Monday, October 5, 2009

Bought 100 MJV at $24.8/ Ten Year Tip Auction Results/More on Fidelity and Online Bond Trading/Comparing Floating Rate Securities

1. 10 YEAR TIP AUCTION (see disclaimer): The auction on Monday was a reopening of the auction from last July where I bought 2 10 year TIP bonds in my Roth. 10 Year TIP Auction Since this was a reopening, the coupon was fixed by the prior auction at 1.875.% Since the price had risen for the TIP bond, I paid $1032.96 for one $1000 bond. This means that I now have 3 TIP bonds maturing on 7/15/2019. The price was 103.296. Based on the price, the effective coupon yield was reduced from 1.875% to 1.51%. The original coupon from July also had an Original Issue Discount that raised the yield to 1.92%. The accrued interest per $1000 was $4.73: www.treasurydirect.go.pdf I would have been better off by buying 3 in July rather than 2 in July and 1 today.

2. Bought 100 of the TC MJV at $24.80 (see Disclaimer): This Trust Certificate contains a Trust Preferred issue from DPL Capital, a wholly owned subsidiary of DPL, an electric utility serving Dayton, Ohio and West Central Ohio: DPL Inc. The underlying security is a typical Trust Preferred with a 8.125% coupon. The coupon for the TC is 8% and par value is $25. The bond matures on 9/1/2031. This is a link to the prospectus: So with a commission my effective current yield and yield to maturity is just a tiny bit over 8%. This is what the RB calls, when it feels charitable, an Old Geezer purchase. I would have to admit that there is little chance of significant price appreciation. Possibly, after receiving several semi-annual payments, I might have opportunity to sell this one for a few dollars in profit as the best possible outcome in my opinion. This is for all practical purposes just an income play.

There are two other TCs that contain the same junior bond, MJY and MJT, and I previously owned and sold MJT. Sold 100 MJT at $24.43 Both of those TCs have 7.875% coupons and MJV was the better buy when I placed the order today.

The prospectus for the underlying security can be found at By typical Trust Preferred, I am referring to the right of DPL to defer payment for up to 5 years, provided no payments are made on a junior security, with interest accruing at the coupon rate on the deferred interest payments (see page 17) DPL Capital sold preferred shares to the public to raise funds to buy from DPL a junior bond, and DPL controls DPL Capital and guarantees its payments to the owners of the Trust Preferred shares. In effect, just to get my arms around this security, I would simply quote this sentence from the MJV Prospectus:

"Although the Securities are issued pursuant to a multi-stage legal structure, the Securities are effectively unsecured and fully subordinated obligations of the Security Guarantor." (i.e. DPL)

Anyone trying to following the legalese may need to draw a diagram. MJV is a Trust Certificate which evidences a beneficial interest in the assets of a Grantor Trust, administered by an independent trustee. The only asset of that trust is a Trust Preferred security. That security is in essence a preferred stock issued by a Delaware Trust, DPC Capital, and the preferred shares represent an undivided interest in the only asset of the trust, a junior bond issue from DPL who also guarantees the payment of the dividends to the owners of the Trust Preferred shares by DPC Capital. MJV type of security would be senior to common and equity preferred stock and junior to senior bonds and secured debt.

3. Fidelity Online Bond Trading: The TP issue can be bought directly in the bond market, but that is an impossibility for me now given the new strictures imposed by Fidelity on bond investing which make the mere placement of limit orders impossible for all practical purposes. More on Fidelity Investments & Online Bond Trading/Third Party Pricing of Bonds If I could buy the security in the bond market, I could conceivably get a slightly better deal on this security, but alas trading bonds online with Fidelity is no longer an option for me. I was able to sell a bond recently. But this is what happened. I saw trades at over 60 at 2:34:43 so I attempted to enter an order to sell at 60 within the extremely narrow limit permitted by Fidelity for the mere placement of an order. I tried several prices around 60 and nothing was allowed to even be entered. I then wanted to see what would happen with a market order, and that order was allowed, filled at 55.2. So that is the end of that. It does no good to complain about it if anyone wants to muster the energy.

4. The Goldman Sachs Floaters Analysis was an Outgrowth of my Analysis of BMLPRH in comparison to the other BAC Floaters: The analysis of GJS in several prior posts, compared to other Goldman Sachs floaters, is price sensitive. A narrowing of the price difference between PYT or GYB and GJS can tilt the balance in favor of the two floaters that pay the greater of a guarantee or .85% over the 3 month Libor which are far better terms the .9% over the 3 month T Bill. The advantage of GJS over the long term is dependent on its lower price and the kind of price spread prevalent at the time of my analysis: Analysis of Prior Question about Goldman Sach's Floaters It is also dependent on a return over the long term to normal 3 month T Bill rates. My buys of PYT and GYB were mostly at much lower prices, with GYB purchased at around $11 and PYT initially at $11.2.
Bought 50 PYT I then bought some more PYT in a retirement account at $13.34: Bought 50 PYT I also took some profit on GYB in a retirement account by selling another lot bought at around $11 at $15. Sold 50 GYB at $15/Jobs Report/Forest City Bonds/Aussie Dollar/Bought 50 KEY-Lottery Ticket I hope to keep my fingers off that sell button since these securities look good long term based on my entry cost. Until I did the more thorough analysis of GJS over the weekend, I had a lower opinion of it than the GYB and PYT, simply due to the lack of the guarantee and what I viewed as a worse float provision.

After I ran a new kind of analysis when comparing BMLPRH, which looked worse on the surface compared to the other BAC floaters, I decided to run a similar analysis on the Goldman floaters. The BMLPRH analysis first focused on spending an equal dollar amount to buy the competing floater, which was then about $3 higher per share. This simply meant that I could buy more shares of BMLPRH. That became critical in the result. Two events then influenced the outcome of the analysis. First, since BMLPRH had a lower guarantee by 1%, its Libor float provision would kick in sooner than BMLPRJ which narrowed the initial advantage of the 4 % guarantee. The advantage was not that great to start given the higher share price of BMLPRJ which cut the yield difference at the guaranteed rate of the two securities in half. Then, before the LIBOR rate reached 3%, the worm turned and BMLPRH started to throw off more income with its larger number of shares. BMLPRH vs. BMLPRJ /Comparing Floaters/Fixed Coupon Corporates Uninteresting

The same basic principle works in GJS's favor as long as it sells at a significant discount to PYT and GYB. The discount at the time of my analysis on Sunday was almost $1.88 below PYT in price and $2.58 below GYB's price. Another advantage of GJS at that lower price is the potential profit at maturity in 2033 or by a substantial narrowing of the current discount to par value. All of these securities, PYT, GYB & GJS, have the same $25 par value.

The ones who are maintaining the current price differentials of BMLPRJ over BMLPRH, or GJS and GYB have to be focusing on a narrow issue for these floaters, treating them not as floaters but more like garden variety fixed coupon investments. Their main focus has to be on the current yield differential at the share price, without focusing on how that yield will change based on a return to more normal Libor and T Bill rates, or even a rise in those rates to 3%, and also without accounting for the additional sums of money that have to be spent to buy BMLPRJ or a GYB. Sure, you could buy 100 shares of BMLPRJ at $16.89 and the yield at its guaranteed rate would be about 6.2%. And you could have bought 100 BMLPRH at $13.2 last Friday and the yield at its guaranteed rate would be around 5.8%. So that extra .4% must seal the deal for a lot of folks. But how is the additional $369 spent on the 100 shares of BMLPRJ accounted for in the cost benefit analysis. Isn't the end of the analysis how much will the same amount money invested in two securities pay in annual dividends or interest. Once you equalize the amounts by investing another $369 in the cheaper floater, and then start to take into account the impact of a rise in LIBOR, then I would submit a different result is reached unless you want to assume an extremely low and abnormal LIBOR rate as the new normal, because that is the only assumption that would render the higher cost BMLPRJ superior over the long term.


  1. Interesting recommendation by Societe Generale to buy European tier 1 hybrid bonds:

  2. I am not one who favors having the government as a partner. I also noticed today that Societe Generale became the latest firm to indicate it intends to sell stock to pay back the state aid it received:

    All of these firms need to free themselves as soon as possible from the deleterious influences of the EC. Merrill Lynch previously issued a report that it would start to make sense for ING to issue shares to pay off the Dutch government when its share price rose to over 13.6 Euros. I noticed that it is inching closer to that number, hitting about 11.5 Euros in European trading today. It does not need to raise all of the funds with a share issuance since it is selling a number of its units to raise cash.