Investing in First Mortgage Pro-rata Corporate Bonds

Every 6 months, I go through my bond portfolio and review any bonds that have fallen into a Standard and Poor’s “CCC+” or has a rating below that.  Recently, I found a bond in my portfolio that was rated “CCC+” and would not mature until 2018. I decided that I did not want to take the chance on such a low rated bond that would not mature for 6 years. At my age, I can’t afford to take the business risk since I will be retiring in 2 to 3 years.  So I sold the bond issue and immediately bought another bond with the proceeds. 

I bought two (2) Golden State Petroleum Transport Corporation 8.04% of 02/01/2019 on May 31, 2012. The bond ISIN is US38121EAJ29. The bond is rated by Standard and Poor’s at BB- and by Moody’s at B2. I bought the bonds for $870.20 each.  My yield to maturity is 11.473%. The bond pays principal and interest on February 1 and August 1 every year until February 1, 2019. 

Wait a minute! Didn’t I tell you that bondholders get paid interest usually twice a year and the principal at maturity? In most cases that is true. But this bond is a First Mortgage Pro-rata Bonds. The word pro-rata is used to describe a proportionate allocation. This is a method of assigning an amount to a fraction, according to its share of the whole. In other words, the company pays interest and principal every six months just like homeowners with a mortgage pays the bank every payment period until the loan is paid off.  

I have been investing in Corporate Bonds since 1972 and never ran across a bond issue like this. So I had to talk to my Online Brokerage Firm to get an education on this type of bond. 

This is the formula that they used to calculate where I am in relation to my ownership of this bond.

$2,000.000 in bonds times a principal factor of 0.75393391 times the Quoted Point Price of  87.021 = $1,312.16  

is the price I paid for these two bonds. I did not have to pay the seller any interest because they received payment of interest last February. The principal factor was reduced to satisfy any accrued interest. 

   

Golden State Petroleum Transport Corporation operates as an agent for two affiliated entities, Golden State Petro (IOM I-A) PLC and Golden State Petro (IOM I-B) PLC. They issued serial and term mortgage notes in 1996 and 1997. The proceeds were used by the affiliated entities to finance the construction and acquisition of two very large crude carriers for charter to an unaffiliated third party. The issue date for this bond was 12/24/1996.

The company was incorporated in 1996 and is based in Hamilton, Bermuda. Golden State Petroleum Transport Corporation is a subsidiary of Golden State Holdings I, Limited.