Wednesday, March 25, 2009

More discussion on Bonds: Purchases and Sell Decisions/BAC/AIG's International Lease Finance

I thought that I would briefly discuss some of Left Brain's chatter tonight on whether to keep or sell two bond positions, and the considerations that led Left Brain to decide to keep them both, possibly adding to one but not the other.

I was thinking recently about adding 100 shares to my existing holding of 200 shares in the TC PJS.  This one contains a senior bond from First American, a title insurance company, and matures in 2028 with a $25 par value. The last purchase was at $7.2  The coupon is 7.625% Some Nibbles Got Filled: JZE, PJS, INZ and FAX  It goes ex interest on Friday, 3/27/09, and I do not have a desire to purchase an interest payment.  I will look for an opportunity to add it closer to $10 somewhere between two and four months from now.  I mentioned previously that I am a long term holder of this position primarily due to my cost, which generates about a 26% current yield at $7.2, and to a lesser extent the nature of FAF's business and the seniority of the bond.  The PJS prospectus can be found at 
this link:  Using a hypothetical purchase at $12.5, 1/2 of par value, the current yield doubles to 15.3% plus $1250 for each 100 shares if par value is paid in 2028.  Amortizing that spread results in another 5.26% annually.  So it is still tempting when I start to think about it like an old geezer. That return is fixed.  Say it again for emphasis.  That return is fixed.  All that needs to happen is for FAF to survive until 2028 and the total annualized return for each year would be around 20.5%, much much higher for the shares purchased at the ridiculous $7.2. 
The trade information at FINRA on the underlying bond is at this link:

If I was going to be tempted to sell a bond, it would be EHL rather than PJS because of the yield differences at my cost.  EHL also goes ex interest on Friday.  Interest is paid quarterly rather than semi-annually which is a plus.  The position was bought at $22.75 in October 2008, so that is positive under the circumstances. It is a First Mortgage bond issued by Entergy Louisiana that is now selling for over its $25 par value.   So, capturing the spread between cost and par value is no longer applicable since I may be able to sell it for more than its par value tomorrow.  So I can earn that return now but that spread is not large like many of the others than I bought and discussed in these blogs.  The gain would be taxed as short term.  All that I lose by selling now is the possibility that the bond may increase its premium to par value and the current yield at my cost.  The bond matures in 2032 so that is a long time to earn around 8.1% based on the $22.75 cost. So, this is a closer call than the First American TC which is throwing off a lot more yield at my cost and is barely half way to par value at its current price.  For now, I decided to hold both EHL and EMO, primarily due to a lack of options to receive the yield offered by them in a security with similar security.     Having said that, EHL's current yield at slightly less than its coupon of 7.4% is not tempting enough for me to add to my position in it.   EMO is a similar bond yielding even less.  

I thought the statement by Ken Lewis was very interesting.  He is reported to have said that BAC wants to start paying off the TARP funds in April and hopes to pay off the entire 45 billion when the banking system is stabilized which he said could occur as early as the 4th quarter of 2009.

Recently, I have been cutting my exposure to senior bonds issued by AIG's large subsidiary International Lease Finance.  Reports came out tonight say that its survival is in doubt without new loans.  Los Angeles Times I was aware that it drew down its credit lines last quarter after its parent ran into trouble and this leasing sub could no longer access the capital markets to refinance its maturing debt.   It is hard to conceive that the government would allow this profitable subsidiary to fail due to liquidity problems.  But I was concerned enough to cut my existing position by about 70% earlier this month, with some bonds maturing in September 2009.  This warning from International Lease was contained in its recently filed annual report.e10vk

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