Tuesday, July 15, 2008

Loading up on CCS

Comcast is the largest cable company in US. Its leverage is 2.5x Net Debt/EBITDA ($30bn debt and $13bn EBITDA in CY08). Interest coverage is quite high at 6x (EBITDA/Interest). As it is a subscription based business model, it is quite recession proof. People might cut their video service as they are thrown out of their homes, or they will stop taking premium services. But the chances that this company goes into bankruptcy is close to 0, if their is anything close to 0 these days.

The company has various series of debt. One of the debt series - CCS - trades on stock exchanges like a stock. The company pays its interest like a dividend. The face value of this is $25. This is a 6.625% note due in 2056, but it is callable anytime after May 15, 2012.

Today, this has fallen a lot, for no obvious reason. Comcast stock and other debt of Comcast are trading just fine. At its current price of $19, the yield to call is 15%. The yield to call on other debt securities - depending on maturity and seniority - is not above 8%. The yield to call (rather than yield to maturity) is the right thing to look at, because if on May 2012, this debt is trading at today's price, Comcast will have every incentive to refinance the debt at the lower rates and pocket the difference.

I think this is one of the best investments out there. On a BBB corporate, one is getting a yield of a corporate in distress. I have bought some today at $19. Lets see how it works out.


Net said...

Hi Gaurav,
I follow your blog regularly. Thanks for posting your views and analysis.
One quick question about CCS, why did it drop 7% today? something we don't know about is coming? or is it an irrational reaction to the general financial market situation?

Gaurav said...

Thanks Net. Apparently a lot of exchange traded debt sold off yesterday. I just did a new post on that.