1. Sallie Mae: After the bell yesterday, the U.S. announced that it had awarded Sallie Mae (SLM) and three other companies contracts to service the government's 550 billion student loan portfolio.Reut I do not own the common but I do own 200 shares of OSM, a Sallie Mae bond maturing in 2017 which pays interest monthly based on the CPI. It took a hit yesterday after the government announced another low CPI reading. While the current interest rate will be low, I would anticipate that CPI will increase during the remaining term of this bond, which seems reasonable to me, and it is currently selling at more than a 50% discount to its par value, as of yesterday's close at $11.61. The TIP also took a hit yesterday falling $.66 to $99.79.
When I first mentioned OSM during the 4th quarter of 2008, the monthly interest then was $.15, and I noted that it was to going to decline due to the fall in the CPI (item # 3: Investment Grade Corporate Bond Spreads/ CPI FLOATER: OSM) The monthly interest for July was declared yesterday at $.0332. This is a disadvantage for a floater with no guarantee.
With a security like OSM, I am not so much concerned about the fluctuating interest payment and the current low payment due to the anemic readings on CPI reported by the government. I am more concerned about receiving par value for the note in 2017, so any news that improves that chance is viewed as positive.
2. Some Big Investor's Selling the TIP: The WSJ reported that some big institutional bond investors were selling the TIP. WSJ.com The break-even point has fallen to 1.76% as of yesterday. Both the TIP and the non-inflation protected treasuries are falling in price this morning.
3. Bought 150 of the TC PKM: I said that I was not going to buy another bond, but this one was barely tempting enough for me. I found it pecking through the QuantumOnline site where it was referred to as AFC Capital, an entity that I had never heard of, so I ignored the entry until yesterday. The underlying security in PKM is an issue from AFC Capital, a Trust Preferred, which is guaranteed by Allmerica Financial Corporation. I had never heard of that company. After some research, I found out that Allmerica had changed its name to Hanover Insurance, yet another company beyond my awareness. So, last night, I spent some time researching Hanover Insurance. It is a property & casualty company, the 32nd largest in the U.S., operating primarily in four states, Michigan, Massachusetts, New York and New Jersey. S & P has the Hanover common rated 4 stars, a recent upgrade from 3 stars on June 6th. I also looked at the Barclay's report which was favorable.
I placed a limit order at $17.8 before the market opened, and it was filled, on the way down to $17.5 on a total of 800 or so shares in volume so far this morning. So whoever bought those shares at $17.5 did a better job today of setting a buy limit order. So, after seeing that, I went ahead and bought another 50 in a retirement account at $17.6. If the security rallies to around $19+ some time within a few months after going ex interest for the next semi annual interest payment, I may sell 50 of the highest cost shares in my taxable account. Otherwise, I will just be content to collect the interest payments. Most of the time limit orders need to be used for these lightly traded Trust Certificates, and the movement can be jerked around on just a few hundred shares. A thousand share buy or sell order can be a major event.
An 8% coupon on a $25 par value will result in a $2 annual interest payment per share. So the yield at a total cost of $17.8 would be 11.23%.
The underlying bond matures on 2/3/2027. Its coupon is 8.207%. The TC has a lower coupon at 8%. Interest is paid in February and August. As to deferral of interest payment, the underlying bond appears to be a typical Trust Preferred, in that deferral may occur for up to five years, the deferred interest payments are cumulative and accrue interest at the coupon rate. This information can be found on page S-9:www.sec.gov
Barron's ran a positive article on Hanover a few days ago, referring to its balance sheet as solid: Barron Reut
Yet, the rating agencies have this TP rated as junk according to the information at QuantumOnline. I checked Fitch. It does not rate the TP issue but has the senior debt rated at BBB-, just above junk. Fitch Corporate
Hanover just tendered for 53.320 million (of the 69.151 million submitted for purchase pursuant to Hanover's offer) in principal amount of this debt at 80% of par value, . YahFin
It also recently bought back some of its senior debt at a discount.
This is a link to the FINRA data for the underlying bond. FINRA - Investor Information - Market Data - Bonds - Bond Detail There is almost no trading of significance in the underlying bond, so I view the data on trades to be virtually meaningless.
4. Mortgage Applications Fall Again: For the week ending June 12, mortgage applications, which include both purchase and refinancing loans, fell for the 4th week, down 15.8%.
5. Link to Article about Preferred Stock: This article is an easy to understand explanation of preferred stocks. Preferred Stock
6. Question about Who Receives a Deferred Cumulative Dividend after the Ex Date of the Deferred Dividend When the Security is Subsequently Sold:
Normally, I know that I will receive a dividend if I own a security on the ex dividend date, even if I sell on the ex dividend date, but I will not receive the dividend by selling the security before the ex dividend date. But, what happens when I sell a cumulative preferred stocks after the ex dividend date for a deferred dividend. If several dividends are deferred, and then I sell, would I receive the accumulated dividends when paid even after selling the stock or would the person who bought those shares from me, and who held them on the ex dividend date for the actual payment of the deferred dividends, receive the deferred dividends? I thought that was a good question, and I am not sure of the answer.
The question is not entirely academic for me. I do have one security that has deferred its cumulative dividend-BEEPRA. My broker reduced my cost basis by the value of that deferred dividend. Now, if I sold it, would I receive the deferred dividend later if and when it was paid? I am not sure one way or the other. Given the fact my broker has reduced my cost basis in the amount of the deferred dividend would suggest to me that I may not receive the dividend later if I sold BEEPRA now, since that reduction captures the unpaid dividend for tax purposes by reducing my cost basis which would increase my gain if the shares were sold at a profit or decrease my loss as the case may be. (i.e. if I later received the dividends, I could be taxed twice?) Also, when the dividend is later declared with the intent of actually paying the deferred dividends, it would seem that the price would be adjusted on that ex dividend date for actual payment by the amount of the dividend to be paid, which suggests that the holder at that time would receive it. But this is just speculation and I just do not know the answer. I am not familiar with any instance where a company has actually paid a deferred dividend once it has gone in deferral. And I have never been in this position before this year. The simple fact that a deferral was even necessary suggests serious financial stress which could lead to a bankruptcy.
Added 6/19: I noticed in a a prospectus for a BAC Trust Preferred that the deferred dividend will be paid "on the distribution payment date following the last day of the deferral period to the holders on record date for that distribution payment date" So if an investor sold prior to that date, then the right to receive the dividend would be lost. The right to receive the deferred dividend is carried with the share until the distribution payment date, and whoever owns the shares then receives all of the deferred distributions paid at that time.
See page S-19, LAST FULL PARAGRAPH: BAC Capital Trust VIII Prospectus Supplement
This is not stated that clearly in the REIT prospectuses, but it makes sense to do it that way.
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I am not a financial advisor but an individual investor trying to navigate my way through a difficult market. I have never worked for a financial institution and never will. In these posts, I am acting as an unpaid financial journalist and an occasional political commentator. I am also aggregating financial news stories that I view as important and providing readers of these posts with links to those articles, sort of a filtered, somewhat intelligent, free search engine. Any discussion made by me of particular securities is not a recommendation to buy or to sell. Trade at your own risk. Consult with your financial advisor prior to making any purchase or sale. I will try to identify my sales too but it may take a few minutes after I implement them to create a post explaining my reasons. The sale may before or after the post. Before buying or selling any stock, even one recommended by a trusted financial advisor, please research it and make up your own mind which is what I always try to do. Research would include reading reports, reviewing financial records, earnings estimates, sec filings and prior earnings releases and news. In this post, and all others by me, I am merely describing my reasons for purchasing or selling securities, and the potential pitfalls that I identified prior to purchase or the reasons for a sale. The securities mentioned in this and all posts written by me may not be suitable for others based on their unique financial position and risk profile. By way of example, it is unlikely that I will ever need the funds contained in my retirement accounts. Always read the prospectus before buying a Trust Certificate, bond, preferred stock or other bond or bond like investments. Information contained in my posts has been obtained from sources believed to be reliable but cannot be guaranteed. It is always important to follow the investment process. the investment process/links to further information on canadian energy or royalty trustsInvestment Process Part II: Bonds and Bond Like Investments NOT A RESEARCH SERVICE/Add of PWE Last Week These posts by me do not constitute investment advice, nor shall they be construed as a guarantee of future results, or as an offer of any transaction in securities. All content in these posts is provided for informational and entertainment purposes only, and it is a form of entertainment for me. Opinions are subject to change and they certainly evolve over time as information is assessed and analyzed for compatibility with prior opinions, the only process for a serious investor, and a topic of frequent discussion in this post. Everyone is responsible for their own investment decisions, and no one should ever make any decision unless they are willing to accept full personal responsibility for it.
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