Monday, March 28, 2011

Bought 1 Cenveo 7.875% Senior Sub Bond Maturing 12/1/2013/Sold 50 JZS at 23.1 in Roth IRA/Bought 50 IND at 22.95

Only twenty-eight per cent of the Portuguese population between 25 and 64 has completed high school.  WSJ  Portugal will likely be the third EC country to recieve a bailout, though the government insists that no bailout is necessary. The government debt in Portugal is approaching 90% of its GDP.

Shipping companies, fearing radiation, are avoiding the Japanese ports at Tokyo and Yokohama.  NYT

An article in Sunday's NYT reveals that the Fukushima nuclear station was not designed to withstand known risks.  The first clear reference to tsunamis by Japan's equivalent to our Nuclear Regulatory Commission came in 2006, when the word first appeared in standards for new nuclear plants. Those guidelines basically asked Japan's power companies to think about tsunamis when designing nuclear stations.

1. Bought 1 Cenveo 7.875% Senior Sub Bond Maturing on 12/1/2013 at 97.5 on Thursday (Junk Bond Ladder Strategy)(see Disclaimer):  Cenveo (CVO) is a publicly traded printing company. This is a link to the firm's web site: Cenveo  The consensus earnings estimate is for an E.P.S. of 50 cents this year and a $1 in 2012. Two analysts contributed to that estimate.  The market cap of the company at a $6.15 share price is around 385 million.  Revenues for the F/Y ending 1/1/2011 were 1.814 billion. cenveo10k.htm  The company lost $2.99 per share in that fiscal year.  A lot of that loss was due to a 181.4 million non-cash charges for goodwill and asset impairment in Cenveo's commercial printing operation. (p.180).  The debt level is uncomfortably high for this company in my opinion and is described at pages 24-25 and pages 47-52 of the last filed annual report:  Form 10 K

The note that I bought is called a "senior subordinated" note which means to me a junior bond for all practical purposes.  It is subordinate to a lot of more senior debt.  However, as shown in the chart at page 47, no other debt is due before the 2013 note matures which is a plus.

My confirmation states that the current yield at my cost is 8.011% and the YTM is 8.592%.

This is a link to the FINRA information about this bond: FINRA The bond is rated well into junk territory at Caa2 by Moody's and CCC+ by S & P.  RB just said that a C+ is almost a B-.  

2. Sold TC JZS at 23.10 in ROTH IRA Last Thursday (see Disclaimer):  JZS is one of several trust certificates that contain the 2033 senior Goldman Sachs' bond as its underlying security.  A Trust Certificate, which trades like a stock, represents an undivided beneficial interest in the assets owned by a trust.  An independent trustee collects the interest payments from the debtor, and then distributes those payments to the owners of the TC.  In the case of JZS, the TC has a coupon of 5.8%, lower than the 6.125% 2033 GS bond.

The TC coupon can be the same, higher or lower, than the bond owned by the trust.  Fewer bonds will be deposited into the trust to support a lower coupon than a higher one, and that fact alone can impact when and if the call warrant owner exercises its option to redeem the TC at par value plus accrued interest and to take possession of the bonds.

That issue came up recently in connection with the redemption of the TC XFJ , containing a Motorola bond, where the TC had a much higher coupon than the underlying bond.  I did the math to show why it was advantageous for the TC owner to call, given the number of bonds owned by the trust needed to support that higher coupon for the TC.  I thought that it would be helpful to copy that discussion, since JZS has a coupon lower than the underlying bond and one reason for buying it was a potential call by the warrant owner: 

"After the the owner of the call warrant exercised its option to redeem XFJ, I was curious why, since the underlying bond, a 2028 senior Motorola bond, was selling near par value.   In fact, I noticed that someone, most likely the owner of the call warrant, sold over 18 million of those bonds on the day of the redemption, with several entries at FINRA grouped together in time.  All of those transactions were near par value.

In answering this question, I am handicapped, in that I would prefer that someone else do all of my math chores.  I have had an aversion to math for my entire life, similar to my disdain for most vegetables.  And, it would add that I decided to go to Tulane in 1969 since that college allowed me to substitute philosophy for calculus.   But, I thought that a better understanding of this issue may be a relevant issue for the future, so I tackled it over the long weekend.

First, as previously discussed, it is common for a TC to have a different coupon than the underlying bond owned by the trust.  Where the TC has a higher rate, then the brokerage firm would have to deposit more bonds with the lower coupon in order to support the coupon payment.

For XFJ, there was a wide discrepancy in coupons.  The Motorola bond has a 6.5% coupon whereas the TC XFJ had a 8.375%.

Trustee's Distribution Statement shows $32,875,000 million in principal amount of the 6.5% MOT bonds.  Those bonds produced $1,068,437.50 of interest for six months, and those funds were distributed to the TC owners. The original Prospectus states that there are 1,020,597 trust certificates with a $25 par value.  Thus,  it took 32.875 million in principal amount of a 6.5% bond to support a 8.375% coupon for a 25.514925 million in principal amount of TCs.  But for a $25,514,925 payment to the owners of the XFJ, plus accrued interest, the call warrant owner could acquire title to $32,875,000.  So it would be become profitable for the call warrant owner to exercise the call even when the underlying bond is selling near par value.  The problem would be finding buyers for most of those bonds before the exercise to avoid holding such a large inventory.

Possibly, there were more TCs actually sold than noted in the prospectus. To check whether or not this happened, I performed the following calculation.  For a year, the bonds that were in the trust would generate $2,136,875 in interest.  The principal value of 1,020,597 TCs at $25 is $25,514,925 which would generate $2,136,874.97  in annual interest income at 8.375%.

Voila, the call warrant owner acquired $32,875,000 in principal amount for $25,514.925.  When the bonds are sold, the buyer would have to pay the accrued interest, so the call warrant owner does not lose anything by having to pay the accrued interest to the TC owners.   And, it would be profitable to exercise the call even if the call warrant owner could sell the bonds at or even below par value."   Item # 7  
More on Call Warrants and TCs 

I had previously traded JZS for a profit:  Sold: 50 JZS @24.15 (Oct 2010)- Bought 50 JZS at 22.95 (August 2010).  I decided to repurchase JZS and other TCs containing the 2033 senior GS bond, which were selling at discounts to their $25 par value, after the call warrant owner called DKW shortly after I made a 150 share purchase: Bought 100 DKW at 22.86 Bought 50 DKW @ 23.07 Alert on TC DKW-Exercise of Call Warrant/SOLD 50 OF 150 DKW @ 25.20 Sold 100 DKW @ 25.25 At that time, the 2033 bond was selling at around 104-106, so it would have made sense for the call warrant owner to exercise the option. Now, that bond is selling closer to its par value. FINRA  When the current price is taken in context with the number of bonds owned by the lower yielding TCs, then it becomes even more doubtful that the warrant will be exercised, thereby undercutting the reason for buying back these TCs after successfully trading several of them.  (for trading of the fixed coupon TCs containing the 2033 bond, see in addition to the forgoing links:  Bought 50 PJI at 20.85 Sold 50 PJI at 23.52 Bought 50 PJI at 23.11 Bought 50 PYB at 22.83).  I just received the semi-annual interest payment on all of the 2033 GS TCs.   The last sale of JZS was near break even after commissions and the interest payment: Bought 50 JZS at 23.37

While I do not view the yield of JZS as attractive, its yield is still better at the $23.15 price than the yield of the underlying bond at any price above par value, where it has mostly been trading for months.  So an institutional investor interested in buying the underlying bond would generally be better off from a yield perspective by buying one of the TCs.    

3. Bought 50 IND at 22.95 in a Satellite Taxable Account Last Thursday (See Disclaimer): IND is one of several ING hybrids.   ING Hybrids: Links in one Post This kind of security is called a hybrid since it is both part of ING's equity for regulatory purposes while being a junior bond. For U.S. taxpayers, the ING hybrids pay qualified dividends, rather than interest, but these securities are in fact junior bonds, the most subordinated debt in ING's capital structure.  I have owned and sold IND and my brokerage company classified all of its distributions as qualified dividends. My last transaction was to sell 100 IND @ 23.92 in October 2010. 

I still own in a regular IRA a functionally equivalent ING hybrid, INZ, bought at $7.82 during the Dark Period. Buy of 50 INZ at 7.82 INZ has a slightly higher coupon. I view the coupon as irrelevant when evaluating functionally equivalent securities. The issues are current yield and yield to maturity at my cost. All of the ING hybrids traded in the U.S. have $25 par values and are at the same level of priority. Since the hybrids have no maturity date, the YTM does not exist, but I would still factor in the likelihood of a call for these perpetual securities.

ING reserves a right to call the hybrids at par value plus accrued dividends, but has no obligation to do so. For the hybrids traded in the U.S. there is no limitation on the call right except for IGK and IDG.  IGK  can not be called before 9/15/2013: IGK Prosepctus  IGK is also the only ING Hybrid trading at above par value, and it is in my opinion the most likely to be called given its high coupon of 8.5%. IDG can not be called prior to 10/15/2012.  IDG Prospectus IDG has the second highest coupon among U.S. exchange traded ING Hybrids.  It has a 7.375% coupon and is consequently less likely to be called than IGK. I recently purchased 50 shares of IDG:  Bought 50 of the ING Hybrid IDG at 23.96 (3/11/2011)

IND has a 7.05% coupon.  I have never been able to find its prospectus at the SEC.  It can be found at ING's web site: Hybrid Securities - ING (456837202/IND)

At a total cost of $22.95, the current yield is around 7.68%.  

I recently raised over 15 grand by selling some stock ETFs in a satellite account. The purchases of both IND and IDG in that account is meant to temporarily soak up some of that surplus cash. I am more than a little reluctant to invest those funds in stocks at the moment, and a money market yield is even a worse alternative.

I have traded in and out of ING Hybrids since the summer of 2008, and do not find them compelling at their current yields.  The current yield has some minor attraction on an after tax basis, but its is unclear how much longer the maximum 15% tax rate for qualified dividends will remain in effect.  

According to, all of these ING Hybrids are currently rated in junk territory, though at a higher level than virtually all of the bonds purchased to date in my Junk Bond Ladder Strategy. Moody's rates them at Ba1 and S & P is now at BB. Before ING ran into trouble during the Dark Period, I believe these hybrids were rated investment grade, though at or near the lowest level.  

I would emphasize the importance of the new EC Burden Sharing policy.  If one of these European institutions ever need state aid again, the owners of the hybrids will be required in my opinion to share the burden.  This means that the dividends will be deferred as a condition to the receipt of state aid with one caveat. If there is in effect a Mandatory Payment Event, then I would doubt that the EC would require a deferral as a precondition until after the expiration of such an Event. Anyone who invests in Hybrids has to fully understand the meaning of Mandatory Payment Event before purchasing one of these hybrids. 

And, in the back of one's mind, there needs to be a place where the following information is stored.  I was able to buy one of these Hybrids, ISF, at $ 4.60, back in February 2009, when many believed that ING was toast. The yield at that price was around 33%. ING did not defer any dividends payable to the Hybrid owners, but the single digit prices for those securities during the Near Depression period could not even be justified by an actual, as opposed to a feared, deferral.  Those low single digit prices would be rational only if there were reasonable and well justified reasons for believing that a bankruptcy filing was imminent and having a greater than 70% or so likelihood of occurring.  When I bought ISF at $4.6, I noted that the price said more about human beings than ING.  It is therefore important to remember about the volatility to the downside.  


  1. unusual volume in Wells trust preferred- WSF- can't find news
    it's at call $ +1 dividend. fyi

  2. Since WSF is a TP, which will be phased out as TIER 1 capital for Wells, it would not be surprising to see it called at some point. I have not seen any information -yet-that it has been called for redemption. It can be called now. The yield on WSF is higher than several other Wells TPs at their respective current prices this morning (e.g. WSF WPK JWF GWF) There could be reasons other than a call to account for today's action.

    WSF does provide a higher yield than JWF which I bought at less than $10 and still own. I also own KTV, originally issued by First Union that was acquired by Wachovia, later digested by Wells. It has some premiums attached to it for an early call. I am still holding some shares bought at less than $18. (2/18/2009 Post) I recently discussed the penalty attached to an early call as a reason for adding 50 in a regular IRA

    Page S-14 of KTV Prospectus:

    Redemption Price Plus Accrued Interest
    Date per Certificate

    December 1, 2011 to November 30, 2012 $26.01
    December 1, 2012 to November 30, 2013 $25.90
    December 1, 2013 to November 30, 2014 $25.80
    December 1, 2014 to November 30, 2015 $25.70
    December 1, 2015 to November 30, 2016 $25.60
    December 1, 2016 and thereafter $25.49