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• MARCH 10, 2010

Investors Tap Into Deathbed Bond Deal

By MARK MAREMONT And APARAJITA SAHA-BUBNA

Billions of dollars in corporate bonds sold to retail investors come with an unusual provision that could be used to generate a fast profit. There's just one catch: Investors must team up to buy the bonds with someone who is about to die

American International Group Inc., Bank of America Corp., Caterpillar Inc., General ElectricCo.'s GE Capital unit and other major U.S. companies often issue bonds with what is known as a survivor's option.

In a little-known practice, investors can recruit a terminally ill person and together they can scoop up these bonds on the open market at a discount. When the ailing bondholder dies, the surviving co-owner can then redeem them at face value and potentially turn a quick profit.

Companies have typically included the macabre provision as a way to allay fears among ordinary individual investors—elderly couples who might worry that one spouse could die before the bonds mature, possibly exposing the survivor to a loss.

But the market's turmoil has made this arrangement more attractive for professional investors, since some bonds are trading at a steep discount. Legal and financial experts say there is nothing to prevent investors from buying the bonds with a dying relative or even a stranger who is terminally ill.

It isn't clear how many investors have piled into such bonds since the financial crisis hit, which initially pushed some below 50 cents on the dollar.

Prices have rebounded from their lows. But some so-called survivor's-option corporate bonds issued by auto lender GMAC Financial Services, AIG unit American General Financial Services and student-loan provider SLM Corp. are still being offered at discounts of more than 20%, according to KnightBondPoint, a unit of Knight Capital Group Inc.

Companies typically issue the bonds because they want to tap into a regular, stable funding source through retail investors. Such companies often sell a small amount of bonds each week, say $25 million, through retail brokers.

Usually, there are two ways an investor can cash in a bond: by selling it to another investor on the open market, or by waiting until the issuer redeems the bond upon its maturity.

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