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Sunday, Sep 24, 2023


Just how hot is the high-yield bond market?It’s on fire, according to Larry Post, ex-Drexelite and founder of the Westside-based Post Advisory, a junk bond money manager. Post says there are about $3 billion in new issues every week.

“There is a high-yield road show (sales presentation) any day of the week, at least four or five (a week), sometimes more, usually held at the Park Hyatt in Century City, but also at the Four Seasons, or The Peninsula,” said Post.

“It’s just a matter of picking out which industries you are interested in, and going (to the road shows). You can’t go to them all,” he said.

By the way, Post still likes bonds of Asia Pulp & Paper Co. Ltd., the Singapore-based paper giant, which has major operations in Indonesia.

Due to the Far East financial fandango and the January collapse of major bond investor Peregrine Investments Holdings Ltd. of Hong Kong, the bonds of Asia Pulp & Paper are trading cheap as in 73 cents per dollar of face value, on bonds set to mature in 18 months.

With interest yield, an investor is looking at an annual return in the 33 percent range, said Post. “Asia Pulp & Paper stock has been trading up,” noted Post, and indeed it has risen to $12.56 a share as of last week, up from $8.56 a share in January. Moreover, a Morgan Stanley analyst issued a buy on the $1.8 billion-in-revenues company two weeks ago.

“This scenario doesn’t make sense,” said Post. “The stock is going up, but the bonds are trading at a steep discount. Either they pay off the bonds (in 18 months), in which case they should be trading much higher, or they don’t, in which case the stock should be at zero (as the company’s bondholders will claim Asia Pulp assets).”

Post is betting the bonds are a great buy.

Whither Oil?Oil prices fell again last week, hitting a four-year low of $14-and-change for a barrel, off from about $22 a barrel a year earlier. It wasn’t supposed to be this way, if you listen to Joseph Di Lillo, founder and chairman of the Santa Monica-based brokerage Drake Capital Securities Inc. “There has been a confluence of four events that no one could have predicted a year ago,” said Di Lillo, who was bullish on oil prices last winter, and still is.

The four events driving down oil prices are, according to Di Lillo: the slowdown of the Asian economies, suppressing demand; the warm El Nino weather that has reduced demand in the Northeast of the United States; the near-collapse of OPEC, with wide-scale cheating on oil production ceilings; and a United Nations agreement to allow Iraq to export more oil.

Di Lillo has been high on Torrance-based Geo Petroleum Inc., a Nasdaq Bulletin Board stock which has “heavy” oil in Oxnard, and also in the Bandini field, near East Los Angeles. The company has been going forward with new technologies to unlock the tar-like oil, involving injecting steam into the ground, and drilling parallel horizontal holes. But, at $14 a barrel, it ain’t worth it anymore, said Di Lillo. This kind of technology is expensive to implement, although once in, it is not expensive to operate, said Di Lillo. Geo is cooling its heels for now, doing some hazardous waste treatment.

Still, Di Lillo believes what goes down can go up. “Worldwide demand for oil has been growing, while supplies have not,” he said. “Unless we have the same unusual confluence of events again next year, I would look for oil to go back up toward $22 a barrel. It might be time to buy oil stocks.”

Tax time

Terry Krupczak, director of tax for entrepreneurial services at the Ernst & Young offices in Woodland Hills, says many of his clients are complaining about language in the 1997 Tax Act.

The big problem is in unexpected limitations on who can benefit from the 0 percent rollover tax treatment of gains derived from investments in small business, but re-invested in other small business. In general, a small business is defined as one with less than $50 million in assets.

Under the 1997 Tax Act, investors who reap capital gains when selling stock in a qualifying small business pay no taxes on the gains, if the profits are re-invested in another qualifying enterprise.

But in rulings this year, the IRS is hewing to the language of the law, which specifies that only individuals, not institutions, can benefit from the law. Venture capital firms had assumed they would benefit from the law, passed in August of last year.

But instead, “It would appear the rollover provision doesn’t apply if you make your investment through a venture capital firm,” said Krupczak.

Even limited partnerships, if one of the limited partners is an institution such as a venture capital firm, don’t benefit, said Krupczak.

“If we can’t get a clarification of this rule, I think a lot of the excitement about this rule, and potential investments, are off,” said Krupczak.

The National Association of Venture Capitalists, as well as local venture firms like Brentwood Associates, have been lobbying Congress for an amendment to the 1997 Act, said Krupczak. “Most venture capitalists expected this law would apply to them, and seemed to be the intent of Congress,” said Krupczak. “But then, it’s sometimes hard to determine what those guys (Congress) really meant when they pass legislation.”

Contributing Reporter Benjamin Mark Cole writes about the local investment community for the Los Angeles Business Journal.

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