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shamapant (< 20)

How do bond yields effect fundamentals?



December 07, 2011 – Comments (3)

Looking at ATP Oil and Gas Corp, here is an excerpt from a 'plunged' fool article:

"In the third quarter, production averaged 24,000 barrels of crude, down from 31,000 in August, and a pair of the company's wells have slowed production. The lower production has sent ATP's bond yields skyrocketing, a major problem for a company that has $2 billion in long-term debt."

-I can see that maybe this lower production is a fundamental problem, but the increase in ATP's bond yields is simply because of investor fear right? Rising ATP bond yields should incur no higher interest expenses for ATP because the rise in yields is due to lower prices rather than higher payouts....I feel like I am misunderstanding some crucial bond concept, so I need your help here.



3 Comments – Post Your Own

#1) On December 07, 2011 at 8:57 PM, rd80 (95.06) wrote:

Assuming the debt is fixed rate bonds, you are correct - the higher bond yield is due to the reduction in bond price in the market and would not change the coupon payments ATPG is making (same coupon, lower price = higher yield), which means ATP's cash flow isn't affected.

The major problem is if ATP needs to issue new bonds or roll over a maturing issue since any new issues would carry the higher borrowing costs.

This particular one is a bit confusing.  The Balance Sheet in the latest 10Q shows just under $2 billion in debt.

FINRA shows two bond issues for ATPG at $1.5 billion each.  One of them shows a last trade in Jan '11, so that may have been called or something.  In any event, both mature in 2015 , both carry11.875% coupon rates and both are shown with CCC- S&P ratings; deep in junk territory.  The one that's still trading shows a yield of a little over 27%.  Great deal if the FINRA quote is correct and if the debt doesn't end up being restructured.  Not all the company's long term debt will be quoted on FINRA, some could be bank loans or privately held.

No postion in ATPG or its bonds.

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#2) On December 08, 2011 at 12:15 PM, outoffocus (23.81) wrote:

On the other hand, depending on the bond covenants, if investors drove down the price in panic (rather than fundamentals) and the company has some extra cash, they may be able to call some of the bonds back at the lower price and possibly retire some of their debt at a discount.  So it could either hurt them or help them.

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#3) On December 08, 2011 at 8:23 PM, buffalonate (48.15) wrote:

Bond yields are purely a function of risk.  If they company is seen as more risky then the yield they will have to pay on new bonds will rise.  That fear can also push down the price of existing bonds so people can buy the bonds at a discount to face value.

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