Wednesday, March 2, 2011

United Refining Tender for 2012 Bonds/ISM/ARCC ADX/SOLD 100 CIZN @ 20.56

I read an article at Morningstar that discussed the macro economic views of Bob Rodriguez who has returned to the mutual fund group FPA Capital after a one year sabbatical.  I would agree with his opinion that the growth in U.S. debt is just insane, fiscally irresponsible simply does not adequately describe what has been happening since Reagan became President in 1980.   He believes that the next crisis will be triggered by government debt in the U.S. and that includes all governments-federal, state and local.  He expects that crisis to happen within two to five years, and is starting to prepare for it now.   Rodriguez recommends reading a book, written by the former controller general under 4 Presidents, titled  Comeback America: Turning the Country Around and Restoring Fiscal Responsibility.  I downloaded a copy into my Kindle.

Until I read a column by Randall Forsyth in, I did not know that the deal between the GOP and Obama on extending the Bush tax cuts also allowed corporations to expense 100% of capital spending in 2011. This will accelerate corporate spending in 2011, basically stealing that growth from 2012 as corporations accelerate the purchase of "qualified" capital equipment into this year.  I then read a few more articles on the subject.  I would agree with the proposition that this provision will boost the earnings of technology companies in 2011. (for a more detailed description of this law, see

A story in the yesterday's highlights that public employees in 41 states earn more than those employed by private firms.  When the pension and healthcare benefits are taken into consideration, the average public employee earns about $2500 more than the average private sector employee, as of 2009.  That difference has been accelerating in recent years.  In California, the average public employee's compensation rose to $71,385 in 2009, rising faster than the inflation rate in every year from 2000-2009.  I know several people who have worked for Nashville for over 30 years.  When they retire in their 50s, they receive the same amount as their last paycheck in pension benefits for the remainder of their lives, in addition to a generous health plan.

Michelle Bachmann, the leading tea party intellectual, is starting to campaign in New Hampshire, testing the waters for a possible run for President.   Nothing could make Obama supporters happier, even more so than having Obama run against Sarah.  Michelle is the goofiest  lamebrain politician in the U.S. today, in my humble opinion.    

1. United Refining Offer for 2012 Note (own):  I received a notice in the mail that United Refining would pay me $975 for my $1000 bond provided I voluntary surrendered it.  According to the notice received from my broker, I could receive another $30 by notifying the broker by 3/4/2011 that I accepted the offer and instructing them to tender my 1 bond to United.  The terms of this offer are more fully explained in United's  SEC Filed Press Release.

This paragraph in the press release may explain the reason for the consent solicitation:

"In the related Solicitation, United Refining is soliciting the consents of the holders of the Notes to proposed amendments to the Indenture (the “Proposed Amendments”). The principal purpose of the Solicitation and the Proposed Amendments is to eliminate substantially all of the restrictive covenants, eliminate or modify certain events of default and eliminate or modify related provisions contained in the Indenture. In order for the Proposed Amendments to be effective, holders of at least a majority of the outstanding aggregate principal amount of the Notes (excluding any such Notes held by United Refining or any affiliate) must consent to the Proposed Amendments. Holders who tender Notes are obligated to consent to the Proposed Amendments and holders may not deliver consents without tendering the related Notes."

I just as soon hold the bond until it matures on 8/15/2012 and collect 3 more semi-annual interest payments. Bought United Refining Senior Bond at 95.5.   As noted in that post, my yield to maturity is 12.991% based on my total cost.  The coupon is 10 1/2%.   By instructing my broker to tender the shares today, I could receive early that part of the YTM based on capturing the spread between par value and my cost, plus an additional  $5 provided I respond in time.   I would hope to receive par value in less than a year and one-half anyway, and the 10.5% interest rate is worth more to me than $5.  I took the credit risk when I bought the bond, and I am still willing to take on that risk for the interest to be paid.

There are some downsides to holding this bond after a successful tender.  If a majority of the notes are tendered, I will be left with less legal protection due to the elimination of "substantially all of the restrictive covenants".  It is also possible that United will simply redeem the remaining notes after a successful Tender.

More importantly, United Refining plans to sell 350 million of a senior secured bond maturing in 2018,  Press Release.  This would in effect subordinate the 2012 senior bond, making it junior in priority in the event of a bankruptcy.   Apparently, United does not want to use all of the proceeds from selling the 2018 to redeem all of the 2012 bond, which is could do at par value plus accrued interest. I believe the 2012 bond has 125 million outstanding.  Form S-4  Thus, United needs to do the consent solicitation to get rid of the restrictive covenants in the 2012 bond, thereby enabling it to float the 2018 senior secured bond and to keep most of the proceeds.   I am basing those conclusions just on the wording in the press release which describes the 2018 bond.  I am not aware of any SEC prospectus for it, which would make the priority issue versus the 2012 bond clear.

This is a close call under the circumstances.  If I had more bonds, I might tender some of them and keep a few. With one bond, I will just keep it until it matures or called for redemption at par value plus accrued interest.

2. Ares Capital (ARCC)(own 150 shares of the common):  I sold recently my position in the ARCC's exchange traded senior bond, ARY.  Sold 100 ARY @ 24.6  ARCC is a business development corporation that currently pays a 35 cent per share quarterly dividend.  Bought:  50 of the BDC ARCC at 16.17 and at $16.3 in the ROTH IRA  Bought  50 ARCC at 16.89

Ares Capital reported GAAP net income for the 4th quarter of 79 cents per share. Core E.P.S., as defined in the press release, was at 42 cents. The net asset value per share rose to $14.92 per share as of 12/31/2010, up from $11.44 at the end of 2009. Ares had investments in 170 companies and the weighted average yield of its investments based on amortized cost was 13.2%.

Ares closed at $17.59 yesterday, down 24 cents.  The earnings call transcript is available at Seeking Alpha.

3. Adams Express (ADX)(own):  There is a proxy fight ongoing between ADX and a hedge fund called Gramercy that is summarized in this article at  Seeking Alpha.  Gramercy has successfully put a proposal on the ballot for this year's shareholder meeting that would require ADX to make a tender for 50% of the shares at or near net asset value and to consider converting to an open end mutual fund in the event shareholders tender more than 50%.  If that passes, and I would guess that it will not, there would be an immediate shrinkage in the discount to net asset value which has historically been high among CEF stock funds as noted by the author of this article.  There have been a few occasions in the past where I made some fast money by a CEF announcing its intent to convert to an open end mutual fund or to liquidate its assets which happened last year with the CEF EBI.  

I voted against the Gramercy proposal.  Instead, I would prefer to see ADX buy more shares in the open market, far more aggressively than now, at discounts greater than 10% to net asset value.  Over time, this will increase the value of my stake in the firm, as I reinvest all dividends paid by ADX to buy additional shares and occasionally make open market purchases when the discount exceeds 15%. Then, at some point in the future, I would support open ending, assuming the discount is still in excess of 10%.  For now, I am content to hold my shares, and to add to the position at discounts to net asset value.

ADX closed yesterday at a 12.54% discount to its net asset value,, which is narrower than usual.  This CEF will frequently trade at over a 14% discount.

4. Sold 100 CIZN at $20.56 (Regional Bank Stocks' basket strategy) (see disclaimer):   This small bank based in Mississippi did not report an increase in earnings per share for the 4th quarter.  I own two other banks, based in the same state, that reported nice increases.  While CIZN has a good dividend, so does the other two banks.  I intend to use the proceeds realized from CIZN to buy more shares in RNST and/or TRMK. Bought: 50 RNST at 13.70  Bought 50 TRMK at 19.57 I am in no hurry to do so, given my current view of the market.    

I made a decent profit on the CIZN shares: Bought  50 CIZN @ 18.7 Bought: 50 CIZN @ 18.25

I am also eliminating some positions in the regional bank basket to cut down on my workload.  The number of stocks in that basket was approaching fifty earlier in the year.  I am going to keep my exposure to the basket fairly constant in the $45,000 to $50,000 range and concentrate on fewer issues.

This brings my realized gains from stock sales to nearly $5000, mostly in 2010.  Item # 3   Realized Gains Regional Banks

5. ISM Index for Manufacturing:  The ISM released its February survey (PMI) for manufacturing activity yesterday.  The index rose for the 21 consecutive month, rising to 61.4 in February from 60.8 in January.  The new orders component rose to 68 from 67.8.  Employment increased to 64.5 from 61.7 in January.  Prices increased to 82.  JP Morgan's global February PMI rose to its second highest reading at 57.8, almost besting the record of 57.9 set in May 2004.     JPMorganMfg030111.pdf

I will discuss the remaining trade from Tuesday in the next post.

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