The recent trading statement from high street electronics retailer Dixons was not well received by the markets. The company, which owns and operates the PC World and Currys shops warned that profits would be some £20m lower this year at revised forecast of £85m. The resulting share price slump means Dixons' shares are now down 45 per cent since the start of the year.
The bond market also reacted to these figures, but in a different way. The short-dated Dixons Group 6.125% November 2012 was marked down several points with the mid-price at 95p. But, given the short maturity of the bond, a relatively small move in the price makes for a big move in the yield. A price of 95 puts the yield at a tempting 9.5 per cent for a bond with 19 months to maturity.
The debate is whether the sell-off is an opportunity for bond investors, who do not need to be concerned with the company's growth prospects, only its ability to repay its debt. And Dixons continues to be profitable, if at a lower level. Consider also that the company has a relatively small amount of debt outstanding (£524m in total) and that the bond has a only short period to run.
In this respect, should the company's profits fall below £15m, then its banking covenants would be endangered. This is reflected in the low credit rating of Ba3 from Moody's and Fitch B+, which are both well below investment grade. So, it is fair to say that there is risk as well as reward. Also, the short maturity means the bond cannot be held within an individual savings accounts, so coupons will be subject to taxation.
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