Wednesday, December 10, 2008

PHOENIX SENIOR BOND: PFX /AIG /A RISK OF PREFERRED STOCKS (LEHPRG REMEMBERED)

Another analyst downgraded Bank of America, forecasting the need for another capital raise of 15 billion and a risk of another dividend cut.   Reuters  I would say the odds of another dividend cut at BAC to be over 50% sometime next year.  

Fitch downgraded the outlook for several REIT sectors to negative for 2009 including those that own malls, offices, and industrial properties.   Reuters

One of the many things beyond my comprehension is life insurance accounting.  I try to learn as much as I can stand but a lack of an accounting background is just one of my many hindrances to grasp all of the relevant issues.  I am more confident holding a senior bond issued by Prudential Financial than Phoenix.  I recently discussed a Phoenix senior bond maturing in 2032 that was then selling at around 7 with a $25 par value and a 7.45% coupon.  This bond has now fallen to around 6, giving it a yield at that price of almost 31% annualized- paid quarterlyLong Term Bonds in Trust Certificate Form/Grantor Trust Legal Opinion PFX Stock Quote - Phoenix Cos Inc New Stock Quote - PFX Quote - PFX Stock Price
(a brief discussion of an accounting issue is found in a prior posts: Notable News 11 3 2008Late Friday Buys: LNC and GXP  )  The bond is an obligation of the insurance holding company.  http://www.sec.gov/Archives/edgar/data/1129633/000095012301509495/y55049b1e424b1.txt I have never held an insurance company bond when its subsidiaries had to be seized by a state regulator due to insufficiency of capital.  I suspect that such an event would leave a senior bond holder at the holding company level with a bad case of heartburn and possibly nothing to show for the scrap of paper held.  I can look at the common stock price of Phoenix, (PNX)PNX: Summary for THE PHOENIX CO INC - Yahoo! Finance, and it is signaling trouble just like the bond price.  The company recently spun off its investment management business. I can not assess with any certainty whether the market is correctly assessing the problems at this company as reflected in the pricing of the senior bond.  If there is a need to raise capital by selling shares, it would be difficult to say the least to raise anything significant at $1.8 a share or less. The prior earnings releases were not great.   Yahoo! Finance FORM 10-Q  
I read the report from Barclays regarding the large impairment charge taken in the last quarter for investment and other losses. I  also read the Morningstar report this morning on Phoenix and it was negative.  The concern is that the life insurance companies have a thin layer of equity left to absorb losses  and this would not be sufficient in the event of a prolonged recession.  I understand that risk so I am not willing to buy the common.  The bond does give me a higher preference right than the common but, as I just said, I doubt that I would receive much if anything in the event of a seizure of the insurance subsidiaries.  But, and there is always a But, I would receive more than the common or preferred shareholders of the holding company.  The main benefit of the bond compared to the common at this juncture is that the senior bond pays me to assume the risk.  At close to a 31% annualized current yield plus another 13% or so in an annualized amortized spread between par and cost at $6 (assuming payment in twenty three years at $25,) I decided to take another bite by buying 100 with a market order late today, filled at 6.06,  bringing my total exposure to 200, with today's buy being placed in an IRA.   If I have one success for every failure for this type of investment, I will be ahead.    On 100 of the 200 shares, I will put a mental stop loss at around 4.  The risk of loss on this one is significant so I would not be surprised to lose money on this bond.  I currently judge the risk/benefit to be worth a little more than $1,000 of my capital. 
 
I remind myself sometimes what happens in a bankruptcy when an investor owns a junior security.  When Lehman went bankrupt, its preferred and common stock became worthless.  Lehman had a floating rate preferred stock tied to LIBOR that has less value now than a used piece of toilet paper, LEHPRG.  I did not own it when Lehman went bankrupt. I did own it for a few days in November/December 2007, sold it for a profit at over $20 after questioning my decision to buy it in the first place.  It is best to be humble and to never assume that every decision made is the correct one.  I remind myself of this event periodically to avoid placing too much money at any one time in any preferred stock issue, no matter how tempting it might be at the current depressed price levels.  There are several ways that I try to control this kind of risk for a junior security like a preferred stock.  First, I monitor the earnings releases and news relating to every company even if my only involvement is a bond or a preferred stock issue.  Second, I spread by risk around by holding several different securities.  Third, I limit my risk by the amount of money used to purchase the security. Fourth, I will frequently trade a security several times until I am either playing with the house's money or at least inching toward that goal (as in the trades this year on the Cousins preferred stock issues where I am close to a $400 profit this year with sales in April, August and November + 2 dividend payments, so that makes me more inclined to re-enter the position at some point).   Lastly, I will not hesitate to sell if I become nervous about the financial condition of the issuer which was the case with Lehman over 1 year ago. 

The virtual total loss associated with preferred stocks issued by Fannie and Freddie is another damper on all preferred stock prices in my opinion.  There is nothing that will sober up an investor quickly about a particular type of security than a fall to zero for some major ones in that class.

The description of AIG's potential 10 billion loss given this afternoon in stories from Reuters, AP and MarketWatch is different than the summary made in the WSJ today.   Yahoo! Finance
It appears that this particular issue is similar to the credit default swaps written by the London unit.  But, if you believe what AIG is saying, it is almost like they are saying that all of their problems are just a temporary liquidity issue requiring some collateral.  After all AIG only needed a mere 150 billion to smooth things over and then everything will be just fine.  I would hope some day that a thorough independent investigation is undertaken about all the details of the AIG bailout with a release to the public of all the pertinent details, particularly on who actually benefited from the taxpayer infusion of capital and how. 

 I am not a financial advisor but an individual investor trying to navigate my way through a difficult market. 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 any reader of these posts, assuming there are more than a couple, 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.  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.  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.   


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