Here at Arthur we're always looking for interesting bonds with good yields. Earlier this month, we stumbled upon a couple of bonds with attractive yields coming out of Coinbase.
Coinbase, the nation's largest cryptocurrency exchange by volume, issued a seven-year bond paying, which now yields 3.7%, and a 10-year bond, which now pays 4.0%. That's right in keeping with the 4.06% effective yield on the ICE BofA U.S. High Yield Index.
So, a nice yield from an innovative company at the forefront of a new financial asset getting a lot of positive attention. This looks like something we'd like to own.
There's only one problem with this scenario. It was issued under the Security and Exchange Commission's (SEC) Rule 144A. Bonds issued under Rule 144A are only available to Qualified Institutional Buyers (QIB).
A QIB is an institution or person with more than $100 million in investable assets, so any client below that threshold can't buy these bonds. To get an idea of how many institutions don't reach the bar to get on that ride, U.S. News & World Report said that the median college endowment was $65 million in 2018. That means not only can't you and I buy these bonds, neither can a sizable amount of institutions in this country.
This is dumb.
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Why would a public company ever issue private bonds?
A privately held company might want to do it to avoid the scrutiny into its financials that a public offering would bring. But, public companies need to file highly detailed breakdowns of their financials every three months. It's pretty damn hard to hide stuff.
So, what's the upside for issuing a 144A bond? Documentation and origination fees are lower, so is the risk of litigation, and the bond can hit the market much quicker than a bond registered with the SEC.
This is blatantly unfair, and we need to stop this. Why am I allowed to buy the company's much riskier stock, but prevented from purchasing a much safer bond from the same company? Clearly, Coinbase doesn't care about its investors. But Coinbase isn't the only one. A lot of the big boys are doing this, companies like cruise operator Carnival and Delta Air Lines.
The only way this is going to change is if we as bond investors make a stink about it.
If not, most of the High Yield bonds out there will soon be 144As.
So, the next time you see a bond has been issued under Rule 144A, this is what's going on. The company is giving you the finger.
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