GEORGIA POWER GAT S
August 07, 2012 - 5:37pm EST by
GideonMagnus
2012 2013
Price: 30.71 EPS $0.00 $0.00
Shares Out. (in M): 4 P/E 0.0x 0.0x
Market Cap (in $M): 100 P/FCF 0.0x 0.0x
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT 0.0x 0.0x
Borrow Cost: NA

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  • Callable Bond
  • Personal Account Idea

Description

 
This is a recommendation to short Georgia Power's 8.2% senior unsecured note, which trades on the NYSE with symbol GAT. Issued during the teeth of the financial crisis in November 2008, this high quality debt issue was sold at a very high interest rate. This issue is callable on 11/1/13 at its $25 face value and there is every reason to believe that it will be promptly called. Just today, the company issued a new senior unsecured note due 8/10/15 with a 0.75% coupon, so it clearly makes no sense for the company to hold onto 8.2% debt.
 
Based on today's closing price of $30.71, GAT has a yield-to-call of worse than -8% (yes, that is minus eight!). This issue would have to remain outstanding until May 2015 before the investor's return gets all the way up to 0%. Thus, even if the company is somewhat slow to redeem the bond, there is a big margin of safety before a short position would be at risk of losing money.
 
Odds are that you will not have to wait until redemption to make money on this position as it has had periodic sell-offs in the past. Also, as the call date draws near, the more intelligent longs will start heading for the door to avoid the guaranteed $5 capital loss per bond. Other options in your favor is unexpected credit risk showing up, although I think that is unlikely.
 
This is a relatively small issue, so the idea is probably only applicable to personal accounts. The short interest is pretty low right now, but has been quite a bit higher at times over the past year.

Risks:
 
Short squeeze - The short interest is relatively low, so I don't think this is a high risk. Also, if you have the staying power to hold until the call date, you have a certain ability to exit at $25.
 
Company chooses not to redeem the bond - Other than pure incompetence, the only reason this won't be called is if the company's cost of capital has skyrocketed. Of course, if that happens then the price of the bond should fall anyway, but you would still be exposed to market risk.
 
 
Prospectus: http://www.sec.gov/Archives/edgar/data/41091/000009212208000068/ga2008c424final.htm
 
New bond issue summary: http://www.reuters.com/article/2012/08/07/georgia-notes-sale-idUSL2E8J78YX20120807?feedType=RSS&feedName=marketsNews&rpc=43
 
Short Interest history: http://www.nasdaq.com/symbol/gat/short-interest

Catalyst

Redemption at $25 on or soon after 11/1/13. Investors are likely to start pushing the price down sooner than that, though, as the call date draws closer.
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