Friday, May 13, 2011

Bought 1 Colt Defense 8.75% Senior Bond Maturing on 11/15/2017 at 85.24/SOLD 50 JZV at 25.62/Bought 100 of the Canadian Stock ETF ZCN:CA at 18.55 CAD/Sold 50 PJR at 25.79

Doug Kass argues that the rally in stocks needs to be sold.  TheStreet

1. Bought 1 Colt Defense 8.75% Senior Note Maturing on 11/15/2017 at 85.24 Last Monday (Junk Bond Ladder Strategy)(see Disclaimer): Colt is a private company that manufactures small arms weapons systems, including the M4 carbine to the U.S. military, and the C8 carbine and C7 rifle to the Canadian military. Several types of weapons are made for law enforcement.  Net sales to the U.S. military accounted for about 55% of 2010 sales. The 2017 senior note was originally a private placement. That note was exchanged for one that was registered with the SEC a few days ago, and is now available for purchase by the public. Prospectus As shown on page 37 of that prospectus, the company lost $11.33 million in 2010 but made profits in 2009 and 2010.  

Interest on the 2017 note is payable semi-annually in May and November. 

This is a link to the FINRA information on this bond. It is currently unrated by Moody's and rated at B- by S & P.

My confirmations states that the current yield at my cost is 10.169% and the YTM is 11.89%.

Colt Defense SEC filings can be found at EDGAR

(added: a more recent discussion can be found in a May 4, 2012 Post: Item # 5 Colt Defense)

(added: due to Colt Defense losing the contract to supply the M4 to the U.S. military, I raised the risk rating to 9+ in a May 9, 2012 Post: Colt Defense-Raising Risk Rating to 9+. A one bond position is immaterial to me)

{added 5/30/12: As expected, S & P reduced Colt's credit rating to CCC, Item # 1Colt Defense DowngradeTEXT-S&P. It can not go much lower. The earnings report for the 2012 first quarter was another disappointment, Item # 5 Colt Defense (5/4/12 Post) I am not optimistic about Colt surviving to pay off this bond at maturity. Colt does file its earnings reports with the SEC: EDGAR}

{added 9/24/14: As I noted in my last update, I did not expect that Colt Defense would survive to pay off the 2018 note. I received an email notice yesterday that this bond had been downgraded to CC by Fitch. The recent earnings report was dismal. SEC Form 10-Q for the Q/E 6/29/14 (page 4: loss of $12.589M) A Forbes article published yesterday summarized some of the Colt Defense's problems. A reference is made in that article to an article in Debtwire, where several sources allegedly told that service that Colt was experiencing a cash crunch that may possibly lead to a restructuring. I would not be surprised to see a BK filing within a year.}

(added 9/30/14: I received an Email notice that Moody's downgraded this bond to Caa3 on 9/29/14)

(added 11/14/14: Based on a review of a recent SEC filing, I would view a bankruptcy filing to be likely: Form 12b-25. According to FINRA, Moody's lowered its rating to Ca on 11/14/14 and S & P is at CC as of 9/19/14, Bonds Detail) I received an email notice confirming the Moody's downgrade to Ca. See also: Colt Defense Searches for Financing as Default Looms - Bloomberg; a good history of this company can be found at Colt's Curse: Gunmaker's Owners Have Led It to Crisis After Crisis - Businessweek)

(added 11/19/14: After reviewing the SEC filing noted in the 11/14/14 add, I was surprised to actually receive the semi-annual interest payment on 11/15/14. I own just 1 bond. Colt avoided a default in an "11th-hour deal with Morgan Stanley" that removed the "immediate threat of default" which then allowed the company to make that interest payment. Gun Maker Colt Strikes Deal to Avoid Year-End Default - I currently see no reason for optimism about receiving the next scheduled payment however)

2. Sold 50 of the TC JZV at $25.62 in the Roth IRA last Monday (see Disclaimer):  I started to trade this TC when it was selling at about 1/2 of its current price. The underlying bond is a senior CNA Financial bond maturing in 2023.  I still own 100 shares of JZV in a taxable account.  I am not eager to sell those shares due to my large unrealized capital gain in the first fifty share lot (see Snapshot at ITEM # 4 Sold 120 of the TC JZV at $25.50). JZV has a 7% coupon on a $25 par value.  I have no interest in it at the prices of my recent sales. 

3. Bought 100 ZCN:CA, A Canadian Stock ETF, at 18.55 CAD Last Monday (Canadian Dollar (CAD) Strategy) (see Disclaimer):  I am using part of my CADs received from selling a few Canadian REITs to add to my Canadian stock ETFs.  I previously bought 100 ZCN:CA @ 18.82 CAD. This ETF is traded on the Toronto exchange and I used my CAD stash to buy the shares.  The expense ratio is just .15%, and the fund owns 60 of the large Canadian companies:  Dow Jones Canada Titans 60 Index ETF This is a link to the Holdings. 

4. Sold 50 of the TC PJR at 25.79 in the Regular IRA (see Disclaimer):   I bought this TC in the regular IRA at $20.7 back in October 2009.  ADDED TO PJR at $20.70 

PJR Average Total Cost Per Share=$20.86 Regular IRA

I still own shares bought at  $16.72 in a taxable account:

The TC has a 7.4% yield, significantly higher coupon than the underlying bond. The underlying security is a 6.75% senior bond from Unum.   This is a link to the FINRA information on the underlying bond which is not actively traded in the bond market.  The underlying bond and the TC mature on the same day, which is 12/15/2028.  The underlying bond is borderline investment grade, currently rated at Baa3 by Moody's and BBB- by S & P according to FINRA.

I also own 100 shares of PJR in a ROTH IRA, with a higher cost basis since the shares were bought in 2010.   

This concludes most of my bond paring, with just a few more sales from last week to summarize.

If the bond market could talk, it would likely be telling investors that it has a different forecast about U.S. economic growth prospects than the stock market.  The bond market is saying to me that economic growth will continue to be sluggish, with little inflation pressure on bond prices, but the growth will not be so anemic as to accelerate credit defaults in the junk bond market to a significant degree.  The stock market appears to believe in a far more robust growth, with higher inflation but not at troublesome levels.   A more important dichotomy is that the stock market is forecasting an extended economic recovery, with no recession on the horizon.  

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