Cash in Hand
These Unsecured Notes are Risky Business
Unrealistically high yields from a financially fragile lender? Sounds like a 1980s rerun.
By Jeffrey R. Kosnett, Senior Editor, Kiplinger's Personal Finance
April 5, 2004
Now and then someone asks me where to buy a junk bond. You know, the kind that yields so much that you would think you were back in the 1980s.
My reply: You shouldn't, because betting on one such company is not safe; and you can't, because the bond desks like those at Fidelity and Schwab that cater to you and me don't keep inventories of low-rated corporate bonds. This is why we have high-yield bond funds. Most do a good job, although today's junk-fund yields are so low -- 7% to 8% -- that I'd pass. Then again, there are worse ideas.
A couple of years ago an accomplished and reliable financial planner told me about an outfit called American Business Financial Services. It offers "investment notes" directly to investors for as little as $1,000 and quotes yields like 11.79% for 15 months or 10% for six months. You fill out a one-page application and send ABFS a check. You don't need a brokerage account. There are no commissions or management fees.
Could this be the insider's solution to the yield drought? Well, two years ago, maybe. ABFS, which dates back to 1988, has never defaulted. But if you want proof to the axiom, "the higher the yield, the wilder the risk," look no further.
Walk on the wild side
These are unsecured, uninsured and subordinated investments. You cannot sell them on the open market. You can only redeem your notes by putting your request in writing and mailing it to ABFS 90 days before they mature.
ABFS is a Philadelphia company that makes home-equity loans and extends small-business credit to borrowers whose bad credit history disqualifies them at banks. Its stock (ABFI) is publicly traded. That means you can read its filings with the Securities and Exchange Commission (which I recommend strongly when you invest in anything less sound than, say, Procter & Gamble). In this case, it's as if Stephen King took up the authorship of 10-Qs and prospectuses.
ABFS' recent filings are bursting with red flags like "if the company is liquidated" and how it is "not in compliance with certain financial covenants" about its net worth and its balance sheet. In February, ABFS reported a delinquency rate on its loans of 11%, up from 5.5% in 2002 and 3% in 2000. It was profitable a year ago, but over the last six months, ABFS lost $51 million -- and it is not a big company.
The stock price is down from $20 to $3.
Basically, ABFS is dependent on investors sending in small amounts to subscribe to its notes.
An '80s rerun?
I say all this because if you go scouring the Web looking for super-high-yield investments, sooner or later you'll learn of ABFS. If you get on their mailing list, you'll get friendly rate announcements with names like March Madness and Spring Fling, inviting you to participate. Stephen King's prospectus is under a separate cover. To repeat, ABFS has never defaulted. It's likely that its customers do not wish to lose their properties.
But if you're going to gamble with unsecured debt, buy it from a company that's making money. This all reminds me of those 1980s stories about failed savings and loans that paid soaring yields on what the people thought were everyday insured deposits but were instead unsecured notes. On reflection, 7.4% with total liquidity from Vanguard High-Yield Corporate bond fund (VWEHX) sounds like a walk in the park.