Thursday, December 2, 2010

ISM/Bought: 1 Regions Bond Maturing 2018 at 96.95, 1 Senior Dean Foods Bond @ 89.48, 50 REPRB @ 23.80, 100 TGA-UN.TO @ 10.58 CAD, 200 JPC @ 8.45/PBIB

The ISM manufacturing index for November still showed expansion in that sector with a reading of 56.5%.  This was in line with the estimate. The new order component declined 2.3 from October but still shows expansion with a reading of 56.6. A similar survey in China showed an increase to 55.2 from 54.7. The European purchasing manager's survey, covering the 16 nation Euro area, rose to 55.3 from 54.6 in the prior month. (the European release can be found in PDF format under "Eurozone: Markit Eurzone Manufacturing PMI" for 12/1/2010 at Markit Economics).

Stocks reacted favorably to this trio of reports, and bonds sold off. The thirty year treasury bond fell 2 8/32 and the yield rose to 4.243%. The ten year treasury declined 1 14/32 and its yield increased to 2.966%.  TLT, the ETF for the long treasury, declined 2.22% to close at $95.89, while TBT rose 4.2%. Both of the junk bond ETFs that I own, JNK and PHB, rose yesterday, with JNK rising .76%.  Signs of an improving economy make some investors more comfortable about the  credit risk associated with the more risky bonds.  

1. Bought 1 Regions Bank (operating bank of Regions Financial) Subordinated Bond at $96.95  on Monday  (see Disclaimer):  This bond has a 7.5% coupon and matures on 5/15/2018. This is a link to the FINRA information on this bond. It is rated a Ba3 by Moody's and BB+ by S & P.  I have an extremely low opinion of this bank, as previously noted and discussed.  The common stock symbol is RF. LB was just fired as Head Trader for buying this bond. 

The long term borrowings of Regions are listed in table 9 at page 63 of the last filed  FORM 10-Q. I was not able to locate the prospectus for this bond.   

This is a link to the  Morningstar page for this bond. The Finra site says that it was issued in May of 2008. This junior bond has the same rating from S & P as the TP from Regions Financial, RFPRZ, that I recently bought.  Bought 50 RFPRZ at 24.49 While I will receive less yield with the 2018 bond, I have a realistic option of holding the bond until maturity, whereas RFPRZ matures in 2048 at the earliest, possibly not until 2078. Final Prospectus Supplement Either way, holding RFPRZ to maturity, in order to recover my principal, is not an option for me.

At my cost, RFPRZ has about a 1.25% higher yield than the 2018 bond. If there is a prolonged period of rising interest rates, causing the value of both of these bonds to fall, I would expect the 2018 bond to fall less, and I would not have that long to wait to recover par value, assuming Regions survives to 5/15/2018.

RF has stated that the 2018 subordinated bond issued by Regions Bank qualifies as Tier 2 capital ( page 39   10-Q) At the end of 2009, the subordinated debt of Regions Bank was rated investment grade by all three ratings agencies, see page 78, FORM 10-K. By 11/1/2010, the subordinated debt of Regions Bank had been downgraded to junk status by Moody's, see page 68, FORM 10-QTheStreet  And, just a few days ago, S & P joined the chorus of downgrades. WSJ  Reuters

Fitch downgraded the subordinated debt of Regions Bank later in November from BBB to BB+.

CreditSights believes that Regions' debt is manageable and that it will be able to work through its loan losses. I suspect that may be right, but no one can predict the future. I do not share their confidence however.

I do not want anymore exposure to RF than this 1 2018 bond and 50 shares of RFPRZ. One way that I control risk is simply by the amount of exposure that I am willing to accept.  The maximum exposure is $10,000 to the securities from one company. For Regions, I do not want to exceed $2500. I sold my lottery ticket in the common shares for a small profit. Sold 50 RF @ 6.57  Bought  50 shares of RF at $3.47. I want to receive significant current income (more than 7.5%) to shoulder even a small risk to this bank.

On my trade confirmation, it states that the yield to maturity is 7.903%.

2. Bought 100 shares of the Canadian REIT TRANSGLOBE APARTMENT REIT at 10.58 CAD on Monday (see Disclaimer): This REIT recently completed its IPO. Its portfolio of Canadian apartment complexes can be viewed at  TransGlobe Apartment REIT. Dividends are paid monthly and the current rate is  6.25 Canadian cents. TransGlobe Apartment Distributions. This works out to about a 7% yield before taxes and the effects of currency exchange.   

As with all of my Canadian securities, I will take the distributions in Canadian dollars.  This is my 6th individual Canadian REIT purchase and I have also bought a Canadian REIT ETF. Bought: 200 SRQ-UN.TO @7.53 CAD;  Bought 100 CUF-UN.TO @ 21.68 CADBought 200 AX-UN.TO @ 13.41 CADBought: 100 CAR-UN.TO @ 17.35Bought: 100 KMP:CA @ 10.17 CAD; and the ETF   Bought:  200 XRE:CA @ 13.78 CAD.

3. BOUGHT 1 SENIOR Dean Foods Bond Maturing on 10/15/2017 at 89.48 on Tuesday (see Disclaimer): I discussed Dean Foods (DF) in connection with another bond purchase made on Monday: Item # 4 BOUGHT  1 Dean Foods Bond at 93.8

This is a different bond, maturing over 1 year later, and it has a 6.9% coupon. This is a link to the FINRA information about this bond. It is rated B2 by Moody's and B by S & P. It was originally offered in 1997.  The Cusip is 242361AB9. This is a link to the Morningstar page on this bond.  I now own 2 Dean Foods' bonds and that is my limit to this junk credit.   My confirmation statement states that yield to maturity is 8.815%. 

4. Added 200 of the Balanced CEF JPC at $8.45 on Tuesday (see Disclaimer): I have nothing to add to my discussion of this balanced stock and bond CEF made in connection with a 200 share purchase in November:  Item # 2  Bought  200 JPC @ 8.61  On 11/30, the closing price was $8.47, and the net asset value per share was $9.46.  This created a -10.47 discount as of that day. 

5. Bought Back 50 REPRB at $23.8 on Tuesday (see disclaimer): This purchase in the most recent barrage of bond purchases is 50 shares of the TP REPRB.  I have bought and sold this one in small increments. Bought 50 REPRB AT 20.78 Bought 50 REPRB at 20.19 Sold REPRB at 24.36 I will just copy my earlier discussion of this TP: 

"REPRB is a Trust Preferred of Everest RE Capital Trust II, a Delaware Trust. It is a typical TP issue. Trust preferred securities are sold to the public in order to raise funds for this trust to purchase junior bonds issued by Everest Re. The TP represents an undivided beneficial interest in the assets of the trust which consists of these junior bonds with the same terms as the TP issue. The junior bond and the TP both mature on 3/29/2034. The TP's coupon is 6.2% with a $25 par value. Interest may be deferred for up to 5 years with a typical stopper provision. In any deferral period, Everest Re can not pay a dividend on any junior security, which would include its common stock, or to repurchase any junior security. In effect, the stopper provision means that no deferral can occur for as long as Everest Re continues to pay dividends on junior securities. When you think about it for a moment, this makes sense. I am not familiar with a single instance where a company could continue paying a dividend on a junior security while attempting to defer payment on the more senior one.

This is a link to the prospectus: Final Prospectus Supplement The stopper provision is at page S-23.

Payments will be taxable as interest and hence are not qualified dividends. The RenaissanceRe security which was sold to buy REPRB is a preferred stock, a form of equity, whereas the Everest TP is properly viewed as a bond, more senior in the capital structure than any form of equity. The labeling of the security as a Trust Preferred confuses individuals as to the defining characteristic of this type of security. Yes, it is a prefered stock issued by a trust, but that stock represents an interest in the asset of the trust which is a junior bond. Regular Preferred and Trust Preferred Trust Preferred Securities: Links in One Post

The QuantumOnline site shows the Everest RE TP rated at investment grade by both Moody's and S & P. The FINRA page for this TP shows a Baa1 rating by Moody's, with Fitch at BBB+ and S & P at BBB."

Interest payments are made quarterly with the next interest date in a few days.  The yield at my cost is about 6.5%. Everest RE Capital Trust II, REPRB  The common stock symbol for Everest Re Group is RE. The current consensus estimate is for earnings of $7.56 per share in 2010 and $11.86 in 2011.  RE is paying a common stock dividend.   

I decided to buy back this bond after looking at alternatives for investment grade bonds, with similar maturities and credit ratings, available for purchase in the bond market.  

Trust Certificates: Links in One 
Trust Preferred Securities: Links in One Post

6. Porter Bancorp (PBIB)(own): PBIB is the worst performing stock in my regional bank basket. Yesterday, Porter Bancorp did go ex distribution for a 5% stock dividend, so I have adjusted my ownership stake to 105 shares. I am not keeping track of shares purchased with dividends in the following table, but I am making adjustments for stock splits and stock dividends.  

Regional Bank Stock Basket as of 12/1/2010
As previously noted when discussing this table, the yield shown is at the current price rather than at my cost.  The trade date is the last purchase date for the security when there are more than one purchase. For multiple purchases of the same stock, I am using the weighted average cost.  I am keeping track of the realized gains in Item # 3 2010 Realized Gains Regional Bank Stock. That total is currently $3,121.31. 

 The remaining trades will be discussed in the next post.