Need urgent bond help

[Monoriu]

I have purchased some bonds (actual bonds, not a bond mutual fund), due 2015.  I got an "exchange offer" in the mail box.  I don't understand what's going on, so I'll just type it out.

If Exchange Offer instruction received by the bank before 24 April 2014 (Noon): with respect to each US$1,000 principal amount of US$ notes (1) at the election of the Eligible Holder, (a) a principal amount of US$1,000 of New 2018 Notes; OR a principal amount of US$1,000 of new 2020 notes, in each case subject to the provisions relating to minimum denominations; PLUS (2) the Exchange Premium of US$45.00; PLUS (3) accrued interest; PLUS (4) the Early Participation Payment of US$7.50.  The consideration described above, excluding Accrued Interest, results in a theorectical exchange price for the US$ Notes of 105.25%.

If Exchange Offer instruction received by the bank after 24 April 2014 (Noon): Same as above, but without the Early Participation Payment of US$7.50.  The consideration described above, exclusing Accrued Interest, results in a theorectical exchange price for the US$ Notes of 104.50%. 

If you wish to participate in the Exchange Offer, please indicate your choice:

a) Exchange to a US$-denominated Regulation S Senior Notes due 2018 with interest rate and yield no less than 8.5%

b) Exchange to a US$-denominated Regulation S Senior Notes due 2020 callable 2017 with interest rate and yield no less than 9.25%.

If you do not wish to participate in the Exchange Offer, you may take no action.

Please seek professional advice if you have any questions.

Now, since languish is my best source of financial advice, what does languish say? 

[Grey Fox]

You may need to seek better financial advice than Languish.

[Monoriu]

As far as I see, there are 2 decision points. 

One, I need to decide to do this or not.  It seems there is no reason to do this after 24 April (noon).  My understanding is that the existing bonds are due 2015.  But for some reason the bond issuer wants to pay me back later.  So this is effectively extending the bond due date by a few years. 

Two, if I am going to do this exchange thing, I need to choose between the new due dates of 2018 or 2020.  The 2020 due date has a higher yield, but is callable in 2017. 

[Monoriu]

You may need to seek better financial advice than Languish.

There is none.  The frontline bank staff don't know anything, hence the "please seek professional advice" line. 

Come on, just say something

[sbr]

Do you need the cash in 2015?

Is the return on extending the bonds better than what you could get out you cashed out and put the money elsewhere?

[Monoriu]

Do you need the cash in 2015?

Definitely not. 

Is the return on extending the bonds better than what you could get out you cashed out and put the money elsewhere?

This is the big question, isn't it?  I have no idea what the "theorectical exchange price" is.  I also don't understand what "interest rate and yield" means.  I understand coupon rate and bond yield, but not "interest rate and yield".  The yield of 8-9% sounds unrealistically high to me in the current market.  So the 8-9% most probably mean something other than bond yield. 

[Admiral Yi]

That's a crazy yield.  What's your current coupon?

And what's the bond rated?

[Monoriu]

That's a crazy yield.  What's your current coupon?

9.75%.  That's coupon, not yield.

[Monoriu]

And what's the bond rated?

Not rated 

[grumbler]

Sounds like they anticipate trouble paying off the higher yield in 2015 and want to push redemption out (and lower the yield) by paying a cash bonus now.

Unless you need the money now, I'd hold on to the existing bonds.  There's a reason why they want to pay you to switch - almost certainly because its a better deal for them (and less of a deal for you).  If you need cash in the short term, taking this deal is better than borrowing the money.

Note that I haven't worked out the financials on this, i am just basically analyzing based on qui bono.  But my advice is to stick with what you have.

[mongers]

I have purchased some bonds (actual bonds, not a bond mutual fund), due 2015.  I got an "exchange offer" in the mail box.  I don't understand what's going on, so I'll just type it out.

If Exchange Offer instruction received by the bank before 24 April 2014 (Noon): with respect to each US$1,000 principal amount of US$ notes (1) at the election of the Eligible Holder, (a) a principal amount of US$1,000 of New 2018 Notes; OR a principal amount of US$1,000 of new 2020 notes, in each case subject to the provisions relating to minimum denominations; PLUS (2) the Exchange Premium of US$45.00; PLUS (3) accrued interest; PLUS (4) the Early Participation Payment of US$7.50.  The consideration described above, excluding Accrued Interest, results in a theorectical exchange price for the US$ Notes of 105.25%.

If Exchange Offer instruction received by the bank after 24 April 2014 (Noon): Same as above, but without the Early Participation Payment of US$7.50.  The consideration described above, exclusing Accrued Interest, results in a theorectical exchange price for the US$ Notes of 104.50%. 

If you wish to participate in the Exchange Offer, please indicate your choice:

a) Exchange to a US$-denominated Regulation S Senior Notes due 2018 with interest rate and yield no less than 8.5%

b) Exchange to a US$-denominated Regulation S Senior Notes due 2020 callable 2017 with interest rate and yield no less than 9.25%.

If you do not wish to participate in the Exchange Offer, you may take no action.

Please seek professional advice if you have any questions.

Now, since languish is my best source of financial advice, what does languish say?

Put everything on red.

[Grey Fox]

You may need to seek better financial advice than Languish.

There is none.  The frontline bank staff don't know anything, hence the "please seek professional advice" line. 

Come on, just say something

I believe these things should not be legal.

[Admiral Yi]

Not rated 

To get that kind of yield in the US you'd have to eat a helluvalot of risk.  I say walk away.

[Monoriu]

I believe these things should not be legal.

I signed a big pile of documents (which I didn't read) when I bought it.  Pretty sure I signed all my rights away.  They have legions of lawyers on their side. 

I have languish though 

[MadImmortalMan]

Is this the money that built the ghost cities and a hundred dams along the Yangtze? 

It is a crazy high rate though. Are these usually denominated in USD?

Instinct says grumbler is right. Fear says when there is debt restructuring going on, bondholders usually get the choice of getting screwed a little or getting screwed a lot. Look at the recent PIIGS haircuts.