Thursday, March 24, 2011

Realized Gains Junk Bond Ladder Strategy/BAC/Japan/Bought 1 Edgen Murray Senior Secured Bond Maturing 2015/Sold: 1 Circus Circus and 1 Synovus Bond-Both Maturing in 2013/Sold 150 of the TC PJL at 26.5

New home sales fell 17% in February to a seasonally adjusted rate of 250,000, the lowest number on record. The median price of new homes fell to $202,100, and there was an 8.9 month supply of new homes based on the last month's sales rate. newressales.pdf Construction is simply not going to provide an impetus to an economic recovery.

Bank of America, one of the large banking institutions, that recklessly and negligently destroyed shareholder capital prior to and during the Near Depression, has been prohibited by the Federal Reserve from raising its 1 cent per share quarterly dividend.  SEC Filed Form 8k In 2008, BAC reduced its quarterly dividend from 64 cents per quarter to 1 cent per share.  The acquisition of Countrywide was one of the many mistakes made by the former CEO during the recent financial crisis, a boneheaded decision made by Ken Lewis. Although I own some BAC common shares, my primary exposure is in its floating rate equity preferred stocks, a couple of trust preferred issues from an entity acquired by BAC and some senior notes. I would therefore prefer that BAC hold onto more capital, rather than sending out more to the common shareholders, in what would probably be a trivial amount anyway. Given the stupidity and recklessness of many large financial institutions, it would be foolish for any investor to rely on the Masters of Disaster for dividends anyway, given those institutions proven ability to blow themselves up with frustrating regularity.  Without a doubt, the Masters of Disaster are the most overpaid doofuses in the history of mankind.

The Japanese government estimates that the costs associated with the recent earthquake and tsunami will be 309 billion dollars, making those events the costliest natural disasters in history.  For those who are bullish on Japan, it needs to be remembered that Japan's debt as a percentage of GDP was already unacceptably high before this tragedy.  The government debt is now close to 225% of GDP, and the total public and private debt is close to a staggering 300%. This is an excellent article on the long term problems facing Japan: Tsunami Accelerates Japan's Economic Meltdown Driven by Debt and Demographics The U.S. by comparison is close to 65%, though that percentage is accelerating at a rapid rate.   The importance of this kind of ratio is discussed in the Forbes article "The Global Debt Bomb", by Bill Gross in his missive titled "The Ring of Fire" and in the book by economists Kenneth Rogoff and Carmen Reinhart  titled "This Time Is Different: Eight Centuries of Financial Folly

This is a link to an interactive map on GDP and debt by country: GDC | Economist Conferences

1. Bought 1 Edgen Murray Senior Secured Bond Maturing on 1/15/2015 at 97.5 Last Tuesday (Junk Bond Ladder Strategy) (see Disclaimer): Edgen Murray is a private corporation engaged in the global distribution of steel products primarily to the oil and gas, power, petrochemical and civil construction industries.  Those steel products consist of pipes, plate and sections, including "highly-engineered prime carbon or alloy steel pipe, pipe components, valves, and high grade structural sections and plates."  The organizational structure of this private company is highly complex, overly so, and can be viewed in chart form at page 7 of the last filed Form 10-Q.  

The bond that I purchased is discussed at pages 16-17 of Edgen's   Form 10-Q for quarterly period ended September 30, 2010. The coupon is 12.25%. Interest is payable semi-annually in January and July.  The bond is scheduled to mature on 1/15/2015. The bond is rated well into junk territory by both Moody's and S & P: FINRA. Both my current yield and YTM would be slightly higher than the coupon of 12.25%.  According to my confirmation, my current yield is 12.461% and the YTM at my cost is 12.812%. 

Even though this bond has some security backing it up, I still view it as extremely risky given the recent operating history of this company and its debt load. 

This bond was originally issued in a private placement. The company later registered the bond with the SEC and exchanged the registered bond for the older one, Prospectus, which allows the bond to be publicly traded.  

Normally, this bond has not been available for purchase in a 1 bond lot over the past several weeks. 

2. Sold 150 of the TC PJL at $26.5 on Tuesday (see Disclaimer): I sold 100 shares of the trust certificate PJL in a taxable account for a long term capital gain, and I received several semi-annual interest payments.  I also sold the 50 shares held in the Roth IRA at the same price. 

This trust owns a senior Verizon Global Funding bond that matures in 2030. The TC's coupon is 7.625% on a $25 par value. I first discussed the two TCs that contain this bond in October 2008, when they were trading at below $20. Trust Certificates PJL and XFL: Verizon Bond The other one, XFL, was called by the owner of the call warrant at its $25 par value plus accrued interest in March 2010. Alert on Verizon TC XFL Call Warrants and Trust Certificates 

I am not concerned about this TC's credit risk. Moody's rates the underlying bond at A3. I have two concerns.  The primary one is that PJL can be called now by the owner of the call warrant at its $25 par value, and it would make economic sense for that to happen.  The underlying bond is trading at a large premium to its par value. FINRA The call warrant owner could make a tidy profit with no risk by redeeming the TCs, taking possession of the bonds owned by the trust and then selling those bonds to its institutional clients.  Most likely, the owner of the call warrant is Merrill Lynch, the originator of this particular grantor trust.

Another concern is that the mere existence of the call warrant will restrain the price of the TC when the underlying bond is selling at a premium to its par value. This gives me little on the way of upside while I still have downside risk associated with a rise in long term rates. In my opinion, a rational price for PJL would currently be par value plus accrued interest. Since I do not view $26.50 as rational given the existence of the call warrant, I sold my 150 shares.

3. Sold 1 Circus Circus Bond Maturing in 2013 at 99.25 on Tuesday (Junk Bond Ladder Strategy) (See Disclaimer):  RB recently bought this junk rated bond at 97.75: RB BOUGHT: 1 Circus Circus Senior SUB Bond Maturing 2013  This transaction was close to a wash.  I used the proceeds to buy the higher yielding Edgen Murray senior secured bond discussed in # 1 above. I have reached the point where I do not want to increase my dollar exposure to junk bonds.  So, if I add 1 bond, another bond has to be sold.  

4. SOLD 1 SYNOVUS JUNIOR BOND Maturing in 2013 AT 97.03 (Junk Bond Ladder Strategy )(SEE DISCLAIMER): This ends my recent foray into SNV junk rated bonds. I previously sold another SNV junior bond maturing in 2017 for a larger profit.  SOLD Synovus Junior Bond Maturing 2017 I intend to invest the proceeds into a higher yielding junk bond.  This SNV junior bond has a 4.875% coupon and was recently purchased at 94: Bought 1 SNV 4.875% Junior Bond Maturing in 2/15/2013

5.  Realized Gains Junk Bond Strategy: Since I have decided to manage my Junk Bond Ladder Strategy, at least to some degree, I am going to keep track of my realized gains and losses. The general idea is to break even on the securities. I recognize that there will be losses given the extreme risks attached to these securities. I will have some gains on them. The gains will arise from small profits realized on sales as well as capturing the difference between my cost and the par value at maturity for those that survive to pay the principal amount. A few of the bonds may be redeemed at par value, but I suspect that will be an exception. However, United Refining appears likely to redeem the 2012 bond soon which will create a small profit on that bond. All of the bonds are being bought at discounts to par value, with several purchased at greater than 10% discounts.

The general idea is have a total return based on the interest payments received, or some greater amount if I am fortunate enough to have a net gain on the bonds. The current yield is close to 9.6%. The spread in yield in favor of these junk bonds, compared to BBB rated bonds with similar maturities, is significant, probably close to 5% per year. I am obviously assuming more credit risk for that additional yield.

The Junk Bond Ladder Strategy includes only bonds bought in the bond market. I have already realized large gains from owning junk bonds traded on the stock exchange: Exchange Traded Bonds In a post from January 2011, I noted some of those junk rated bonds that I owned at that time.  Since that post was written, the junk rated Hanover bond, PKM, was called for redemption by the owner of the call warrant, and I sold DKQ. Junk rated exchange traded bonds have provided me with some of my largest percentage gains in the bond asset category. Many of them have since been redeemed by the issuer or called by the owner of the call warrant. These included the trust certificates PKM and KRH (Hanover); FCZ (Ford Motor Credit); and DKR (Hertz TC). Virtually all of the TPs were junk rated when I purchased them: Trust Preferred Securities: Links in One Post

Realized Gains Junk Bond Ladder Strategy (excludes gains from exchange traded bonds and interest):

1.  Synovus Two Bonds: +$65.09 (1 2013 junior bond and 1 2017 junior bond)
2.  Regions: +$64.28 (1 2018 Junior bond)
3.  Circus Circus: -1 (1 Senior Sub bond)
4.  USG: +$32.44 (1 Senior Bond)
5.  United Refining + 37 (1 Senior Bond Redeemed)
6.  Hawker Beechcraft (1 Senior) +52.41
7.  Albertsons 2029 Bond (1 Senior Bond) +50.36
8.  Mueller Water 2017 Bond (1 Senior Sub) +42.21
9.  Albertson's 2026 Bond (1 Senior) + 63.42
10. Dean Foods 2016 Bond (1 Senior) +49.97 
11. Dean Foods 2017 Bond (2 Senior) +103.42
12. Sold Cup 2014 (1 Senior Sub) + 43.89
13. Warner Music 2014 (redeemed by issuer) +18.29
14. Alon Krotz Springs 2014 (2 Senior Secured-forgot to add this one) +151.77
15. MeadWestvaco 2032 (1 senior) +15.82
16. Edison Mission 2017 (2 bonds) -$381.11
17. Goodyear Tire 2020 (1 senior) +59.2 
18. Quicksilver 2016 (1 senior)  Zero
19. Cincinnati Bell 2020 (1 senior) +43.59
20. Windstream 2020 (1 senior) +39
21. Supervalu 2016 (1 senior) +37.3
22. Windstream 2019 (2 senior) +81.78 
23. United Rentals 2020 (1 sen sub) +77.67
24. Apria Healthcare Series A (1 senior secured): +$37.21
25. Vulcan Materials 2018 (1 senior): + $56.94 
26. Cooper Tire 2027 (1 senior) -22.47
27. General Maritime (1 senior) -946.63
28. Vulcan Materials 2021 (1 senior) + 63.6
29. USG 2016 (1 senior) +$48.23
30. Boyd Gaming 2016 (1 senior sub) +5.49
31. Commercial Metals 2017 (1 senior) +30.54
32. Appleton Papers 2015 (1 Senior) -48.71
33. Wendys 2025 (1 Senior) -6.88
34. Belo 2027 ( 1 senior) +25.26
35. SuperValue 2014 +24.75 
36. Donnelley 2021 (1 senior) +55.94
37. Donnelley 2029 (1 senior) -129.57
38. Cenveo 2013 (2 senior sub) +53.81 
39. United Refining 2018 (3 Senior) +232.4
40. Dillard's 2027 (1 senior) -4.75 
41. Norcraft 2015 (1 second lien) +$108.5
42. Cincinnati Bell 2018(2 senior Subs) +5.79
43. ArvinMeritor 2018 (1 senior) +75.88
44. Apria Healthcare Series "B" (1 senior secured 2014)) +16.29
45. J.C. Penney 2020 (1 senior) +35.03
46. Select Medical 2015 (1 senior sub redeemed by issuer) +19.5
47. J.C. Penney 2017 (1 senior) +66.11
48. Sears 2018 (3 senior secured) +172.83
49. Edgen Murray 2015 (1 senior secured) +98.83 
Realized Market Discount Calculated Through 12/31/11 = +155.88
Total= +$956.89 

As long as that total remains green, I will consider this strategy to be a success, simply due to collecting the interest payments without suffering a net loss on the bonds.

This is the bar chart containing the bonds in this strategy, showing basic information. This chart includes 2 investment grade Prudential bonds maturing in 2012 that are not part of this strategy, but can not be excluded from the information provided by the broker who prepared this chart. Those two bonds are the only ones kept when I made the shift out of short term bonds into stocks in March 2009. All of the bonds in this chart were purchased in the bond market:

The green amounts shown in 2021 and 2022 is $618 in interest payments from the few bonds maturing after 2022. 

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