By the time I arrive at work, I have already received numerous emails from various brokerage firms showing their bond offerings. For the past six months, the yield to maturity, or return, that these bonds offer has gotten lower and the quality of offerings has gotten worse. A five year corporate bond issued by a company with a good balance sheet that paid 4.5% a year ago now offers to pay 3%. Adding insult to injury, interest income on bonds is taxed at the highest rate, leaving little return left over after tax. As a result, we have to get more creative to get a reasonable return from bonds.
Convertible bonds are one solution we have found. Like regular bonds, convertibles pay a regular fixed income stream. Unlike regular bonds, convertible bonds offer significant upside potential if the common shares of the issuer go up in value. Holders of convertible bonds have the ability to benefit from the underlying stock’s gain by converting their bonds to stock. Once the stock price moves above a pre-determine price, the convertible bond holder is “in the money” and the convertible bonds starts to move in lock step with the underlying stock. One such bond we purchased for clients at $104 is now trading at $141.
A recent purchase for some clients was a convertible bond issued by Transforce Inc. Transforce is a diversified trucking company that operates the second largest courier and package delivery business in Canada. Transforce’s convertible bond pays an attractive 6% yield and offers the possibility of upside if its stock rises above $19 before the bond matures in November 2015. Transforce’s stock is currently trading at $15.20 per share. Even if Transforce’s stock never reaches $19 over the next four years, our clients will still collect a healthy yield to maturity.
Disclosure: The author holds no position in Transforce or Transforce Convertible Bond
