt compared to a second lien. This indicates persistent concern about the financial prospects of the company.

Who knows where the bonds of these companies will be in one year? But the crash of the shares of the companies raises questions about the logic of the rules that allow individuals to buy stocks from Coinbase or AMC, but not their unregistered bonds to "protect" inexperienced investors.

Barksdale investment management can hold investments in the companies mentioned