Monday, March 14, 2011

United Refining/Sold 50 MSPRA at 21.03 in Roth IRA/Added 100 IGI at 19.65/Added 50 RNST at 15.85/Sold 50 STDPRB at 20.2/

An article in the NYT highlights the correlation between collective bargaining rights for state employees and the generosity of a state's pension plan. Some states, with relatively few public employees covered by collective bargaining, have the most generous pension replacement rates, the amount of pre-retirement income paid by a pension plan. Colorado leads the list with a 90.4% replacement rate and has only 25.7% of public employees covered by collective bargaining.  While collective bargaining does lead to overly generous benefits in a few states like New York and New Jersey, there does not appear to be a significant correlation on a nationwide basis.

The long term bear market in stocks and the unusually long period of low interest rates are ultimately the primary cause of the underfunding problem.  The local governments were using unrealistic estimates of how much their pension plans would earn, and those estimates were used to justify the granting of even better benefits to public employees. (see 61 page abstract of a study at .pdf)  There was an editorial in the  NYT recently that pointed out that the pension obligation of New York state was 100 million per year in 2000 and is now running closer to 1.5 billion and will exceed 2 billion dollars per year by 2014. If the local government's used a more realistic long term average return on their pension plan investments, say 7% for a balanced portfolio, the underfunding problem would be exacerbated in an alarming fashion.

United Refining issued a press release late last week announcing that 57.55% of the outstanding 2012 senior notes had been tendered in response to its offer.  Press Release As I understand it, the successful consent tender eliminated virtually all of the restrictive covenants contained in the Indenture for the 2012 senior note.  This apparently allowed the company to proceed with the private placement of a secured bond. Form 8-K Part of the proceeds from that issuance are being used to pay the owners of the 2012 bond who tendered their notes.   I own only 1 of the 2012 senior notes bought in early December 2010  at 95.5. I have received one semi-annual interest payment.

I did not believe it was was worth my time to contact a broker and tender the note for a payment $5 in excess of its par value. SEC Filed Press Release I may have done so with more exposure than a single bond.   I expect that United will redeem the non-tendering bonds based on the comments made in its paper solicitation received on 3/3, the day before I had to notify my broker.  Whatever happens now, I will make a small profit on the bond, if redeemed early, plus some interest.

According to the FINRA Information on the 2012 bond, it is still trading as of 3/11, either slightly below or above its par value.  While at the FINRA site, I noticed a listing for a United Refining bond maturing in 2018 , symbol UREF.AA, CUSIP U9112YAF5, with a 10.5% coupon maturing on 2/28/2018 with a first coupon date on 8/28/2011.  I suspect that is the new bond, since all of the terms match the description contained in the Form 8-K.  If it is registered with the SEC at some later date, which will make it available for my purchase, I will consider buying 1 bond only at a 5% or greater discount to value.

Speaking with Tea Bags in her hands in New Hampshire, the Tea Party's favorite candidate for President,  Michele Bachmann, told the audience that "you're in the state where the shot was heard around the world in Lexington and Concord", referring to the first battles of the Revolutionary War.  Earlier, she maintained that the   Founding Fathers  worked tirelessly until slavery was no more in the U.S.

Michele's soul sister, Sarah Palin, recently told Glen Beck that the U.S. needs to stand by its ally, North Korea . Glen may rival Michele in his ignorance.  Well, so what, Sarah has a few gaping holes in her knowledge base, particularly concerning Korea. During the campaign, as she was being schooled about world events in preparation for her debate with Biden, Sarah could not explain why there were two Koreas or what the Federal Reserve did.  NYT (from the book "Game Change" which is being made into a movie with Julianne Moore playing Sarah) Ignorance can be blissful.

1. Added 100 of the TERM Bond CEF IGI at $19.65 Last Wednesday (see disclaimer):   This purchase brings me up to 350 shares in this term bond CEF.  As previously discussed, this fund is scheduled to liquidate at the end of 2024.  The term date will hopefully reduce the interest rate risk of owning a bond fund. (see:  Coping with the Federal Reserve's Jihad Against Savers & Responsible Americans & the Potential Major Correction in Bonds Down the Road;  Managing Interest Rate RiskInterest Rate Risks- Bonds)  This fund invests mostly in investment grade corporate bonds and has about a 6.38% yield at a total cost of $19.65. The fund is required to have at least 80% of its bonds rated investment grade: Western Asset Investment Grade This is a link to its current holdings: IGI Holdings  The fund is not currently leveraged.  Morningstar

I have bought and sold this CEF. Some of my trades include the following:  Added 100 of the CEF IGI at 19.78 (February 2010) Bought 100 CEF IGI at $19.89 in IRA (February 2010)   Sold 100 IGI at 21.26 In IRA (selling then at over NAV)  Bought 50 IGI at 20.05 in the Roth & 100 @ 19.85 in a Taxable Account (Nov 2010)  Sold:100 IGI @ 20.75 (Nov 2010)

There were several reasons for adding 100 shares.  First, this security pays monthly dividends and consequently furthers my most basic strategy of increasing cash flow for the purpose of buying more income securities. The current monthly rate is $.1045  Distributions  Second, I received the annual report recently and was comfortable with the credit risk associated with most of the bonds owned by this fund. SEC Filed Shareholder Report for the period ending 11/30/2010  There are some senior secured bank loans that are probably rated junk. Third,  the fund is inexpensively priced on a relative discount basis compared to its average  discount of 3.46% over the past six months. Relative Value and Absolute Discounts in CEFs  The discount to net asset value was -7.53 as of 3/9/11, based on a net asset value per share of $21.26 and a closing market price of $19.66. And, importantly, an investment grade bond fund with a liquidation date in 2024 has less interest rate risk than a similar bond fund with no term date during a period of rising interest rates.  The manager of the term bond can simply hold many of the bonds until maturity, thereby recovering any unrealized loss in principal value due to the interest rate rise. As of 12/31/2010, the effective duration of the bonds owned by IGI was 6.53 years.   Portfolio Characteristics

IGI closed at $19.62 last Friday and had at that time a net asset value per share of $21.3, creating a discount to net asset value of -7.89.  

At some point, I intend to pare and/or eliminate bond funds with durations of more than 10 years, using a rise in the 10 year treasury above 4% as a trigger for the commencement of those sales.   I may start to pare one or two with longer durations than 10 years before hitting that trigger point, when the fund juices its yield by using leverage to buy longer dated bonds.   

2. Sold 50 of the 150 STDPRB at $20.20 Last Wednesday (see Disclaimer):  STDPRB is a floating rate equity preferred stock with a guarantee, issued by Santander Finance and guaranteed by Santander, a large banking institution headquartered in Spain.  This security pays qualified dividends at the greater of 4% or .52% above the 3 month LIBOR rate.  This security has remained fairly volatile and frequently declines on major negative news about Spain or Spanish government debt.   

Due to the volatility in these shares, I have been booking profits periodically.  The largest profit was on the first 100 shares bought at $15.3 that was later sold at $18.11 last August.  I also sold my shares in the ROTH IRA.  Sold 50 STDPRB at 19.64 in the Roth IRA  

The 50 shares sold last Wednesday were bought slightly over a year ago and were the highest cost shares remaining in a taxable account.  Bought 50 STDPRD at $18.54  By selling those shares, I reduce slightly my average cost for the 100 remaining shares:  Bought 50 STDPRB @ 17.96 (January 2011) Bought 50 STDPRB at $18.5 (April 2010)

I can confirm that the dividend paid to me in 2010 by this security were classified as qualified dividends on my 1099. 

3. Bought 50 RNST at $15.85 Last Wednesday (Regional Bank Stocks' basket strategy) (see Disclaimer):  I have managed to pare my regional bank basket down from almost 50 stocks to 31.  As I eliminate some positions, I intend to add to others.  Recently, I sold 100 shares of Citizen's Holding (CIZN), a micro cap bank headquartered in Mississippi. I mentioned in the post discussing that sale that I would add to either RNST or TRMK, two other Mississippi based banks. Item # 4 SOLD 100 CIZN @ 20.56   RNST and CIZN both have similar dividend yields, but RNST is starting to show more improvement in its earnings growth.  I discuss the 2010 4th quarter reports of RNST in Item # 2 RNST.

More importantly, RNST is growing its geographic area through FDIC assisted transactions.  When I first purchased shares, this bank had operations in Mississippi, Tennessee, and Alabama. Two recent FDIC assisted acquisitions extended the footprint into Georgia. Renasant Bank - Locations  The first of this transaction occurred in July 2010 and involved the Crescent Bank and Trust Company, and RNST acquired 11 branches in northwest Georgia as a result of that FDIC assisted acquisition.  The other transaction was finalized in February 2011 and involved the acquisition of 3 branches formerly owned by American Trust from the FDIC. (see pages 1 and 2 of the  Form 10-K for fiscal year ended December 31, 2010;  SEC Filed Press Release for the American Trust transaction, and  Form 8-K for the deal on Crescent).

I have previously traded 50 shares of RNST for a small profit.  Prior to the 50 share add last Wednesday, I owned fifty shares bought at $13.70, and I am reinvesting the dividend to buy additional shares.

The current quarterly dividend rate is 17 cents. At a total cost of $15.50, the dividend yield would be 4.39%.

I also view it as a positive that this bank refused to participate in TARP:   Press Release

The bank did not reduce the dividend during the Dark Period, another positive from my viewpoint.  The dividend has not been raised since the 2009 calender year, and has been stuck at an annual rate of 68 cents per share since then.  That failure to increase the dividend, while understandable, is still viewed negatively.

The stock hit a high of $32.63 in 2006, sort of a high water mark for the previous long term bull market in bank stocks which began after the last major banking debacle in 1990-1991.

The stock may be fully valued at its current share price, assuming no dividend increase in 2011 and the bank earns the consensus estimate of 98 cents per share.  However, there may be room to run with a dividend increase and higher than expected earnings this year, or having the earnings growth anticipated by the consensus forecast of $1.26 in 2012.  RNST Analyst Estimates

The stock closed Friday at $15.34, down 15 cents for the day. 

4. SOLD 50 MSPRA (MS-PA at YF) in the Roth IRA at $21.02 on Thursday (see Disclaimer):  MSPRA is a floating rate equity preferred stock issued by Morgan Stanley that pays qualified dividends at the greater of 4% or .7% over the 3 month LIBOR rate based on a $25 par value.  The security is both non-cumulative and perpetual, which is normal for this type of security.

I have been trading this security, moving  closer to playing with the house's money on it. {Item # 1 Bought MSPRA at $12.88 (5/26/2009 Post) SOLD 100 MSPRA at 21.43 (1/22/2010 Post) Bought 50 MSPRA at 15.7 (May 2010) Sold MSPRA at 18.50 (July 2010)

The 50 shares sold last Thursday were bought in the Roth IRA in late January 2011  @ 19.57.

I still own 100 shares recently bought in a taxable account: Bought 50 MSPRA at 19.71 (December 2010) Sold 50 STIPRA at 20.9 & Added 50 MSPRA at 19.54 (February 2011).  In that last post, I made the decision to switch out of the STIPRA floater from SunTrust Bank into MSPRA.  Both securities have the same guarantee, but MSPRA has a higher float provision and a lower price on the date of the switch.

Floaters: Links in One Post

I am gradually catching up with the trades from last week.

My 1099 for 2010 does classify the MSPRA dividends as qualified dividends.

No comments:

Post a Comment