Friday, April 8, 2011

RIG/Bought 1 Cooper Tire 7.625% Senior Bond Maturing 3/15/2027 at 96.647/ Bought 1 Pactiv 6.4% Senior Bond Maturing on 1/15/2018 at 91.5

Transocean, the owner and operator of the Deepwater Horizon rig, declared that 2010 was its best year in safety. As a result of the "exemplary" record,  the company awarded bonuses to RIG's executives. I have not yet forgotten that  the Deepwater Horizon exploded in a fireball, killing 11 people, and polluted the entire Gulf Coast with oil.  But, in modern times, rewarding people for failure is nothing unusual. The Masters of Disaster are among those who routinely receive outrageous pay packages for losing large sums of money. Taking a financial institution to the brink of insolvency with idiotic decisions apparently deserves the most compensation.

The NYT reported yesterday that Social Security has paid out more in benefits to allegedly disabled workers than it has collected from payroll taxes. The disability benefits, now paid to 1 out of 21 Americans between the ages of 25 to 64, totaled 115 billion dollars in 2010.

1. Bought 1 Cooper Tire Senior Bond Maturing 3/15/2027 at 96.647 Last Wednesday (Junk Bond Ladder Strategy)  (see Disclaimer): This senior bond has a 7.625% coupon and matures on 3/15/2027.  It is rated in junk territory by both Moody's and S & P. So it has both significant credit and interest rate risk. 

This is a link to Cooper Tires web page.  The company did report a profit of 116.3 million dollars from continuing operations in 2010 or $1.86 per diluted shares. Page 18 2010 Annual Report The balance sheet as of 12/31/2010 shows 413.359 million in cash and total assets of 2.305 billion dollars (p.34).  Long term debt is listed at 320.724 million. The debt is discussed in note 8 at pages 47-48.  This does not look excessive to me like many of the other companies whose junk bonds are owned in this strategy, including the one discussed in Item # 2  below.  The parent company has a 8% coupon note coming due in 2019, with 173.578 million shown as outstanding. The 2027 note only has 116.880 million left. Sales in 2010 were 3.36 billion dollars.  

The common stock trades under the symbol CTB, currently hovering around $25 per share and a market capitalization of around 1.56 billion dollars. Price to sales is around .48. The consensus estimate, made by 8 analysts, is for an E.P.S. of $2.48 in 2011 and $2.85 in 2012. 

This is a link to the FINRA information on this bond:  FINRA The bond is currently rated B2 by Moody's and BB- by S & P.  The credit ratings are explained in this article at Wikipedia. A B2 rating by Moody's is well within junk territory and is viewed as "highly speculative" 

This is a link to the prospectus filed with the SEC in 1997: I looked at the prospectus to ascertain the bonds basic terms. Interest is payable semi-annually on the 15th of March and September. The notes are not redeemable prior to maturity. The notes will rank equally with all of Cooper's "unsecured and unsubordinated indebtedness", a phrase that indicates to me that this is an unsecured senior bond.  

There is also a trust certificate that trades on the stock exchange which represents an undivided beneficial interest in the 2019 senior bond. The symbol is PKJ.  I do not own it. It is trading above its par value and is vulnerable to a redemption by the owner of the call warrant.  PKJ's coupon is 8%, same as the underlying bond. Interest is paid semi-annually in June and December, so this TC is carrying a fair amount of accrued interest at this point in time. TC's trade flat, which simply means that the buyer does not pay accrued interest to the seller which occurs of course with purchases in the bond market.  

My confirmation states that the current yield at my cost is 7.824%, slightly above the 7.625% coupon due to purchasing the bond at a small discount to par value. The YTM is 7.908%.

2. Bought 1 Pactiv 6.4% Senior Bond Maturing on 1/15/2018 at 91.5 (Junk Bond Ladder Strategy)(see Disclaimer): Pactiv is an American packaging company that makes the Hefty bags among other products. Pactiv was formerly known as Tenneco Packaging. Pactiv was acquired by the privately owned Reynolds Group Holdings, headquarted in New Zealand, that also owns reynolds aluminum foil. Reynolds Kitchens 

This is a link to the FINRA information about this bond: FINRA As shown on the chart at that page, the bond was trading well over par value until Reynolds Group launched its takeover of Pactiv. The bond then slid to reflect a junk valuation based on Reynolds credit rating.  Moody's now rates the bond Caa1.  

This brings me up to 3 bonds issued by Pactiv.  The other two have longer maturities and higher yields. Both were issued by Tenneco Packaging: Bought 1Tenneco Packaging 8.375% Senior Bond Maturing in 4/15/2027 Bought 1 Tenneco Packaging 7.95% Senior Bond Maturing 1225/2025 I hope that is my limit. 

Reynolds is a company that has grown by virtue of acquisitions financed with debt. 

The current yield at my cost is 6.993%. The YTM will be higher at 7.888%, assuming Reynolds survives to pay par value at maturity.  

I discussed briefly its last financial report at Item # 4 Reynolds Group. I also link the firm's last financial reports in that post.  

As of 12/31/2010, Reynolds Group shows long term debt of 11.699 billion. (page 16:   reynoldsgroupholdings/Financials.pdf I would suggest paying that debt down with cash flow for several years before embarking on another debt financed acquisition.

Added: I subsequently bought one more of the 2018 Pactiv bond: Added 1 Pactiv 6.4% Senior Note Maturing in 2018 at 77 (October 2011)

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