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Nothing Wrong with Owning These Baby Bonds

Over the weekend I did quite a bit of reading and research on both Telephone & Data Systems (TDS) and United States Cellular (USM), which is 82% owned by TDS. TDS has revenue of about $4 billion annually, while USM has revenue of $3 billion. Note that most of the revenue shown by TDS is from their ownership of USM.

TDS has 4 baby bond issues outstanding and USM has 5 issues outstanding–coupons range from 5.50% to 7.25%.

Most of the 9 issues are trading right around their $25/share liquidation preference–only 2 are trading at lofty levels. 7 of the 9 issues are now in the optional redemption–meaning they are available to be called anytime now. Recall that USM sold a $500 million baby bond (UZE) a month ago with adequate proceeds to call most of the two 7.25% issues (UZB and UZC), but given the pricing level of the issues little damage would be done to an investor if called now.

Markets have been knocking these bonds lower in the last week or two and the pricing is attractive now.

In researching the fundamentals of the two companies I was surprised how solidly the companies are performing. These 2 smaller cellular companies are NOT growth companies–but on the other hand they perform well against the giants of the industry. Net income and free cash flow has been reasonably good–although they invest giant amounts in capital improvements as you might expect in the industry they are in.

Their most recent quarterly report can be found here.

The baby bonds from TDS are rated BB by Standard and Poors and Ba2 by Moodys. The USM bonds are BB by S&P and Ba1 from Moodys. Right now this is kind of the sweet spot for where I am investing now–below investment grade, but solid.

Disclosure I own a position in the TDA 5.875% (TDA) now and am looking to add a USM position today.

31 thoughts on “Nothing Wrong with Owning These Baby Bonds”

  1. Tim,

    Nice catch dude.
    I held both in Oct-Nov and took profit on them and assumed they took off.
    Just picked up a double-lot of UZE and a single-lot of TDA.
    Totally agree with your take on US Cellular.
    Thanks for bringing the price drops to our attention.

  2. UZE the 5.5% coupon baby bond selling off (as are many other preferreds).

    Added some UZE at $24.6x. Isn’t this is a better deal than UZD with a higher coupon still trading at $26s?

  3. Tim. TDA fell almost down to 10 bucks during the covid sell off. Just wondering why not put money into bcv-a or ncv-a instead, both of which held above 20 bucks during the sell off. True you’re giving up half a point return but I’d rather sleep well at night.

    1. Marksch1–I have both you mentioned. Yes I think if you look at the weekly average charts I publish each Monday it shows exactly what you mention–junky shares fall most in a ‘panic’ type selloff, but I am loaded with the investment grade issues and am stretching a bit for more yield with solid–but below investment grade issues. You are not right–nor wrong–just a difference in all the investors reading here.

  4. TDS common sells at $19 but MS has it at ow with a PT of $42. The MS research emphasized the value of the tower network. Equally important is that even before 5G, the TDS rural cell network is considered second rate. The report basically implied that TDS and its operating sub need to either sell its system or spend a lot to catch up. Selling would be great for the preferred but big spending would be risky. Given their recent issue of baby bonds, it looks like they favor the renovation option? I will take the common route.

  5. I’ve been buying $UZA and $UZC at the current levels. That helps hedge that a 7.25% bond will be called but the 6.95% bond won’t.

    USM is a great company to buy the bonds for. They can hold their own or be bought out by a much stronger company in telecom or tech which would also be good for the bonds.

  6. Tim did a great job looking at these bonds over the weekend. I won’t post much here in the future, but always like the insight from investors on income markets. Bonds of USM have usually been rated about BB+, but the real value here on the company is their cell phone towers. I’ve gotten my family and a few nonprofits into these bonds, with results of about 7% over the past number of years and they have been great holdings for us.

    Here is a quick link on perhaps why there is some value in the parent company, USM. Morgan Stanley knew this a long time ago, but the company is basically a third rate mobile phone operator. However, there appears to be some values in the towers. Happy investing to everyone in 2021 and wish everyone continued success, both personally and professionally! My general background is in real estate, so this is always why I found the bonds so compelling.


    1. KL – Parent company, USM??? From https://www.tdsinc.com/about/our-businesses/default.aspx, “TDS offers wireless voice and data services and products across the United States through our publicly traded subsidiary, U.S. Cellular.” And according to QOL (not always up to date on stats like this), “Telephone and Data Systems, Inc. owns 82 percent of U.S. Cellular.” Am I misinterpreting what you’re saying? I do see where the article you refer to says, “Shares of United States Cellular Corp (NYSE: USM) and its majority owner Telephone & Data Systems, Inc. (NYSE: TDS) soared almost as high Tuesday as the cell towers the companies own….” but something’s amiss here I think and it’s that first sentence in the article link.. Further into the article they seem to get it right – “Flannery is careful to say that Morgan Stanley knows of no pending plan for U.S. Cellular — which is 82% owned by TDS…”

      1. Lol, needs more than glasses. USM is not the parent company. I think some of us have already read that old article as well. Not a lot of value for me in reading a hunch/recommendation suggested by a single analyst from an article that old. A lot can happen also with assets as years go by, especially in a tech company.

      2. 2WR, you’re right – TDS is the parent. Bonds at USM have a better claim on assets, but the OP has yet again posted inaccuracies.

  7. Don’t forget there’s also GJH the $10 par Synthetic Fixed-Income Sec STRATS 2004-06, 6.375% for US Cellular Corp with a 12/15/33 due date where the underlying securities are the 6.70% Senior Notes, due 12/15/2033 issued by United States Cellular Corp.” It’s not very frequently traded but attractive. I’ve been bidding not very aggressively and very unsuccessfully. Long TDJ

  8. Tried to find / trade TDA on Schwab with no luck. Ticker does not come up. What am I missing?

      1. Works now – it was my mistake. Guess I am having trouble keeping three letters straight at the beginning of the year!

  9. I just took a look at the financials on these companies, decided that I agree with Tim, and bought 200 of UZC at 25.27, deciding it’s the best priced for yield and I’ll take my chances on a call.

    I’d like to add that USM has one outstanding bond, Cusip 911684AD0, with a maturity of 12/15/33, current market YTM of about 3.7%, and the same Ba1/BB credit ratings. The bond market seems to like this company as well.

  10. I have owned TDE bonds for years. I currently own the stock too. Roger Conrad who writes a month investment letter called Conrad’s Utility Investor. He’s been covering this industry for 35 years. I have subscribed to his letter for over 10 years and have done very well. By very well I mean solid gains with good dividends. No huge spikes up or down. His letter specializes in essential services like utilities, teleco’s, MLP’s. Below is what he has to say about TDS. He believes its a take over target as the last rural phone company in the country. I’ve spoken to him personally and he likes TDS.

    Solid rural and small town wireless and wireline communications franchise is on track for low single digit percentage dividend increase in early 2021. Moody’s rates bonds on US Cellular unit (18% minority interest not owned by TDS trades publicly) at Ba1, cites cost of 5G network buildout (2021 launch) and “intense” competitive challenges offset by modest leverage and high quality assets. Has a 5.5% minority interest in wireless partnership controlled by Verizon in Los Angeles market, also fifth largest wireless tower operator in US and is only game in town in multiple markets. Company is a takeover target with sum of parts arguably worth much more than the whole currently, enterprise value just 4.9 times trailing 12 months EBITDA. Stock rated buy by all five analysts covering it, nearly 8% owned by insiders. Quality Grade B (No Change).

    1. JB/AZ–thanks for the input. The problem with TDS being taken out is that it is controlled by the Carlsen family through the special common shares (series A) which are 10 vote per share giving them around 54% I think.

      But yes I would tend to agree with Roger–as mentioned in your comment I did notice they own around 4200 towers–that is one hell of an asset.

      1. Tim, for whatever its worth JP Morgan just came out with an over weight rating on TDS and USM’s stock. I know this is not a stock site, but if they like the stock it gives me a better feeling about the bonds and preferreds. He is their post.
        JPM is also is Overweight on TDS Telecom (NYSE:TDS), and its mobile unit United States Cellular (NYSE:USM). TDS has strong broadband trends and a compelling upside from sum-of-the-parts valuation, while U.S. Cellular is undervalued at current levels, it says. A $30 price target on TDS implies 60% upside, while a target of $42 on USM suggests 36% upside.

    2. JB/AZ, a couple of questions re Conrad’s Utility Investor: in the 10 years you’ve subscribed, how much has the price increased? Do you follow his portfolios, or pick and choose?

      If you’d rather take this offline, I’m burdavis@gmail.com or burdavis at SA.

  11. TDS has a 7% note (TDJ) currently callable and USM has a 7.25% note (UZB) currently callable. In this interest rate environment one has to wonder why these are still outstanding.

    1. Retired–must have gone to the same school as Gabelli and Gladstone–always slow to call.

      1. You’re welcome Gary–maybe one of the best risk/rewards available to us in this low coupon environment.

        1. Tim, I have been in and out of USM baby bonds for a very long time. Then I always like TDE, one baby bond below the TDJ. You are absolutely correct that TDI and its wholly owned subsidiary, had learned well how to survive competing with the giants such as A T & T, T Mobile, Verizon etc. Many years it was rated double investment grade just like the old CTL (Century Link; now changed symbol and name as LUMN). Similar to CTL baby bonds, all TDI, were double downgraded to its current rating status. One diligent SA writer, Mr. Richard Hill, who did lots of hard work, looking up each quarterly earnings report plus all the 10 Q and 10 K together with market action of some sort, had TDE on his BUY list. Mr. Hill does not write any more article after a brief collaboration with Mr. Brad Thomas. I believe that he still offer his membership for $1,000 or so per year. Our Mr. Gridbird has made comments to Richard Hill’s article publishing giving list of preferreds and baby bonds he considered worthwhile to consider. I sold just 100 shares of TDE because of POSSIBLE call risk. TDI has NOT called any of its baby bonds. To my best knowledge USM had not either, despite quite a few lower interest offerings, which started trading above $26 per share. As Mrs. Brehm of Silicon would say, AMAZING.
          Thank you Tim, for your BEST website for income investing on this planet and Happy New Year.

        1. Bill W–in the olden days when there were few websites dealing with baby bonds and preferred we definitely could move markets–now with so much info out there I don’t know if I can move things.

        2. I have noticed that our recommendations are probably moving the markets a bit on some issues. Not the ones trading 50,000 shares/day, but others under 10k we seem to move. I think we have thousands of readers, and am guessing the daily readers are 1,000 +

          1. The volume for TDA was 40,000 shares on 1/4 which is 4X what it was the previous few weeks (excepting 1/31). 1000 of that was me. 🙂

            Would be fascinating to know how much of that originated here.

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