Friday, January 7, 2011

Bought 100 GJP at 21.95/Bought 1 Synovus Junior Bond Maturing in 2017 at 86.3

This is a link to a helpful site that provides the "troubled asset ratio" (TAR) for virtually every bank in the country.  The  TAR "compares the sum of troubled assets with the sum of TIER 1 Capital plus Loan Loss Reserves". Bank search    Lower is better for the TAR ratio.   This is a link to the TAR ratio for TOWER (TOBC), the last add in the Regional Bank Stocks' basket strategy.

Denis Gartman added his opinion to the growing chorus of gurus warning about the emergence of a long term secular bear market in bonds. He expects the long treasury bond to hit an 8% yield in a few years.  I would agree with him that a long term secular bear market is in the offing for bonds.  These cycles historically have been measured in decades rather than years.   The last bond bear market, which was born after WWII, began its life taking baby steps before inflicting substantial injury to bond owners starting in the late 1960, administering the   coup de grâce in 1978 to 1982.  By 1981, the yield on the long bond exceed 14%.  What happened?  I previously reproduced a chart of the rate of inflation in those years: 


Consumer Price Index, 1913- | The Federal Reserve Bank of Minneapolis  The number on the right is the rate of inflation.  I believe it was more the demand for money, rather than the inflation rate, that caused the bond bear market prior to 1965.  The stock market was experiencing a long term secular bull market between 1950 and 1965, shown by a 45 degree upward slope in the S & P 500 depicted in graphs at LONG TERM SECULAR BULL PATTERN 1950 TO 1966/ Long Term Secular Bear Pattern from The Great Depression.

The Barrons technical analyst believes that a long term bond bear market will be confirmed by a fall in the 7 to 10 year treasury ETF, IEF, to the $89-90 range.  IEF closed yesterday at $93.22, down from $100.08 on 10/11/2010. IEF Historical Prices | iShares Lehman 7-10 Year Treasury 

While I agree with the premise that we are near the transition point to a long term secular bear market in bonds, I am not yet convinced that the market has already made that transition.   Still, I am using a 4% yield on the 10 year treasury as a trigger to reduce my bond fund exposure and to invest those proceeds in individual intermediate term bonds that I can hold to their respective maturities.  The 10 closed yesterday at a 3.4% yield.  MDC - Java Chart - - for UST10Y

1.  RB Bought 1 Synovus (SNV) Junior Bond Maturing in 2017 at $86.3 with the Concession (85.5 Limit Order)  on Thursday (see Disclaimer):  First of all, LB disclaims all responsibility for the purchase of this junk rated junior bond issue from the troubled southern regional bank Synovus Financial Corporation.  LB was diligently working on a modification to trading rule 1,434,730,184 (1)(A)(2)(iv) for the Unstable Vix Pattern when the RB seized control over the trading desk and purchased this bond.  

This particular junior bond matures on 6/15/2017 and has a 5.125% coupon.  According to FINRA, the bond is rated junk, with Moody's assigning a B3 rating.  There are 400 million of these bonds outstanding.  

This particular bond was issued in 2005, which explains its low coupon.   This bond has the same priority as the 2013 bond bought earlier in the week.  Item # 5 Bought 1 SNV Junior Bond Maturing in 2013 at 94 The market has more confidence in SNV paying off the 2013 bond than the one maturing in 2017, judging from the yield differential.    My confirmation states that the current yield at my cost is 5.938% with a yield to maturity of 7.881%. 

This is a link to its prospectus:    SYNOVUS FINANCIAL CORP.  Interest is paid semi-annually in June and December. 

I have not had a kind word to say about SNV whenever I discussed it.  The best possible outcome for its bondholders and shareholders is the acquisition of this bank by one more competently run and consequently in a superior financial position.   It may take more balance sheet cleanup before SNV could be sold to a competently run bank.  10 Regional Banks in the M&A Crosshairs - TheStreet

I do not own the common stock and I am a little queasy owning a miniscule amount of these short term junior bonds.   Someone asked what is the likelihood of a default.  No one knows the answer to that kind of question.  It is certainly conceivable.  If the economy continues to recover, I would just view it as unlikely.  

2. Bought 100 GJP at $21.95 in the Roth IRA (See Disclaimer):  GJP is a Synthetic Floater that I can no longer buy as a Fidelity Brokerage customer.  The rationale given by Fidelity is that a "majority" of their customers do not understand these securities and consequently all of their customers are now prohibited from buying any of the synthetic floaters along with many other exchange traded bonds including a simple "baby bonds".   As a result of that expanding list of prohibited buys, which mostly impacted my Roth IRA, I moved that account to Vanguard and the transfer was completed yesterday.  I was therefore able to buy GJP yesterday.  

For those who have been following my buys and sells of synthetic securities, GJP will be a familiar security.  It will pay the greater of 3% or 1.15% above the three month treasury bill rate on a $25 par value. The interest rate can not exceed 8%.  Is that hard to understand?   GJP is a trust certificate.  The underlying security owned by the trust is a senior bond issued by Dominion Resources (D), a large electric utility based in Virginia.   That bond has a fixed coupon of 5.95% and is rated investment grade according to  FINRA.  The GJP's float is created by a swap agreement between the trust and Wachovia, now part of Wells Fargo.  The trustee collects the interest payments made by Dominion on the senior bonds owned by the trust and then swaps those funds for whatever is due the owners of the trust certificate GJP.  Due to the low interest rates now, Wachovia would pay the trust 3% and collect 5.95%, keeping the spread.     The bank can start to lose money on the deal, assuming it has not hedged its risk, when the three month T Bill rises above 4.8%.  At that point the bank would be paying more out than it receives under the swap agreement.

The owners of the TC bear the credit risk of Dominion paying the interest on the note.  If it fails to pay, the owners of the TC will be the ones to suffer, while Wells Fargo only loses a right to receive its spread.  I am comfortable with the Dominion's credit risk, which is a main reason why I keep coming back to this security after selling it.

Due to complex tax issues associated with the swap agreement, I will only own synthetic floaters in a retirement account.

GJP has a 8% maximum rate which will be hit when the 3 month Treasury Bill rate exceeds 6.85% (6.85% 3 month T Bill + the 1.15% Spread=8%).  While that is not going to happen anytime soon, historically speaking, a three month treasury bill rate over 6.85% has occurred for expended periods of time.

I now know can compute the range of interest rates payable by this security at my total cost of $21.95.   I know that the guarantee of 3% translates into an annualized yield, paid in monthly installments, of 3.41%.  The maximum rate, hit when the three month T Bill exceeds 6.85% during the relevant computation period, will be 9.1%.   I also have the potential for capital appreciation due to a rise in the market price or simply by holding this security until the underlying bond matures on 6/15/2035.

GJP Prospectus:

I have already realized several gains from this security, along with several monthly interest payments: Bought 100 GJP at $18.97 (October 2009Sold 100 GJP at 22.42 (Feb 2010)  Bought 50 GJP at 20.55 (July 2010)  Sold: 50 GJP at 23.31, 50 JZS @24.15 (Oct 2010)  Bought GJP at $17.75 (April 2009).  On that last post referenced, I can not find where I sold the GJP's shares purchased at $17.75.    If I can successfully trade this security a couple of more times, and collect more interest payments,  I will hopefully be in a position of playing with the house's money on a 100 share buy.   I will need to find out how much was made selling the shares bought at $17.75 to have a better feel for when that point is reached.   For each time that I have bought this security, it would be fair to say that I was not attempting to shoot the lights out, but overall my returns have been good given the nature and terms of this security.

3. Current Chart and Cash Flow of Junk Bond Ladder:  The following is a chart and other pertinent information about the junk bond ladder that I have been building.  This information is provided by my brokerage firm, and this kind of depiction helps me construct the ladder in a matter which I deem appropriate for me:


Where there is only green shown in the chart, this simply means that nothing comes due in that year but I still have some bonds generating interest income.   I know where I need to add by looking at this chart, but I have had difficulty finding suitable bonds maturing in 2015 and 2019 so far.  My ladder will not be equal weighted by year. 

As long time readers know, I employ a multitude of strategies involving all kinds of asset classes.  The junk bond ladder is just the latest.  If the economy continues to grow, hopefully some of the credit issues for these companies will improve which is why junk bonds have been faring better than the so-called credit risk free treasury bonds.  I am also responding to a possible increase in rates by buying mostly short and intermediate term individual bonds, thereby giving me the option of holding them to maturity.  Still, being what I would call an Aggressive Conservative Investor, I am not going to risk much in these low quality bonds.  I am actually looking forward to having the opportunity to build an investment grade corporate bond ladder at higher yields than prevailing now.

I am attempting to keep track of the bonds purchased under this strategy in Item # 3  Junk Bond Ladder Strategy.

I bought shares in a Canadian REIT and a senior bond on Thursday that I will discuss in the next post. 


  1. what do you think about?
    *BOISE CASCADE CORP DEB 7.35000% 02/01/2016 7.350 02/01/2016 B2 B


    14 left (1min) yield close to 8%

  2. i guess they're just treading water.

  3. I believe that this note is an OfficeMax obligation. If my memory is correct, Boise Cascade acquired OfficeMax many years ago and then around 2005 changed its Name from Boise Cascade to OfficeMax. It then sold its forest products business to a private equity firm and retained a 20% in what is now known as Boise Cascade Holding LLC.

    This debt is listed in the Annual Report for OfficeMax: See Page 70 of OMX's 2009 annual report.

    However FINRA does not list any bonds under OfficeMAX.

    Back in 1996, there was a Boise Cascade Corporation that traded under the symbol BCC

    Now did you know that this bond appears to be an OfficeMax obligation? Be honest now.

  4. I do not believe that the 7.35% 2016 bond is an obligation of Boise Cascade Holdings, LLC, a private company, which is referenced in your citation to It is not listed under their debt in their SEC filings. See Page 34:
    1317436/000110465910010993/a09-36090_110k.htm That company only has a 7.125% senior sub note due in 2014.

  5. I don't think Office Max is related, but very interesting. Fidelity has the 2014s also but they are callable and trading near par. They sold the paper biz, now the Boise inc, symbol BZ. The earnings report shows only $3.1mil revs after litigation settlement, a net loss of the 3rd Q of $-5.6mil. They have about $225mil cash and $235mil or so debt, I see their WA mil burned down, didn't research yet if on purpose(hehe), said they aren't rebuilding it, but expanding Lousiana operation, I suppose they got Fed stim monies, just a guess. So, ? becomes how risky & if can trust non-public financials or not, like ratings. Lumber demand could be flat for 5 yrs. What if builders finally realize they're cutting their throats by adding supply and pack it in.

  6. I think that you need to look at the history of OfficeMax at the SEC website.

  7. I'll pass. This smells.I want nothing to do with any office supply.

  8. I do not think that it smells. The 2016 bond is shown as an OfficeMax obligation at page 70 of its annual report:

    "The Company's debt, almost all of which is unsecured, consists of both recourse and non-recourse obligations as follows at year-end:

    2009 2008


    Recourse debt:

    9.45% debentures, paid in 2009

    $ — $ 35,707
    6.50% notes, due in 2010

    13,680 13,680
    7.35% debentures, due in 2016

    17,967 17,967
    Medium-term notes, Series A, with interest rates averaging 7.9% and 7.8%, due in varying amounts periodically through 2013

    36,900 51,900
    Revenue bonds, with interest rates averaging 6.4% and 6.4%, due in varying amounts periodically through 2029

    189,930 189,930
    American & Foreign Power Company Inc. 5% debentures, due in 2030

    18,526 18,526
    Grupo OfficeMax installment loans, due in monthly installments through 2014

    16,085 11,202
    Other indebtedness, with interest rates averaging 7.0% and 10.9%, due in varying amounts annually through 2016

    4,528 16,058

    297,616 354,970
    Less unamortized discount

    564 596
    Less current portion

    22,430 64,452

    $ 274,622 $ 289,922

    Non-recourse debt:

    5.42% securitized timber notes, due in 2019

    735,000 735,000
    5.54% securitized timber notes, due in 2019

    735,000 735,000

    $ 1,470,000 $ 1,470,000

    I believe that the 2014 note that you reference is an obligation of the private company, of which OMX owns 20%.

  9. ok. so would you take a lottery for 2 or 3? assuming avail next wk on fidelity.
    earnings have been improving:

    cash/debt maybe manageble:

  10. Last night I found the prospectus for the bond at the SEC web site under OfficeMax. It was originally issued in 1996 and is a senior unsecured bond. I will most likely buy 1, possibly 2, provided I am comfortable about the credit risk which requires me to spend at least an hour or two looking at OMX more closely. I am going to discuss in my Monday's post how I approach my research on bond investing.

    I will not reach a decision until Monday on this OMX 2016 bond.

    I do not believe that this bond ever appeared on the screens that I use at Fidelity, but it popped right up when I entered the search term at Vanguard. If it had appeared I would have already done my research on OfficeMax. I already knew about its history.

    I have never bought the common stock, and I have more familiarity with Staples and Office Depot. I do not see anything really that differentiates the companies in the office supply retail space.

    I will also take a look at the 2014 bond that is an obligation of the private company, Boise Cascade L.L.C. even though it is selling near par value.

    The earnings picture for OMX does look better than some of the other companies whose junk bonds I have recently bought.

  11. thanks. There aren't many investors/researchers around who could have dug that bond history up.