Reader Mailbag: TL;DR But Need to Act
That’s the culture we live in today: too long, didn’t read. Attention spans are short and time is valuable. Our free will allows us to ignore those things that don’t pique our interest or offer a clear benefit.
However, some of you are in the midst of an exchange offer that entails lengthy options, paperwork, and an October 3 deadline. It is one of the most complicated redemption offers I have seen. The guys at Charles Schwab agreed with me when I called them regarding a broken pdf link to the deal documents.
The investments I’m talking about are Fossil Group Inc. 7% Senior Notes due 2026 (FOSLL). I did not recommend them, but I am in the same boat and need to decide what I will do with my position. Today, we’re going to look at this trade.
Exchange traded senior notes are great income investments. Senior notes have higher standing in the repayment hierarchy and a fixed par (face) value and interest payment. The payments cannot be changed by company management. When you find senior notes traded on the exchange, they make great income tools.
It’s even better if you can get them at a discount to par value. Remember, when price goes down, yield goes up. It’s the same here. FOSLL pays 7% based on the $25 par value, but shares haven’t traded at that level since 2022.
Source: Charles Schwab
Most of my position was bought at $18.50. Based on the annual $1.75 payment, I’ve been collecting a 9.4% yield. I had planned to hold the notes until they matured next year, but that’s no longer an option.
Unnecessary Complexity Might Be a Warning
Fossil Group is a fashion accessories company known mostly for its watches and leather goods. It has its own brands and the license to manufacture watches for other designer brands.
The company is in the middle of a three-point turnaround plan: refocus on its core business, rightsize the cost structure, and strengthen the balance sheet. That last one is how we got into this situation.
The company is essentially pushing its debt maturities out to 2029. It’s giving the current note holders incentives to volunteer for the new notes. The convoluted documents make it clear that even if less than 90% of noteholders agree, it will restructure them under the UK Companies Act of 2006.
The incentives are what make the offer complicated and are dependent on “participation in new money financing.” Fossil is not just rolling the debt forward, it’s also asking for more money.
It’s like loaning a friend money. Before the agreed payback date, they tell you they need more time to pay it back. And by the way, they need to borrow more money, too!
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You basically have three options:
- Participate in New Money: This will exchange your notes for first-out, first-lien notes at a higher interest rate of 9.5%. To qualify, you need to add to your position at full par value of $25. Fossil will also throw in one share of common stock for each $34.06 spent on new notes.
- Agree to New Notes, Without Adding: Your new notes will be second-out, second-lien notes at the current interest rate of 7.5%.
- Sell Your Notes at Current Market Prices
The company will split noteholders into two groups: first-out, first-lien and second-out, second-lien. If Fossil defaults, or if it cannot make the interest payments, the new money participants will be higher in the claim line.
Both groups will receive warrants (the option, but not the obligation) to purchase common shares at $0.50. They will also receive a consent premium which will be $1 million in new notes divided amongst everyone who opts for choices 1 or 2. These are in addition to the original notes being exchanged.
I’m Still Torn
The best option to continue earning income with the lowest chance of losing money is to volunteer for the new notes with no new money. I would love to collect my 9.4% for another three years. But the more I think about the complexity, the more I see red flags.
Fossil Group has had three straight years of margin expansion, and management raised full-year guidance for 2025. A mid-teens percentage decline is now expected in global sales versus the prior forecast of mid-high teens. That’s an improvement, but not by much. And management has not commented on full-year earnings, just sales and margins.
I have said before that I want consumer discretionary exposure right now, but I don’t think Fossil is the long-term investment I want. That’s exactly what all these incentives are trying to convince us to do—give them more money and let them keep it longer.
Before I sat down to write this letter, I had planned to participate in the new money option. I wanted to see how this redemption offer—more complex than anything I’ve ever seen—would play out. I saw it as a fun experiment.
Now, after reading everything a second and third time, I’m not so sure. I’m not convinced in Fossil Group’s turnaround plan. And I’d have to hold until 2029 to get my par value back… and who’s to say they won’t try something like this again. Personally, I would need a double-digit yield to take this ride with them. Instead, I will sell my position at the market and look for a better opportunity.
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For more income, now and in the future,
Kelly Green
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