Bonds trading lower than the common shares
This happens a lot in these situations.
The people buying and selling the bonds usually have a better idea of what is going on, and trade accordingly.
The people trading trading in the common shares are usually the 'muppets', all piling in because they do not understand what is going on, don't know the bankruptcy process and can't read financial statements.
I think part of the reason for this dichotomy is that for the muppets, it is too hard to trade bonds, where as trading common shares is very easy, so they all pile into the common shares and only trade the common shares. If the muppets were acting rationally and really thought the company was going to survive and the bonds were way down, they should be buying bonds before even thinking about buying any common shares. I think also part of the thinking process for the muppets is: "Why would I want to own a bond, the best I can do is get paid off at par". i.e. The muppets view the common shares as a better trade because the there is no cap on the gains, where was bonds usually would only trade up to par.
That is why you get prices between the bonds and common shares that do not make any sense. Since the bonds recover ahead of the common shares in a bankruptcy, the bonds should trade near par if they were going to be made whole, and then it would make sense for the common shares to trade up also.
The fact that the lower tiers of bonds are almost dead means no one expects the bonds to recover much, so the common shares should be trading way off. Instead, the muppets are all piling in and pushing the common shares up, meaning they are all setting themselves up for one big loss once the effective date is confirmed.
This stuff goes on almost every single time with Chapter 11 trades. There is some kind of press release that the muppets think means the existing common shares have value, and the stock spikes, when in reality the common shares are usually dead.
Louis J. Desy Jr.
