US Exchange Traded Debt (ETD) aka “Baby Bonds” Investment (No withholding tax for non-US resident).

One of my favorite US investment instrument is Exchange Traded Debt (ETD) aka “Baby Bonds” . ETDs are actually no different from your regular bond traded on the stock exchanges instead of the bond markets. ETD securities are issued in $25 denominations and can be traded on the stock exchanges in the same manner as common stocks. Therefore, you can invest in ETD for $25 per share compare the minimum $1000/$5000 investment for bond. Buying ETD in small denomination can help in diversification. Another advantage is that ETD securities pay interest payments quarterly instead of the semi-annual interest payment from bonds. ETD enable you to have more regular payout per year which is good for retiree. Since Exchange Traded Debt is like bond, there is no US withholding tax for non resident.

My current ETD holding generate about US$6970 of interest income annually.

Stock/bonds	Classification	Tax	Holding	Current px (S$ or US$)	Current worth	Div date	yield	Est. Payout	Grade
AGIIL ARGD	ETD	N	400	25.65	10260	3/6/9/12	6.5	650	bbb-
BSA	ETD	N	200	23.6	4720	1/4/7/10	5.13	256.5	bbb-
EbayL	ETD	N	400	26	10400	2/5/8/11	6	600	bbb+
ENBA	ETD	N	500	26.46	13230	1/4/7/10	6.375	796.875	bbb-
GBLIL	ETD	N	400	25.5	10200	1/4/7/10	7.875	787.5	bbb (Ambest)
GBLIZ	ETD	N	400	25.25	10100	2/5/8/11	7.75	775	bbb (Ambest)
MGR	ETD	N	75	25.24	1893	3/6/9/12	5.875	110.15625	bbb
PJH-Prudential Financial 5.75% Jr Sub Notes	ETD	N	500	25.42	12710	3/6/9/12	5.75	718.75	bbb+
PRH	ETD	N	200	25.42	5084	3/6/9/12	5.7	285	bbb+
RILYL	ETD	N	288	25.37	7306.56	1/4/7/10	7.5	540	nr
RILYZ	ETD	N	300	25.19	7557	1/4/7/10	7.5	562.5	nr
SNHNL	ETD	N	200	24.52	4904	3/6/9/12	6.25	312.5	bbb-
SOJA	ETD	N	200	26	5200	1/4/7/10	6.25	312.5	bbb
THGA-Hanover Insurance Group 6.35% Subordinated Notes	ETD	N	166	25.55	4241.3	3/6/9/12	6.35	263.525	bb
							Total	6970.80625

Exchange Traded Debt mostly carries maturity of 30 years or more (although some are just 5-10 years).  Most exchange traded debt issues are ‘junior’ to the companies secured debt and senior to preferred and common shares. Most of the issues are $25.00/share issues and generally are callable at $25.00 plus accrued interest 5 years from the date of issue.
Caution should be used when purchasing these debt securities when the 5 year first call date is approaching.  In an environment of falling interest rates companies will be ‘refinancing’ as much debt as possible at lower interest rates.  If you purchase at a price above $25 you will incur a capital loss if the issue is called.


Exchange-traded debt securities are unique corporate debt securities designed for sale to the individual investor on equity exchanges vs the bond market. ETD also resemble preferred stocks in their basic features, but since they are debt and rank above preferred stock, they are generally considered less risky than preferred stocks.  Upon liquidation, the exchange-traded debt securities rank junior to the company’s secured debt and senior to the company’s preferred and common stock. By their nature, ETD are safer than traditional preferreds because if the company is liquidated, debt is paid before equity.

Note that a good share of the exchange traded debt issues are investment grade issues.  This makes these ETD good issues to be considered by those that like preferred shares as they are very similar (except they are one step higher on the ‘claim’ ladder in a bankruptcy). ETD Issuers tend to be majority Finance/Insurance companies and they are usually pretty stable business. In recent year, we also see ETD issuers coming from the technology sector like Ebay, Verizon , AT&T etc

General attributes of ETD securities:

1. Issue price – $25 per share.
2. Distributions – Higher than 10 year Treasury yields but slightly less than preferred stocks. Currently paying around 5 to 7.5% per annum. Interest payments are paid monthly or quarterly.
3. Maturity – Most have maturity dates of 30 years.
4. Call provisions – generally callable at the company’s option on or after 5 years from the date of issue.
5. Call price – callable at par (issue price).
6. Ranking – senior to the company’s preferred and common stock and junior to the company’s senior debt on liquidation and payment of dividends

Searching and researching ETD for investments: 

My favorite website to find ETD listing and researching is 
http://www.quantumonline.com/debttable.cfm?SortColumn=Company&SortOrder=ASC

 

Currently, this is a table of 206 exchange-traded debt securities  The table list down the Symbol and the general attributes of a ETD like Coupon rate , Call date ,Payout date and Credit rating etc. In the table, investment grade credit ratings are printed in green while non-investment grade credit ratings are printed in red.


The table also provide a link to MarketWatch and Yahoo Finance  under the Distribution Date for you to do more in-depth research on the financial metrics linked to the underlying ETD symbol.

There are many financial metrics that investors can use to help determine if a company would provide a lower risk investment. Some of the most important signs of a financially healthy company are growing revenue, solid earnings, healthy cash flow and low debt. There are other things that are important, such as a good and growing product line, time in business, consistent results and good management, etc.
The same financial metrics for investing in bonds and shares apply to ETD. 

• Profitability: Checking the last 5 years and 5 quarters have been profitable. There is nothing better than profits, but if the company uses Non-GAAP accounting, you may have to look deeper. We can identify whether the company reports EPS or other Non-GAAP accounting metrics such as FFO, AFFO, NII, CAFD, etc.
• Payout Ratios:  Checking stock dividend payout ratio and preferred stock dividend payout ratio can be a good indicator whether the ETD issuers are capable of paying interest. A ratio of under 1 indicates that the dividend is less than the earnings used to pay the dividend.
• Operating Cash Flow Payout: One of the important things a company can do is to have a positive operating cash flow at the end of the period. A ratio of under 1 indicates that the preferred dividend is less than the operating cash flow.
• Interest Coverage: This metric is used to determine whether or not the Earnings Before Interest and Taxes (EBIT) is sufficient to pay interest payments. Since an ETD is a debt, all payments are interest payments, not dividends. If the number is greater than 1, then there is enough earnings to pay the interest.
• Debt to EBITDA Ratio: Debt/EBITDA is a measure of a company’s ability to pay off its incurred debt in relation to its earnings – before Interest, Taxes, depreciation & Amortization. Low debt is important for all companies.
• Debt to Equity Ratio: One of the most important measures of a healthy company is to have low debt. High debt could challenge a company during economic downturns and slow a company’s growth during good times. We are looking for a low debt ratio. Best to compare with others in same or similar industry.

I have been investing for a few year in Exchange Traded Debt for a few years. If you choose good ETDs  for investment, the prices are usually very stable like bonds and provide all the benefits available in bonds investment. However, ETD is not a well-understood investment instrument and therefore it is not as liquid as your stocks and bonds. Therefore , do your own due diligence and assess your individual financial need that ETD is for long term and it is meant to hold till maturity.