1. ING Dividends/ Paying the Dutch Government Back/Mandatory Payment Events/ & the Idiotic Burden Sharing Policy of the EC: This is part of an email that I sent to a reader for anyone who wants to know more about the Mandatory Payment Event clauses in the IGK prospectus, and what was meant by my reference to four back and four forward in an earlier post:
"The four back and four forward is what ING has to pay after a Mandatory Payment Event whether or not it wants to pay, or even if it is under a legitimate mandatory deferral before the mandatory payment event. Look at it this way. ING defers the next three payments. In April 2010, it buys back Junior Securities from the Dutch government. This is a Mandatory Payment Event which would have required ING to pay the three deferrals before paying the Dutch government, plus the next four quarterly payments even if ING did not want to do it. Mandatory means just that-no excuses. One type of mandatory event would be the payment of a common stock dividend. Before that could be done, ING would have to pay up to the last 4 deferrals on IGK and pay the next four quarterly payments unless a valid Mandatory Deferral Event occurs before one of the prospective payments. So the payment of a one cent common dividend annually would trigger the requirement to pay all four subsequent IGK interest payments. The mandatory payment events are for the protection of the bondholders. It basically keeps ING from paying on a junior security while trying to defer IGK. The AEB has a better provision. Upon a mandatory payment event, all deferred payments have to be paid in full, not just the last four."
As a practical matter, the payment of the common dividend is the security blanket that the hybrid holder wants to have. Once that is gone, your attention needs to be focused on a lot of issues including credit worthiness. Elimination of a common dividend is not a sign of economic health for a firm accustomed to paying one. It is a sign of duress. I have characterized the elimination of the common dividend as creating an enhanced state of danger to both the holder of an equity preferred security and a junior bond. An owner of a non-cumulative equity preferred is in a super enhanced state of danger. Their dividend can be eliminated, as in gone, as in kaput and forget about it. The owner of a junior bond is in better shape in that the distributions are cumulative. With a legal deferral, the payment obligation is not eliminated but merely deferred. Unfortunately, for a security like IGK, there is no limit on the time period for deferral unless there occurs a Mandatory Payment Event or ING voluntarily decides to pay up. A junior bond from a U.S. financial institution will generally have a five year limit on deferrals.
So why have I focused on the Mandatory Payment Event language? ING has not deferred payment on any of its hybrid securities--yet. IGK is scheduled to go ex on August 28th. The reason for discussing this issue is that the European Commission has started to pressure firms that received bailouts to defer payment on their subordinated junior bonds when the firm has not generated enough profit to pay its bond obligations. It does not matter to the EC whether or not the firm is solvent, capable of making the payment, and has plenty of surplus capital. It remains to be seen whether ING will be so pressured or what will happen. My reason for discussing the Mandatory Payment Event is to show institutional investors, with a lot a stake, that there are good arguments capable of disrupting the EC's plans upon the occurrence of certain events, such as the purchase by one of these Dutch firms of Junior Securities issued to the Dutch government last Fall in connection with the government bailouts. Does the EC not want ING and Aegon to pay back the Dutch government? Once Aegon buys back a Junior Security, it triggers the Mandatory Payment Event and immediately defeats the EC's burden sharing policy as it applies to the junior subordinated debt. At that point, Aegon would for example have to pay all deferred payments on its hybrid AEB and the next four. So, why bother unless the EC wants those firms to not pay back their government in order to persevere in its idiotic "burden sharing" policy that has already done more harm to European firms than any good that could conceivably come out it. It is just an an extremely stupid policy. And, besides being counter-productive by raising the cost of capital for European institutions for years to come, it is not likely to even be effective. As I said, does the EC want the firms who have raised capital by selling securities or assets to refuse to pay their governments back just to permit the implementation of a misguided political policy by the EC?
2. Bought 50 UTIW at $12.7 (see Disclaimer): I was gone almost all day today on family business. I decided to buy 50 shares of a company whose existence was first revealed to me in one of my Morningstar screens. The firm's name is UTi Worldwide, a air and sea freight forwarder and logistics company. It came up on one of the screens that I use at Morningstar where I use a low price to sales ratio and a large discount to Morningstar's fair value estimate. The price that I bought at today was about a 50% discount to the Morningstar fair value estimate and the P/S is about .32. As you would expect, their operations have been adversely impacted by the global slowdown in trade. Even so, earnings are estimated at $ .75 for the F/Y ending in January 2010, and .94 for F/Y 2011. This is around 12-13 times forward earnings with a PEG ratio of .98 estimated by analysts over the next five years. UTIW: Key Statistics for UTi Worldwide Inc. A PEG of less than 1 and P/S of .32 is tempting to me. For a firm like this one, a lot depends on how fast global trade recovers from the current recession. A five year high in price was reached in early 2006 at around 36. Since the Lehman bankruptcy which in retrospect was a pivotal economic event, the stock has traded in a narrow channel of between 10 to 15.
The firms seems to have its infrastructure already in place, with offices and warehouses in 62 countries.
I was actually surprised by the balance sheet. There was less debt than I expected, and a lot of cash: UTIW: Balance Sheet for UTi Worldwide Inc
I relied primarily on the Morningstar report but S & P has one too, rating UTIW at 4 stars. I also reviewed the last quarterly report filed with the SEC: e10vq I did not want to buy more than 50 shares until I have a better feel upon the strength of the global recovery. ( the Baltic Dry Index has been on a downward slope since early June: Bloomberg.com )
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