Tuesday, December 21, 2010

Bought 1 Cincinnati Bell Bond Maturing 2018 at 94/Added 50 REPRB at 22.03/Added to OSM at 18.47

I received yesterday the redemption proceeds of RNRPPB that was called by its issuer, RenaissanceRe. That one was an equity preferred stock which paid qualified dividends and had a 7.3% coupon on a $25 par value. There are two remaining equity preferred stocks issued by RenaissanceRe, RNRPRC and RNRPRD. All of these issues are rated investment grade (BBB+ by S & P). However, their yields are below 7% based on their current prices.  Most non-REIT equity preferred stocks do not have cumulative dividends. The RNR equity preferred stocks do have cumulative dividends.

Before buying the highest yielding remaining RNR preferred stock with the redemption proceeds received for RNRPRB, I will consider adding to my existing position in a trust preferred issue, REPRB, which is in essence a junior bond from Everest Re. Sold 50 RNRPRD at 22.05 & Bought 50 REPRB AT 20.78 That one pays interest rather than qualified dividends. The yield is about the same as the two equity preferred stocks from RenaissanceRe. The TP has a maturity date, which I view as important, while the preferred stocks are perpetual like their common stock cousins.  

Steve Kroft interviewed Meredith Whitney for a 60 minutes segment titled State Budgets: The Day of Reckoning. The segment was biased clearly in favor of Ms. Whitney's dire forecasts, and the municipal bond market reacted on Monday by resuming its selloff. Other than Ms. Whitney's forecast of 50 to 100 "sizable" municipal bond defaults, there was no new news in the broadcast.   

I last mentioned Meridith's frequently alarmist views back in November 2009 when she was extremely bearish on the market. Item # 5 Sarah and Meredith A municipal bond ETF, MUB, continued its descent yesterday, falling $1.08 to close at $98.85. 

Webster Financial (WBS), my best percentage gainer in the Regional Bank Stocks' basket strategy among the stocks that are still owned, announced its intent to sell 6.630 million shares and will use the proceeds to repurchase the 200 million in government preferred stock. WBS closed yesterday at $18.49. Buy of 50 WBS at $4.58 

1. Added 50 OSM at $18.47 on Monday (see Disclaimer): After reading Andrew Bary's favorable column in Barrons about SLM (Sallie Mae), I felt better about the creditworthiness of Sallie Mae, at least until its exchange traded CPI floater OSM matures in 2017.  

Of the three SLM exchange traded bonds, Bary only specifically mentioned JSM, a 6% fixed coupon senior bond maturing in 2043, www.sec.gov. I have zero interest in that one. JSM has about a 8.09% current yield at yesterday's closing price of $18.88 ($25 par value), up 35 cents for the day.   

I have bought and sold the other CPI linked note, ISM, that matures in 2018. Bought 50 ISM in IRA at $11.85 (prospectus: www.sec.gov)

Prior to yesterday I had pared my position in OSM to just 100 shares after hitting a high of 300 shares earlier in the year. Yesterday's purchase brings me to the mid-point of 150 shares, where I have some comfort level with the risk/reward. When I started to purchase shares in OSM back in October 2008, when the price was close to $10, my major concern was credit risk. I would still be extremely concerned about credit risk for a SLM note maturing in 2043, such as JSM, and the interest risk for that fixed coupon, long maturity bond would be in my estimation considerably greater than the two CPI floaters, OSM and ISM, that mature in 2017 and 2018, respectively. And OSM and ISM are floaters tied to CPI which in itself reduces interest rate risk. 

As discussed in several posts from December 2008, OSM is a senior bond issued by SLM that matures in March 2017 at $25 per share. (December 2008 posts: cpi floaters pfk and osm   cpi floater: osm  cpi and cpi floaters-osm inflation or deflation: bond alternatives)

This bond pays monthly interest based on a 2% spread to a complex CPI calculation which I am about to perform for anyone interested in this security. www.sec.gov Due to the recent low CPI numbers, the interest payable by OSM will be trending down in the months to come. Consequently, this security will likely be generating modest income well into 2011. The primary appeal to me now is not so much current income  but the increasing likelihood that SLM will survive to par value in March 2017, creating a decent return just on the share profit of about $6.5 per share at yesterday's last purchase price.

In addition, while inflation may be tame for many more months, it is certainly possible that CPI will start to rise to much higher levels than now before this bond matures, thereby generating more current income.

To calculate the monthly interest rate, SLM uses the CPI Index for All Consumers without seasonal adjustment, and that data can be found at research.stlouisfed.org. The calculation uses a twelve month percentage change in that CPI, and there is a 3 month lag.

I last calculated the penny rate for November 2010 that was based on the percentage change between July 2009 and July 2010,  Item # 1 CPI for July:

July 2010 218.011
July 2009 215.351  
Difference 2.66
Divide Difference by 215.351=.01235
Add Spread .02 for OSM= .03235
Multiply .03235 x. $25 par value= $.80875
Multiply $.80875 x. 31/365=  $.068688

The penny rate reached almost 9 cents earlier in the year. See Item # 9 Bought 50 OSM at 15.74  So the penny rate had already started to trend down before the release of the latest low inflation numbers. 

With the release of the November CPI number, I can calculate the penny rate for March 2011:

November 2010   218.803
November 2009   216.330
Difference          2.4733
Divide Difference by 216.33 =  .011432
Add Spread of .02 for OSM=  .03143
Multiply .03143 by $25 par value= .78575
Multiply .78575 by 31/365 = $.06673  (if the payment period is 30 days, then the multiplier would be 30/365) 

Since I was more comfortable with the credit risk of Prudential, I decided to keep my shares in the PRU CPI floater, PFK, that were bought at favorable prices. Bought 100 PFK at 18.47 Bought 90 PFK in IRA $18.94  Added 50 PFK at $17.83 Added 50 PFK in Roth at 20.88-Averaged UP  I am just sitting on those shares. I am not inclined to sell those shares even though that security has been trading at over its par value. I am not interested in buying more shares at current prices, however.   (see also July 2009 Post: Comparing Prudential Floating Rate Bonds Tied to CPI and Fixed Rate Coupon Bonds Maturing in 2018

My average cost for the remaining 100 shares of OSM was below $16, so this last purchase of 50 shares will raise my cost basis some. The last purchase was in May 2010 at 15.74. The lower cost shares were sold using FIFO accounting.

2. Bought 1 Cincinnati Bell Bond Maturing in 2018 at 94 with concession (see Disclaimer):  I have nothing to add to my recent discussion of Cincinnati Bell made in a post earlier this month when I bought another one of its bond Bought 1 Cincinnati Bell Senior Bond Maturing in 2020 at 96.8  I would just note that the common stock (CBB) has been subject to some selling pressure for several trading sessions, falling from a close at $2.66 on 12/10 to  $2.34 yesterday.   And I believe the bonds have fallen some too.

This particular bond is a senior "subordinated" bond maturing on 3/15/2008 and has a 8.75% coupon.  This is a link to the FINRA site that contains information about the ratings and trades for this bond.  It is rated junk.   Fitch has the lowest grade at CCC.

This bond was originally issued in March 2010.

This is a link to the prospectus: Final Prospectus Supplement

Given the risk, I do not intent to buy any more bonds from CBB. I am considering a purchase of the common stock in the LT category.

The confirmation statement showed a YTM of 9.764%, and a current yield based on my cost of 9.229%.

3. ADDED 50 REPRB at 22.03 on Monday (see Disclaimer): I decided to round my lot to 100 shares in REPRB with the proceeds received from RNRPRB yesterday. This security is a typical trust preferred, and was issued by Everest Re Capital Trust II. That trust used the proceeds from selling the TPs to the public to buy a junior bond from Everest Re. The TP represents an undivided beneficial interest in that junior bond. I simply view this kind of security as a junior bond with liberal rights of deferral. Interest payments are cumulative and are paid quarterly. This security just went ex interest. It is rated investment grade.

The TP and its underlying bond mature on the same day in 2034 (3/29/2034).  Everest Re is paying a common stock dividend. To defer interest payments to the owners of REPRB, Everest Re Group, Ltd  (RE) would first have to eliminate the common stock dividend.

I have previously bought and sold this security: Bought REPRB at 20.19  Sold REPRB at 24.36

This is a link to the prospectus:  Final Prospectus Supplement  The coupon is just 6.2%. This gives me a current yield of about 7% at a total cost of $22.03 and a higher YTM given the purchase at a discount to the $25 par value.

REPRB blew through my limit order at $22.05 on its way down to 21.74 yesterday, and then recovered some to close at $21.96, down 28 cents for the day.

Trust Preferred Securities: Links in One Post

I ran out of desirable bond buys last year.  Now, as bonds are called, I am simply reduced to finding the least undesirable replacement.

I am scheduled to receive the redemption proceeds from KRH and XFB tomorrow, DFY on Thursday, and TDA on Monday, respectively.