Saturday, February 16, 2013

AEE pulls support for junk bond.

Ameren Energy will no longer support Ameren Energy Generating Company debt.


Investing of any sort is a risky business but unless you work for a living or have a generous benefactor, you have few choices when investing for income.  Junk bond or high yield investing is very risky.  Ameren generating company may default on a junk bond that I profiled September 5, 2012.


The Bond

Ameren Energy Generating Company issued this bond November 12, 2009 with a coupon of 6.3% at a price of $99.746.  This bond matures April 1, 2020.  According to FINRA (Financial Industry Regulatory Authority), the bond last traded at $51.168 yielding 19.143%.   For additional information about the bond, use the FINRA link at the end of this post.

Ameren Energy Generating Company & Ameren Energy Company.

Ameren Energy  Generating Company is a wholly owned subsidiary of Ameren Energy Company. The parent company Ameren Energy (AEE) is solid.   However, the energy generating subsidiary has been a bust.  It loses money while it sells the available capacity of energy generation.  This subsidiary does not actually make energy.   The parent AEE has decided to exit the energy generation business and has given notice that it will not financially support the energy generating subsidiary.  According to an article in "Seeking Alpha" several decisions will be made in the near future that will affect how debt from the bonds is handled.  A link to the "Seeking Alpha" article is provided at the end of this post.

Buy, sell, or hold?

If you own this bond as I do, you have to decide how to handle this unfortunate news.  I will closely follow the events of the next few weeks to decide if I should add to my position.   I do like the big yield.

A market for this bond does exist and I might be able to get $50 if I sell it.   Based on my basis of $87 this is a loss of about 42.5%.   That magnitude of loss is hard to swallow.  It's like buying Apple at $600 riding it up to $700 then back down to $450.  However difficult it is to take the loss it is better than losing it all if the bond goes into default.    Even with an orderly bankruptcy you may only receive ten cents on the dollar.    However, I am not willing to give up on it yet.

Therefore, I will hold for awhile.  Stayed tuned for updates.


TheMoneyMadam

Links:

See Article from "Seeking Alpha" on AEE high yield bond
See Finra data on AEE Bond
See Original MoneyMadam Post  on AEE high yield bond