This note is just a reminder for baby bond buyers–and in particular to those new to buying baby bonds.
Buyers, or potential buyers, need to check the terms closely on the baby bonds they are considering buying for terms and conditions that are not friendly to the holder.
For instance on the new WR Berkley baby bond priced yesterday it has the normal terms of quarterly payments and optionally callable in 2023 etc., but it also has a deferral clause.
Here it is–
The Issuer has the right on one or more occasions to defer the payment of interest on the debentures for up to five consecutive years (each such period, an “optional deferral period”). During an optional deferral period, interest will continue to accrue at the interest rate on the debentures, compounded quarterly as of each interest payment date to the extent permitted by applicable law.
Many, but not all, baby bonds have some type of deferral clause.
Obviously if one of these companies ever defers interest payments on debt you can figure they are in very rough shape and whether one would continue to hold the bonds would depend on each situation. We can’t remember this happening in recent years, but “buyer beware”.
For some potential buyers this is a deal killer. Just like a preferred stock being non-cumulative being a deal killer for many. For us personally we look at the entire package-there are no automatic deal killers–simply is the reward large enough to compensate for the risk.