We buy a junk bond, follow it along a journey of failure and rebirth. : Planet Money Team Indicator buys Cardiff a surprise present. A terrible, extremely risky, but wildly interesting investment. Then it gets interesting. The company that issued the junk bond declared bankruptcy. But that wasn't the end of the story. | Subscribe to our daily podcast, The Indicator here.
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We Buy A Junk Bond

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We Buy A Junk Bond

We Buy A Junk Bond

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Hey, everyone. Stacey Vanek Smith here. I'm the co-host of PLANET MONEY's daily show The Indicator. So about six months ago, we at The Indicator made an investment. It was a risky investment. Pretty much everybody told us we were going to lose our shirts, but we went for it anyway. And this investment took us on a pretty amazing journey into the world of energy markets, debt, pink slips and even death, transformation and rebirth. It has been truly epic.

We've devoted several episodes of The Indicator to this journey, but today, on a very special PLANET MONEY, we have combined them, the whole journey into one episode. And it all started back in December with a surprise, a holiday surprise, actually, for my co-host Cardiff Garcia. Here it is.


VANEK SMITH: Cardiff Garcia, we've asked you to come into the studio today because there is a new member of Team Indicator.


Oh, really?

VANEK SMITH: Yeah. You - of course, you know most of our team - our producers Darius Rafieyan...


VANEK SMITH: ...And Leena Sanzgiri...


VANEK SMITH: ...And our editor Paddy Hirsch.


GARCIA: And this new mystery person about whom I was not consulted (laughter).

RAFIEYAN: Yes, there is a new member of the team.


SANZGIRI: So, Cardiff, you might remember in an interview earlier this week you told economist Tim Harford that you thought a junk bond would be the perfect gift.

GARCIA: For Christmas, yes.

RAFIEYAN: And so we called up our editor Paddy Hirsch and said, hey...

HIRSCH: Santa Claus.


RAFIEYAN: ...Can we get Cardiff a junk bond?

HIRSCH: And Santa said, has Cardiff been a good boy this year?


VANEK SMITH: And we said, absolutely, he has...

RAFIEYAN: Good enough.

VANEK SMITH: ...This year.

GARCIA: I'm at the edge of my seat, by the way.

VANEK SMITH: (Laughter).

HIRSCH: I said, let's try it. PLANET MONEY has a special little slush fund for things just like this, and it's just sitting there gathering dust. Go for it.


VANEK SMITH: So we decided that we were going to make a probably terrible, incredibly risky but maybe - just maybe - very lucrative investment. We were going to buy a junk bond.


VANEK SMITH: Hello and welcome to PLANET MONEY. A lot has happened since December, and a lot has happened with our junk bond since December. Today on the show, we bring you a three-part saga - our junk bond journey, starting with the purchase.


VANEK SMITH: Buying a junk bond - we did not really know where to begin. So we called up one of our very favorite bond market experts, Marilyn Cohen. She is the founder of Envision Capital Management.

SANZGIRI: Hi, how are you?

MARILYN COHEN: Top of the morning, it is. I'm doing good.

SANZGIRI: And we told her, we want to buy a junk bond.

VANEK SMITH: She had some reservations.

COHEN: That is a terrible idea.


COHEN: Terrible.

SANZGIRI: But why is it a bad idea? I mean, what is a junk bond?

COHEN: A junk bond simply is a company that issues a debt that is not investment grade.

SANZGIRI: Investment grade - so there are big ratings agencies that give companies grades based on their financial soundness.

VANEK SMITH: So a company like Johnson & Johnson or Microsoft have a triple-A credit rating. They're in good financial shape. If you lend them money, they will almost certainly pay you back. But not everyone gets a triple-A. If a company is struggling, if lending them money is a bit risky, the company might get downgraded to a double-A, a double-A-minus or a triple-B.

SANZGIRI: And there's a credit ratings threshold, and once you fall below that, your bond - your debt - is classified as junk.

VANEK SMITH: Junk. Marilyn says the official term, by the way, is high-yield bond. The yield is the interest payment you get when you lend money to a company, when you invest in a bond. And when companies dip into junk territory, they are considered really risky to lend money to. Their bonds are seen as risky. So the company issuing those bonds has to offer really high yields, really high interest rates, on those bonds to attract investors.

SANZGIRI: So, normally, the bond market is considered very safe and not very profitable.

VANEK SMITH: The junk bond market is the exception to all this. It's risky and profitable. These are companies that are actually at risk of not paying investors back. This is - it's like - junk bonds just means, like, risky bonds. This is like lending money to your flaky roommate.

COHEN: Ah, yeah. There you go.


VANEK SMITH: Right now, Marilyn says, the junk bond market is on fire. Corporate debt is at an all-time high. Interest rates have been low for so long that it's really cheap for companies to just borrow money for whatever reason. So they have been. For investors in bonds, this is not always great news because low interest rates mean you don't necessarily make much money on bonds. So more investors have been creeping into riskier bonds, hoping to make some money.

SANZGIRI: Like us.


SANZGIRI: So we asked Marilyn how to buy a junk bond.

COHEN: You'd have to set up a brokerage account and buy the bond, you know, online.

RAFIEYAN: I'm opening up my Fidelity account.

SANZGIRI: So we roped in producer Darius Rafieyan, and we said, hey, don't you have an online brokerage account? Want to help us get Cardiff a junk bond? Darius called Fidelity, and they told him high-yield bonds would be a little tricky to find.

RAFIEYAN: He specifically said that they hide the high-yield bonds.


RAFIEYAN: Like, they don't hide them. They don't - they make it - you have to go searching for them because they don't want people to see these huge yields and be like, well, bonds are safe, and if this is paying 146% interest, like, why wouldn't I just do that? So to Fidelity's credit, they make it difficult to make bad decisions (laughter).


VANEK SMITH: It's very funny.

SANZGIRI: That makes some sense, though.

VANEK SMITH: But we are determined to make a bad decision.

SANZGIRI: Yes, exactly.

RAFIEYAN: Oh, we're going to make some bad decisions.

VANEK SMITH: We are here to make a bad decision.

SANZGIRI: We are here...

RAFIEYAN: Looking at corporate high yield.

SANZGIRI: Yeah, we're going to open this.


RAFIEYAN: There's currently 1,264 bonds available.

VANEK SMITH: Of the junk variety.

SANZGIRI: (Laughter) High yield. High yield.

RAFIEYAN: The first one on the list, Ford Motor. Ford Motor.


VANEK SMITH: Oh, they're junk bonds status? High yield?

RAFIEYAN: So this one, it costs a thousand dollars for one of them.


VANEK SMITH: That's probably over our budget.

RAFIEYAN: And you have to buy a minimum of 200.

SANZGIRI: That's a little rich for our blood.

RAFIEYAN: So if you have $200,000, you cant get these bonds. But...

VANEK SMITH: OK. Can we organize by, like, lowest to highest price (laughter)?


RAFIEYAN: Yes. So let's do by lowest price. All right. So here's a bond issued by a company called Hornbeck Offshore Services.

VANEK SMITH: Offshore services - oil?

RAFIEYAN: I assume it's oil, right?

SANZGIRI: Yeah. I would imagine so.

RAFIEYAN: So just to show you how cheap and junky this bond is, if it actually gets to maturity, which seems not likely, these bonds yield 146.7%.


RAFIEYAN: To give - put that in perspective...

VANEK SMITH: And over what period?

SANZGIRI: Over a year.

RAFIEYAN: Over - yeah. Like, a year and change from now. To give you a frame of reference, a 12-month treasury is yielding 1.5%.


RAFIEYAN: So 1.5% versus 146%.

VANEK SMITH: Nice. OK. I mean, you know, there is, like, a good side to junk.

RAFIEYAN: Good yield, for sure. So these bonds are $286.50.



RAFIEYAN: And a minimum of two.

VANEK SMITH: So that would be $600.

RAFIEYAN: Yeah, just a little under $600.

VANEK SMITH: That's the cheapest one.

RAFIEYAN: Yeah. I think that the bond industry might be for rich people.

VANEK SMITH: It's looking this way.

SANZGIRI: It seems...

VANEK SMITH: I feel like we could buy stocks for way less.


VANEK SMITH: I know we could.

RAFIEYAN: Yeah. We could buy penny stocks.

VANEK SMITH: We could buy penny stocks. But it looks like we're going with Hornbeck.

SANZGIRI: Looks like we're going offshore.


RAFIEYAN: We got the order all lined up.

VANEK SMITH: OK. So what does it say? Let's read it off.

RAFIEYAN: So we got two bonds from Hornbeck Offshore Services, maturity date March 1, 2021. It's going to cost us $612.28.


RAFIEYAN: All right. So I'm hovering over it.

SANZGIRI: Here we go.

RAFIEYAN: Place order. Processing. Thank you. Your order has been placed.


VANEK SMITH: All right. We are the - we own a junk bond. How - I don't know. How do you feel?

RAFIEYAN: I'm getting a little bit of a rush.


RAFIEYAN: I've never bought a bond before.

VANEK SMITH: Me neither.

SANZGIRI: We bought two, not even one.

VANEK SMITH: We have two bonds. I know. And we need to - I feel like we need to name this bond.

RAFIEYAN: So it's a company called Hornbeck Offshore Services.

SANZGIRI: Hornbeck.

RAFIEYAN: Oh, Becky.

SANZGIRI: Oh, I like Becky.

RAFIEYAN: Becky with the good yield.


BEYONCE: (Singing) He better call Becky with the good hair.

VANEK SMITH: Becky with the good yield - so good.

RAFIEYAN: We got that high junk-grade yield.

VANEK SMITH: (Laughter).

RAFIEYAN: Becky with the good yield.

VANEK SMITH: Becky with the good yield. OK. Well, we are the proud new owners of a bond for Hornbeck Offshore Services. And now just one thing is left.

SANZGIRI: We have to give it to Cardiff.

VANEK SMITH: We have to give it to Cardiff.

GARCIA: OK. So you've handed me, Stacey, this blue folder, right?


GARCIA: It's got bows on it. I'm going to rip these off.

VANEK SMITH: This is a packet of information about the bond and articles about the company.

RAFIEYAN: And also, because it is an oil drilling company - fossil fuels, oil - we decided that Becky would best be represented as a dinosaur because oil comes from dinosaurs - fossil fuels. So here is Becky, the little pink dinosaur, Becky with the good yield.


SANZGIRI: So Team Indicator owns a junk bond.

VANEK SMITH: Two junk bonds.

SANZGIRI: Two junk bonds.

GARCIA: Christmas did indeed come early this year.

SANZGIRI: So what do you think of your gift?

GARCIA: Very exciting, guys.

SANZGIRI: So you like it?



GARCIA: It's awesome.

RAFIEYAN: So, Cardiff, how does it feel to be in the junk business?

GARCIA: It's about time, right? It's about time.


VANEK SMITH: After the break, we get to know Becky.


VANEK SMITH: Just how risky was our investment in Becky? Well, a couple of months after we made this purchase, we called Claire Boston to ask.

CLAIRE BOSTON: I was walking down the street and you said, oh, we bought Hornbeck. And I audibly gasped.

VANEK SMITH: Claire covers the bond market for Bloomberg.

BOSTON: Hornbeck is an extremely risky company. I spent a lot of time looking at these companies. And you guys didn't just pick, you know, like higher quality junk bond.

VANEK SMITH: A higher quality junk bond.

GARCIA: Yeah. We knew how to pick them.

VANEK SMITH: I know (laughter). Claire says the junk bond market is a pretty big and varied place, and not all junk bonds are created equal.

BOSTON: So there are three basic tiers.

GARCIA: We mentioned company credit ratings - triple-A, double-A, single-A, triple-B, etc. These are all desirable ratings for a company. These are so-called investment-grade ratings. It's a lot like a person's credit rating. If you're below triple-B, though, you're now in junk bond territory, like our bond.

BOSTON: The first tier is double-B. That is what we would call the high-quality junk. No one is worried about them not being able to pay back their bonds.

VANEK SMITH: For instance, some of Ford Motors bonds are in that category, also J.C. Penney and Twitter.

GARCIA: And a record number of U.S. companies are issuing junk bonds now, Claire says. Companies have started borrowing unprecedented amounts of money and using it to buy up other companies and to expand their operations and do all kinds of things. And why not? The money's cheap. But all that debt will bring your credit rating down. And that's why so many big, stable companies are in the junk category right now.

BOSTON: And then sort of the biggest part of the junk market is sort of that single-B range. They'll call it the middle, you know. And so that's kind of what people consider to be traditional junk so, you know, a little riskier.

VANEK SMITH: Companies like Bethlehem Steel, Revlon, Uber - a lot of companies that are still considered to be solid companies, just maybe having some cash flow problems.

BOSTON: And then the lowest tier is CCC.

VANEK SMITH: That's where we bought (laughter).


VANEK SMITH: Tell me about this lowest tier.

BOSTON: These are companies that definitely you could think about potentially running into trouble and not being able to pay their obligations back.

VANEK SMITH: Like maybe going bankrupt or something like that.

BOSTON: Yes. Even in the best of times, investors are a little sort of wary of really loading up on CCC debt.

GARCIA: Hornbeck Offshore Services is in that lowest tier.


GARCIA: Of course, it is.

VANEK SMITH: That's where we invested.

GARCIA: Hornbeck, the company, is based in Covington, La., a little city right near the Gulf Coast. Hornbeck was founded in 1997 by Todd Hornbeck, and he is still the company's CEO.

VANEK SMITH: Hornbeck has about 1,000 employees, and it owns a fleet of boats that it hires out to supply people and equipment to offshore drilling sites. Now, we tried to call Hornbeck a bunch of times but...


GARCIA: Yeah, that was the closest thing we got to a response.

VANEK SMITH: (Laughter).

GARCIA: OK. So we've established that Hornbeck's debt is in the lowest level of junk right now. Claire Boston says actually a lot of oil companies are in that situation because low oil prices have pushed a lot of these companies into troubled territory But especially companies like Hornbeck.

BOSTON: Not only is it energy, which is kind of an out-of-favor sector right now, it is the most out of favor of the out-of-favors.

VANEK SMITH: Oh, how come?

BOSTON: It is an offshore drilling services company, and offshore drilling is basically the category of the market where energy companies are exploring for oil, not, you know, in the ground or in the swamp, you know, in the U.S. but deep underwater.

VANEK SMITH: And super expensive.

BOSTON: Exactly. And so those companies need the highest oil prices to make money. And so I talk to a lot of investors for my job, and I have investors that say, oh, you know, like, we think parts of energy are OK. But right now, very few of them are willing to take a risk on offshore.

VANEK SMITH: Five years ago, a share of Hornbeck stock cost about 23 bucks. Right now, it's around 60 cents a share. In fact, right after we bought our bonds, Hornbeck was suspended from trading on the New York Stock Exchange because its share price had dropped so low.

GARCIA: David Deckelbaum is the managing director of equity research at the investment bank Cowen and Company. Stacey, you called them up to figure out what this would mean for us, for our investment in Hornbeck.

VANEK SMITH: Hornbeck's had a rough time. I think they're now trading in - is it pink sheets? Is that right?

DAVID DECKELBAUM: Yeah. That's right. Yeah.

VANEK SMITH: In pink sheets. That seems bad. That's like...


VANEK SMITH: OK. That's not what you want.

DECKELBAUM: Yeah. Once you go pink, that's, like, the last color you're going to see, you know?

GARCIA: Well, that's depressing.

VANEK SMITH: Yes. That's not good.

GARCIA: David says Hornbeck just has a lot of debt and not many prospects for making money in the near future.

VANEK SMITH: So do you think we'll get our money back?

DECKELBAUM: (Laughter) When you acquire a distressed debt instrument, you know, I think it's...


DECKELBAUM: You know, you can...

VANEK SMITH: (Laughter).

DECKELBAUM: You can always - but once you're involved in a distressed situation, it's a matter of negotiation. And, you know, sometimes a company can be so down and out that they just elect to go bankrupt and wipe out all of their credit or wipe out all of their bonds.


DECKELBAUM: But, you know, keep in mind, like, most of these companies are run by folks that want to stay employed but don't necessarily want to go bankrupt. So I think what you tend to happen is usually there's some sort of exchange, and the current bondholders would have to agree on that.

VANEK SMITH: And that is exactly what happened. We talked to David in February, and almost right after that, Hornbeck started doing something called an amend and extend on its debt. So our bond was supposed to mature in 2021. That is when we would have gotten all of our money back, plus, of course, the 146% interest.

GARCIA: If we got it back, yeah.

VANEK SMITH: Yeah. Now Hornbeck is asking bondholders to wait until 2025 to cash out on those bonds. In return, it's offering a better deal, which means we might actually make a little money on our bond.

GARCIA: I don't know. It seems like maybe right now that...

VANEK SMITH: Believe, Cardiff.

GARCIA: ...Deal only applies to accredited investors, real investors. It's not actually clear right now if we qualify for it but...

VANEK SMITH: So unfair.

GARCIA: Yeah. Well, David Deckelbaum says Hornbeck is no doubt in serious talks with many of those other investors right now and asking them to approve this amend and extend deal. He says Hornbeck most definitely has its hands full.

VANEK SMITH: But we're going to keep trying them. Next up - Becky meets a pandemic. And our investment adventure takes a very surprising turn.


VANEK SMITH: OK. So everything you just heard, that happened months ago before the pandemic, before the economy tanked. So just last month, we decided we should check on Becky. And we called up Claire Boston, the bond expert from Bloomberg.


BOSTON: You know, way back when you did that, it was pre-COVID. But the company was already having some serious struggles and had started to do things that looked like perhaps it was going to file for bankruptcy.

VANEK SMITH: Then, of course, like, the world fell apart and COVID happened. And we kind of forgot about Becky for a little while.

GARCIA: Kind of did stop paying attention, yes.

VANEK SMITH: And so now I have some updates for you. I checked in, checking on Becky.

GARCIA: I had a feeling this day was coming.

VANEK SMITH: (Laughter) Yes. OK. So first update - Hornbeck is bankrupt.

GARCIA: Yeah. That's very sad. I actually tried not to look up Hornbeck, but this news did come across my screen at one point, so I knew it. I just didn't want to know what it meant for us. So I've avoided looking too much into it.

VANEK SMITH: I mean, in a lot of ways, it's not that surprising. Over the last six months, thousands of U.S. companies have filed for bankruptcy. It has been a really brutal time.

GARCIA: Yeah. And, I mean, Hornbeck, I remember, was struggling before the COVID pandemic came along. I mean, it already couldn't pay its debts back then.

VANEK SMITH: Yes. So Hornbeck declared bankruptcy, but, you know, even if a company declares bankruptcy, if you have a bond, you will typically get paid back in the bankruptcy settlement - right? - at least in part. So, you know, we're not necessarily in terrible shape. I asked Claire, OK, please look into this for us. Tell us what happened to Becky.

BOSTON: So I am a nerd. I pulled the restructuring plan out of the bankruptcy documents, and they lay it all out.

VANEK SMITH: Oh, my gosh, we love nerds so much. Yes. What'd they say? Give us all the details.

BOSTON: Do you - like, do you want the good news or the bad news? Because, actually, I think it's actually mostly bad unfortunately.



GARCIA: OK. OK. But that means there is some good news, yes?

VANEK SMITH: Yes. I love this glass-is-half-full Cardiff Garcia that I'm meeting. This is wonderful.

GARCIA: You're saying there's a chance. Yes.

VANEK SMITH: I am saying there is a chance. Exactly.

GARCIA: OK. Stacey, I'm ready. Our junk bond, Becky, hit me. What has happened to it?

VANEK SMITH: OK. So we know a few things. The company that issued the bond, Hornbeck Offshore Services, declared bankruptcy back in May. Claire Boston, who covers the bond market for Bloomberg, said, you know, there's good news and bad news.

BOSTON: OK. So you guys are going to get about $5 back.

VANEK SMITH: Oh, OK. Really? For both bonds, $5?

BOSTON: Both bonds, $5.

VANEK SMITH: Wait. The good news is that it's not nothing?


VANEK SMITH: So the good news is that we are getting an amount back. The bad news is that we're getting $5.


VANEK SMITH: So, Cardiff, apparently, it's actually less than $5. It's more like $3. But Claire was, like, feeling generous and so she rounded up for us.


GARCIA: Much appreciated. So you're saying our two bonds that we paid $600 for are now worth about, rounded up, five bucks or so.

VANEK SMITH: Yeah. Yeah. Mmm hmm.

GARCIA: OK. I guess the follow-up question is, why did we get so little? Where did our $595 go?

VANEK SMITH: That is an excellent question, and I asked Claire about this. And so she said the bond market is just, like, a dark and complicated place. And there are a bunch of different kinds of bonds. And so in the case of bankruptcy, she says, all of the bondholders, all the people the company owes money to, they get in this kind of line to get their money back.

BOSTON: But what happened to you and the reason that you guys are getting so little is that you're sitting kind of back in the line.

VANEK SMITH: So, Cardiff, you can think of it like boarding an airplane. First up, you know, you have the people with small children, active military. Those guys, super premium bondholders, they get 100% of their money back. Then you've got, like, the platinum members. They got about 88% of their money back. Then way, way, way, way, way, way down the list...

BOSTON: You guys.

VANEK SMITH: General boarding.

BOSTON: And you're getting half a percent.

VANEK SMITH: Yeah. I mean, OK, so remember, though, the potential payoff here was really high - 146%. We would have more than doubled our money if Hornbeck had pulled through and had not gone bankrupt. But, of course, that is the dark side of junk, which is that if a company goes under, junk bondholders are really far back in the line. You lose your shirt.

GARCIA: And we lost our shirts.

VANEK SMITH: We lost our shirts.

GARCIA: So Becky, our - yeah, our $600 pair of bonds is now worth roughly a cup of coffee.

VANEK SMITH: There is a twist, though, Cardiff.


VANEK SMITH: Becky is not actually a bond anymore.

GARCIA: Ah, do tell.

VANEK SMITH: OK. So it's a little bit of a tale, so settle in. So remember, Hornbeck went bankrupt back in May, right?


VANEK SMITH: So when I heard that, I assumed that it was just going out of business forever.

Actually, though, like, this makes me sad. I mean, it - I mean, this is, like - I think they employed, like, a thousand people.

BOSTON: Yeah. No. It - that's a fair way to think about bankruptcy. Any time that a bankruptcy occurs, it almost always means significant layoffs, store closings. That being said, you know, Hornbeck plans to emerge from bankruptcy. They'll still exist.

VANEK SMITH: Oh, they will? They do?

BOSTON: Yes. Yes.

VANEK SMITH: OK. So here's the skinny - Hornbeck declared bankruptcy. It was able to shed more than a billion dollars in debt, and it's going to get back to business.

GARCIA: Oh, OK. All right.

VANEK SMITH: Yeah. Yeah. Hornbeck lives. Yeah.

GARCIA: So it's not gone. OK. So what does that mean for our little junk bond?

VANEK SMITH: Well, our little junk bond, Becky, died. She is no more. She entered, you know, the chrysalis of bankruptcy, and she emerged a stock.

GARCIA: Oh, great. So we own stock in Hornbeck.

VANEK SMITH: We own stock in the newly emerged from bankruptcy Hornbeck 2.0.

GARCIA: So Becky went from being Becky with the good yield to Becky with the possible future upside appreciation. I don't know - something like that.

VANEK SMITH: I think that's a very exciting option. I feel like we should explore a few more. I have some ideas.

GARCIA: Fine, fine.

VANEK SMITH: One of them that I came up with - Phoebe - hear me out. Because Becky died, rose like a phoenix from the ashes and so Phoenix, Becky, Phoebe.


VANEK SMITH: That's one idea - Becky 2.0, Re-Becky?

GARCIA: I like Phoebe. I like Phoebe. I think I'm going with Phoebe.

VANEK SMITH: OK. I feel like we can have listeners vote on this on Twitter to, like, help us out.

GARCIA: Let's do it.

VANEK SMITH: All right. We're on.


VANEK SMITH: So we did indeed have listeners vote - put the call out on Twitter a couple weeks ago. And the people have spoken. Our new bond turned stock - Zombecky (ph). To keep following the Zombecky saga, please subscribe to The Indicator podcast. It is always 10 minutes or less each weekday. This episode was produced by Leena Sanzgiri, Darius Rafieyan, Nick Fountain and Liza Yeager. The Indicator is edited by Paddy Hirsch. I'm Stacey Vanek Smith.

GARCIA: And I'm Cardiff Garcia.

VANEK SMITH: And this is NPR. Thanks for listening.

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