Wednesday, March 9, 2011

Canadian Dollar (CAD) Strategy/MKN/ Bought 1 Travelport Bond Maturing in 2014 at 99.5/Bought 300 of the Canadian ETF XTR/GY DYN/More on BKLN

I was pleased to see a drop in the DJ UBS Commodity Index yesterday (charts and quotes at DJ UBS Commodity Futures Index or WSJ).  That index closed at 167.41, down -1.04 yesterday.  I no longer own an ETF or ETN that invests in commodities and the rise in commodity prices was starting to have an overall negative impact on my portfolio.  And, the decline in the index gives the "principal protected note" MKN some breathing room.  As previously discussed, that unsecured senior note will pay the greater of 3% or the percentage rise in the commodity index up to a 33% increase from its starting value. The starting value for the second annual period was 132.67.  I received an 18% annual interest payment in the first period.  The second period ends on March 30, 2011.  The index can not close one day above 176.45 for me to receive another good pay day.  One close above that maximum number before the closing date causes a reversion back to the 3% guarantee irrespective of the percentage increase in the index:


The coupon amount payable on each coupon payment date will depend upon the closing value of the underlying index on each index business day during the related coupon period, will be based on the percentage change in the closing value of the underlying index during such coupon period and will not be less than $0.30 (3% of $10 principal amount per note) per note nor be greater than $3.30 (33% of $10 principal amount per note) per note. Thus, for each $10 principal amount note held, you will receive on each coupon payment date either:
n
an amount equal to the product of (a) $10 and (b) the percentage change in the closing value of the underlying index from the first index business day of the related coupon period through the last index business day of the coupon period (which we refer to as the index percentage change), if (i) the closing value of the underlying index on every index business day during the coupon period is less than or equal to 133% of the closing value of the underlying index on the first index business day of the coupon period (which we refer to as the starting value) and (ii) the index percentage change is greater than 3%; or
n
an amount equal to $0.30 (3% of $10 principal amount per note), in all other cases.

Pricing Supplement No.

Bought 100 MKN at 9.85 (Jan 2010)  MKZ and MKN Now (February 2011)

An article published yesterday at TheStreet discusses ten liquid bank stocks with the highest dividend yields. Of the ones mentioned, I own HCBK, NYB, FNFG, FNB, VLY, TRUST, UBSI and RNST in my Regional Bank Stocks' basket strategy.  I would not rely on the current dividend paid by HCBK for the reasons discussed in my earlier post: Item # 5 HCBK

1. Bought 1 Travelport Senior Bond Maturing on 9/1/2014 at 99.5 on Monday (Junk Bond Ladder Strategy)(see Disclaimer):  I now own two Travelport bonds.  The other one matures in 2016, and has a slightly higher yield to maturity than the 2014 bond bought on Monday.  Bought: 1 Travelport Senior SUB Bond Maturing in 2016  Recognizing the high risk of this credit, I have now reached my limit in Travelport bonds at 2, with slightly less than $2000 in total exposure.  My prior limit was just 1 bond, but I decided to increase the limit to 2 bonds based on this Press Release filed with the SEC on 3/7/2011.

Travelport announced that it intended to delever its balance sheet by selling its GTA business for 720 million dollars, using the proceeds to pay down debt.  The firm also announced that its preliminary adjusted EBITDA number for 2010, excluding the GTA business, is 545 million on net revenues of 1.996 billion dollars.  Travelport expects to report earnings on 3/31.  The sale of the GTA business is subject to various approvals. Assuming all necessary approvals are secured, the transaction is expected to close in May.  

According to my confirmation, this bond is rated B3 by Moody's and CCC+ by S & P. In other words, it is well within junk territory. 

The coupon is 9.875%.  Since I paid close to par value for this bond, my current yield and YTM would be close to the coupon amount.  This particular bond just paid its semi-annual interest payment, so I paid a negligible amount of accrued interest for this bond.  A buyer of a bond in the bond market pays the seller the accrued interest at the time of the sale. In bond land terminology, the bonds do not trade flat.

This is a link to the FINRA Information about this bond, which includes the ratings and trades.

The prospectus for this bond can be found at  www.sec.gov.  Along with other Travelport bonds listed in that SEC filing, this 2014 bond was originally a private placement and was exchanged for the one now trading which is registered with the SEC.  This bond is rated higher than the 2016 bond that I previously bought.  The 2014 bond is a senior unsecured bond.  The 2016 bond is a senior unsecured subordinated bond, meaning a bond junior in priority to a senior bond.  I would prefer that the Masters of Disaster just call a senior subordinated bond a "junior bond" which is what it is in effect.    

While this bond is risky, my current view is that the yields form these bonds provide me with adequate compensation for the risk of no more than $2000 in capital, based on what I know now. 

2. BOUGHT 300 of the Canadian ETF XTR:CA at $12.34 CAD on Monday (Canadian Dollar Strategy)(see Disclaimer):  This purchase is just part of my ongoing effort to generate income for my significant Canadian Dollar position.  Some of the other positions in this strategy include the following: 


All of the foregoing ETFs and stocks pay monthly dividends except for XEG and ZCN which pay quarterly. Among Canadian common stocks, I have small positions in BAM-A.TO and  ERF

For the Canadian ETFs, I am focusing on two sponsors:  iShares Canada and  Claymore Canada

The ETF XTR, which was bought on Monday, does pay monthly dividends.  It is composed of other ETFs in the Canadian Ishares family of funds, both stock and bond ETFs. The total expense ratio is .55% taking into account the acquired fund fees. XTR Overview - iShares ETFs  The funds holdings as of 3/4/2011 can be found at XTR Holdings.  The weighting at that time was 64.48%stocks/25.74% Bonds/9.78% Other.  

The Canadian dollar strategy is based on an opinion that the CAD will rise against the USD over the long term.  Over the past two years, the CAD has certainly made a strong move against the USD.  One CAD is now worth more than 1 USD. 

I believe that the provincial and federal governments in Canada are far more responsible than the local and federal governments in the U.S.  This view is shared by others. Comments on Barrons Roundtable Part II (January 2011 Post)  Bill Gross:The New Normal (February 2010 Post) El-Erian Interview Barron's (May 2010 Post)

A more ominous opinion about U.S. debt was expressed yesterday by Gross in his interview at Yahoo's Tech Ticker.  

I have a far more favorable opinion of the large Canadian banks than their counterparts in the U.S. Large U.S. financial institutions routinely blow themselves up, allowing their overpaid Masters of Disaster to threaten the banks' solvency with idiotic schemes designed to enrich themselves at the expense of the bank's shareholders. The Canadians are just far less likely to make stupid investments that threaten their solvency.

Canada is also rich in natural resources, which I view as important in the years to come.  

And, importantly, the population in Canada is light compared to other developed countries, particularly its aging population. 

I can also afford to wait for events to unfold.  It does not really matter to  me what the exchange rate is now or a year from now.  When and if 1 CAD buys more than $1.25 USD, I will consider exchanging some CADs for USDs.

And, it probably should not be mentioned in public, particularly since there are many Canadians who read this blog.  But, I will say something more nonetheless.  Canada is referred to as Northern Tennessee here at HQ, and RB's desire to acquire all of Northern Tennessee is certainly no longer a secret.  Progress is slow, time is running out, but the goal remains fully intact.  

From my perspective, the strategy will be successful provided I can achieve a 7% annualized and compounded total return on my investments purchased with my CADs.  Most of that return could be achieved by simply collecting the income and selling the positions for small gains.  I will also need to realize some trading gains.  I have traded some positions such as Husky Energy for small profits.

3. MORE on the Senior Loan ETF PKLN: In Monday's post, I discussed some of the drawbacks of senior bank loan funds: Item # 3 Bank Loan Funds  In those comments, I discussed how those loans are frequently made in connection with a leveraged buyout that loads up the company with a ton of debt.  As a consequence, there is an enhanced risk of a default.

In yesterday's WSJ journal,  there is an article that highlights this salient point in connection with the leveraged buyout of Texas Utilities that took the debt level of that company from around 11 billion to 36 billion.  The company is now under considerable strain to service that debt.  I have just stayed away from any security issued by the parent company or any of its subsidiaries.  What the hedge funds did just seemed so ridiculous to me at the time of the buyout that I will not bother examining in depth whether the bonds are worth the risk, even given their high yields. I would, however, question the competence of any junk bond fund manager who has a significant position in either the secured loans (given the debt level) and particularly the unsecured bonds.

One of the subsidiaries of TXU, now known as Energy Future Holdings, is a company called Texas Competitive Electric Holdings Company, which is mentioned in that WSJ article.   I am not going to buy any of that firm's bonds either.

But, I wanted to highlight that bonds from this grouping of companies, given the size of offerings, can be found in many junk bond portfolios.  In fact, the recently launched senior bank loan ETF had a loan to Texas Competitive Electric Holdings as its top weighted position as of yesterday at 3.4%.     BKLN - Senior Loan Portfolio Holdings  I am not making a judgment about that particular loan other than to say that I want no part of it.  A recent article about BKLN can be found at ETF Database.

Another energy producer, Dynegy (DYN) warned in its recently filed annual report of a possible bankruptcy if it is unable to renegotiate its credit agreements with banks.   SEC Filed Form10-k  There is also a "going concern" warning starting at pages 4 and F-13 of that report.

4. Gencorp (GY)(own: LOTTERY TICKET strategy): I noticed yesterday that one of my LTs, Gencorp (GY) popped over 10% in price yesterday to close at $5.71.  I did not see any news to account for the move which did occur on about three times the average daily volume.   In my latest foray into this name, RB bought 50 shares of GY at $4.65, having previously sold 50 shares at $6.4 that were bought at $3.7.  This is just a form of entertainment for the RB, tolerated by Headknocker, since an insignificant amount of money is at risk and the Nit Wit has been on a role in this category for over 2 years now.  To the extent there are reasons supporting those purchases, they are discussed in the foregoing linked posts. One reason is the ownership of over 12,000 acres of land near Sacramento.  The market cap of the stock is around 332 million at the current price. I have not paid any attention to this security since making that last purchase which is typical for "investments" falling in the LT category.

I did review briefly the last quarterly report:   SEC Filed Press Sales and backlog appear to be picking up some steam, but earnings hardly create any enthusiasm.

Brandywine Realty Trust (BDN), which is owned, was the subject of a segment on Cramer's show last night:  TheStreet  I have not discussed the common stock, but I have mentioned buying one of its cumulative preferred stocks:   BUY of 50 BDNPRC at $9.25 (February 2009)

I had one other trade from Monday and a few from Tuesday that I will discuss in the next post. 

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