Monday, April 4, 2011

Comparing HBAPRG to BMLPRJ/MBC Reverts to the 3% Minimum Payment/Bought 1 Brunswick 7.375% Senior Bond Maturing 9/1/2023/Bought 1 MeadWestvaco 6.8% Senior Bond Maturing 2032 at 92.926/Sold 100 CAR-UN.TO at 19.17 CAD/Sold 50 HBAPRG at 24.02

The Russell 2000 closed at 846.77 last Friday, ^RUT, a matter of importance to owners of the Citigroup Funding note MBC.  The maximum level for MBC's second annual coupon period was 844.077. Since the Russell closed above that level for just one day, the owners of MBC will receive the minimum 3% coupon, irrespective of the increase in the Russell 2000 during that note's second coupon period.   Bought 100 MBC at 9.78  Bought 100 MBC at 9.84 Given the strong gains in the Russell 2000, I mentioned in a post from March 2011 that I would not be surprised by a reversion to the 3% minimum.  MBC & MOU  MOU is better than MBC simply because it allows for a 37% increase, compared to MBC's 30%, in the Russell 2000 index over its starting value per annual period, before triggering a reversion back to the 3% minimum coupon payment.

The Labor Department reported last Friday that non-farm payroll employment increased by 216,000 in March and the unemployment rate was little changed at 8.8%.  Employment Situation Summary  The U-6 number, a broader measure of unemployment referred to by the government as "labor underutilization", fell to 15.7%.  Table A-15. Alternative measures of labor underutilization Over the past year, government employment is down about 356,000, whereas private jobs have increased by 1.656 million.

The ISM manufacturing index for March 2011 was reported at 61.2%. The new orders component declined to 63.3 from 68 in February.  

I have changed my reinvestment option on my Coca Cola shares to payment in cash.  KO shares are now trading at over $65, and I am not interested in buying more shares at that level or higher. KO closed at $67.22 last Friday, up 88 cents for the day.  My stake in KO common shares is close to my $10,000 limit, and was initiated during the Dark Period  at $38.72.   The recent upward spurt in KO shares has taken the stock to new five year highs.   KO Interactive Chart 

My default option is to take all dividends in cash. I will change the option to reinvestment into additional shares when I view the stock to be undervalued.  On Friday, I changed the option to reinvestment for my HPQ shares.    Hewlett-Packard closed at $40.98, up 1 cent in trading last Friday, and traded as low as $40.5.

I am also reinvesting the dividends paid by General Electric and will change to payment in cash when the shares start to trade comfortably over $25.  I am already near my limit of $10,000 with just the common stock, and consequently can not buy more than 50 shares. I do not intend to purchase more shares except with reinvested dividends. Most of those buys were made during the Dark Period with cash flow. Bought 30 GE at 15.85 with Cash Flow (December 2008) Bought GE at 10.89 with Cash Flow (February 2009)  ADDED 50 GE at 12.3 (January 2009) Added 30 GE at $11.75 with cash flow (June 2009) Bought GE at 15.48 (Dec 2009) Added to GE at 15.64 (June 2010)  Bought 40 GE at 13.88  (July 2010-my last market purchase) Most of those purchases were made between $10 to $16.  My current position is close to 500 shares.

In this week's issue, Barrons has a favorable cover story on GE.

60 minutes last night had a segment exposing the pervasive fraud by financial institutions, who have used document mills to create forged documents that are necessary legal prerequisites to foreclose on homes.  CBS News  One fact, which is never mentioned by reporters from CBS or the NYT when writing this kind of story, is that the homeowner has defaulted on the mortgage and is frequently doing whatever they can to stay in the home for as long as possible, sometimes for years, without making any payments. 

1. Bought 1 Brunswick 7.375% Senior Bond Maturing 9//1/2023 at 94.2 Last Thursday (Junk Bond Ladder Strategy) (see Disclaimer): This senior bond has a 7.375% coupon and matures in 12 years plus a few months. I am starting to extend the Junk Bond Ladder some with later maturities, but the strategy is weighted in short term issues with an average maturity close to 7 years.

Brunswick has large market shares in three businesses: boat and marine engines, bowling & billiards, and fitness equipment. Brunswick | Company Those kind of leisure businesses did not fare well during the recent recession.  Its fitness line brands are LifeFitness and Hammer Strength. 

Moody's rates this bond Caa1. S & P has it at CCC which feels about right for this credit. This is a link to the FINRA information on this bond: FINRA

This is a link to Brunswick's 2010 Annual Report:  Form10-k

My confirmation states that the current yield is 7.763% and the YTM is 8.017%

I have zero interest in the common stock, symbol BC, which closed at $25.59 last Friday. The market cap at that price is about 2.28 billion dollars.  The consensus estimate for 2011 is currently 27 cents per share in 2011, rising to $1.11 in 2012. BC Analyst Estimates

2. Bought 1 6.8% Senior MeadWestvaco Bond Maturing 11/15/2032 at 92.926 Last Thursday(Junk Bond Ladder Strategy)(see Disclaimer): This bond is a borderline investment grade credit.   S & P gives this bond an investment grade rating of BBB, which seems about right to me, whereas Moody's has it in junk territory at Ba1.  This is a link to the FINRA information on this bond. FINRA  This is one of the higher quality bonds in the Junk Bond Ladder strategy. 

I would call MWV a consumer packaging company. MWV Home

This is a link to the MWV 2010 Annual Report: FORM 10-K The company earned 62 cents per share in 2010 on 5.693 billion in revenues (page 9).  The long term debt is listed on page 56.  The current consensus estimate is for earnings of $1.82 per share in 2011 and $2.12  in 2012. MWV Analyst Estimates | Meadwestvaco Corporation

This is a link to the bond's prospectus, filed with the SEC in 2002: Prospectus Supplement  I just checked the prospectus for basic terms relating to the bond.  The financial information in such an old prospectus is just stale and not useful.   There is a "make whole" provision in the event of a redemption.  MWV's subsidiaries are guarantors.  Interest is payable semi-annually on 5/15 and 11/15.  The bond matures on 11/15/2032.  The bond is a senior unsecured bond.

My confirmation states that the current yield is 7.255% and the yield to maturity is 7.384%.

3. Sold 100 Canadian Apartments at 19.17 CAD Last Thursday (Canadian Dollar (CAD) Strategy)(see Disclaimer):  The Canadian Dollar strategy involves the ownership of a significant amount of CADS, already purchased with my U.S. Dollars, and then attempting to earn a return on those CADs by investing in securities traded on the Toronto stock exchange.  I will invest only in income generating securities and will take all distributions paid in Canadian dollars. Perhaps, when the 1 CAD buys $1.25 USD, I may convert some of the Canadian dollar stash back into USDs.  The purchase of shares in Canadian Apartments (CAR-UN.TO) did generate monthly dividend payments for me, and I sold the shares for a profit.  In short, this security served its role in this particular strategy. Bought: 100 CAR-UN.TO @ 17.35 (11/3/2010 Post) I have now built my CAD stash back up to near 6 thousand, and will just wait for an opportunity to redeploy those funds.

4. Sold 50 HBAPRG at 24.02 Last Thursday (inflation/deflation strategy) (see disclaimer):  Soon after buying HBAPRG, I mentioned that the better buy at that time was HBAPRF which I still own.  I am in a trading mode on the floating rate equity preferred stocks and do not find any of them attractive at current prices.  Possibly, I will warm to them more when LIBOR rates return to more normal levels.

Bought:   50 HBAPRG at 23.31 (1/19/2011 POST) In that post, I referred to that purchase as a "marginal" buy. 

Advantages and Disadvantages of Equity Preferred Floating Rate Securities

HBAPRG is a non-cumulative equity preferred stock issue from HSBC USA, an indirect wholly owned subsidiary of HSBC Holdings, plc that pays the greater of 4% or .75% over the 3 month LIBOR rate. Prospectus

Prior to its acquisition by Bank of America, Merrill Lynch issued a non-cumulative equity preferred stock that pays the greater of 4% or .75% over 3 month LIBOR. Final Prospectus Supplement I have traded the security and currently have a position: Bought 50 BMLPRJ at 18.50 Added 50 BMLPRJ at 17.74 Sold 50 BMLPRJ at $19.25 Bought 100 BMLPRJ @ 19.32/ My last purchase was the result of a pared trade:   Sold 100 BMLPRL @ 19.14  (see generally: Floaters: Links in One Post)

 BMLPRJ closed last Friday at $19.15.   HBAPRG closed at $23.9.  Which one is the better buy?

1. Both pay qualified dividends on a quarterly basis and have the same 4% minimum.

2. Both have the same .75% float above the 3 month LIBOR which will eventually become the applicable rate when it exceeds the 4% minimum.

3. Both are perpetual securities with $25 par values.

4. Both are at the same level of priority in the capital structure, below all bonds and senior only to common stock.

5. Both have similar stopper provisions. The preferred dividend has to be paid for as long as dividends are paid on a more junior security, i.e., common stock.  Is the stopper provision, however, more meaningful for the BAC shareholders given that its common shareholders are independent, expect to be paid a dividend and they vote for the Board of Directors, whereas HSBC USA is wholly owned by its parent?

It comes down to the assessment of credit risk. Assuming the market is being rational, which is not an assumption that I would ever make, the price difference can only be justified by the difference in credit risk.  Is that judgment rational?  What would be the odds of BAC eliminating its current 1 cent per share common stock dividend, something that it would have to do in order to eliminate dividends on its equity preferred issues?    

This kind of analysis is relational.  The end result does not suggest that either price is a good one for a potential investor. Instead, the analysis looks at the comparison between two similar securities and asks whether the spread differential in yield is reasonably justified?  

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