Wednesday, May 18, 2011

Junk Bond Ladder Table/Bought 1 AGY Holdings 11% 2nd Lien Senior Bond at 98.1 Maturing 11/15/2014/Sold All FE on Pop at 45.10/Sold 1/2 WMT at 56.17/Bought 1 R.R. Donelley 6.625% Senior Bond Maturing 4/15/2029 at 93

I would agree with the opinions expressed by Pimco's CEO, Mohamed El-Erian, in his interview published Monday in USATODAY.

The two "principal protected notes" that I own, whose interest payments are linked to gold prices, use the P.M. London Fix to determine the gold price. I have been using the numbers provided by  Kitco Inc. to make the calculations relevant to these notes. I found the data from the actual source at GF1.  This is a link to the P.M. gold fixes for 2011: Gold Fixings | LBMA The P.M. fix reached a high of $1,541 on 5/4/2011.  This is the same number that I had from Kitco, discussed in the introductory section of this post: Stocks & Politics: MTY. This is a link to the London fixes for 2010. Gold Fixings | LBMA The price shown for 7/27/2010, the relevant starting value date for MTY, is $1168, and that was the number which I have used to calculate the maximum level for MTY in its current coupon period. I was just double checking the Kitco numbers. 

1. Bought 1 AGY Holdings 11% Second Lien Senior Bond at $98.1 on Monday (Junk Bond Ladder Strategy)(see Disclaimer): This is yet another extremely risky purchase under this strategy, made more dicey by the poor results reported by AGY for the first quarter. SEC Filed Press Release The company reported a net loss of $6.9 million on revenues of $44.9 million.  As of 3/31/2011, the balance sheet shows $304.814 million in total assets, of which 18.447 were classified as intangible. Long term debt was shown at $221.269 million. The "accumulated deficit" was $119.450 million, up from $112.562 as of 12/31/2010.  So, this is a very dicey purchase.  

AGY is a private company and calls itself a "leading manufacturer of advanced glass fibers that are used as reinforcing materials in numerous diverse high-value applications". (page 17 of the 2010 Form 10-K)

The debt is discussed at pages F-20 to F-23. The 2014 second lien note had an original principal amount of 175 million, so it represents a good chunk of the long term debt.  This note is discussed at page F-21 of the 2010 Annual Report.  It is junior in priority to the secured credit facility however.  One positive is that the more senior credit facility is not that large compared to the value of the firms plant and equipment.  Most of the secured credit facility appears to be non-recourse to the corporation and involves AGY Asia (see page F-20). 

This bond started out as a private placement that was later registered with the SEC:    S-4/A #1  As noted in that prospectus, the note matures on 11/15/2014.

This is a link to the FINRA Information about this bond which includes the credit rating information and recent trading activity. 

This is a link to the firm's web site: AGY :: Strength in Materials

Link to SEC Filings: EDGAR Search Results

My confirmation states that the current yield at my cost is 11.122% and the YTM is 11.389%.

ADDED 9/16/11: I noted on 9/16/11 a precipitous plunge in this bond's value and published a post on that subject: AGY HOLDINGS 2014 BOND PLUNGE IN PRICE (9/16/11 post). If I find out anything more, I will add an addendum to that post. Fortunately, I own only 1 bond.

ADDED 10/24/12:  S & P downgraded the bond rating to "C" on 10/22/12. See also subsequent posts: Item # 3 AGY HoldingsAGY (7/31/12) and Item # 4 Earnings: AGY Holdings (11/15/11 Post). I have a 10+ risk rating on this bond, the highest potential risk grade. Personal Risk Ratings For Junk Bonds

2. SOLD 50 of Highest Cost Shares of WMT on Pop at $56.17 Last Monday (Large Cap Valuation Strategy)(see Disclaimer): I discussed how WMT fit into the Large Cap Valuation strategy in Item #1 WMT and the Large Cap Valuation Strategy (3/8/2011 Post). I am reinvesting the dividend but elected to sell my highest cost shares purchased at $53.52 last December. This sale lowers my average cost some since I later averaged down by buying the other 50 shares at $52.21

Walmart reported earnings on Tuesday morning. While WMT beat the consensus estimate by 3 cents, earning 98 cents per share, the same store sales in the U.S. declined for the 8th straight quarter, falling 1.1% in the first quarter.

Wal-Mart Stores fell 52 cents in response to this report to close at $55.44 yesterday. Barrons published a downbeat article on this report yesterday. The author pointed out that international operating income declined 3.3% year-over-year, even though international sales rose 11.5%.

A different viewpoint is expressed by the analyst at S & P, who reiterated yesterday a strong 5 star buy rating on the shares, and raised the F/Y EPS forecast by five cents to $4.52 while keeping a 12 month target price of $65.

3. Sold Remaining Shares in Core Electric Utility Holding FirstEnergy on Pop at $45.10 (see Disclaimer):  Normally I would hold shares in a core holding for years.  For electric utilities, I do not expect much capital appreciation in the shares and will be satisfied with a 10% annualized total return over time.  More than half of that return would be generated by the dividend and hopefully a positive capital return on the shares purchased with the dividend.  I had just completed two pares of my position in FE, which drove down the cost of my remaining shares to $36.67.  Pared ED and FE: Sold 25 ED @ 52.5 & 50 FE @ 41.33 (5/9/2011 Post)  SOLD 50 FE AT $40.7 (February 2011 Post) I noticed a substantial pop in the shares on Monday, more than 6%, and the LB could not resist just taking the profit since that is just way too much return, too quick for an electric utility stock, at least for our LB who is still in a trading mode utilizing its myriad rules for long term secular bear markets.      
FE 182 SHARES +$807.12

Some of the recent purchases are discussed in these posts:  Bought 50 FE at 36.75 (March 4, 2011) Added 30 to FE @ 36.1 (October 2010)

RB wanted to point out that FE closed at $45.54 yesterday, and that the NERD MACHINE was told by HK to cut down on the charitable contributions to our destitute Uncle Sam in 2011, particularly short term capital gains.   FirstEnergy Corp, FE

4. Bought 1 R.R. Donnelley 6.625% Bond Maturing 4/15/2029 at 93 on Monday  (Junk Bond Ladder Strategy)(see Disclaimer):  R.R. Donnelley & Sons Company (RRD) is a public company operating primarily as a commercial printer. This bond was investment grade until recently, but has been downgraded into high tier junk.  According to my confirmation, Moody's rates it Ba1 and S & P has it at BB+.  As a result of the ratings downgrades, the bond has fallen recently by a couple of points. I would view it as borderline junk given the large amount of debt on the balance sheet, currently $3.2364 billion as of 3/31/2011.  RRD is estimated to earn $1.96 in 2011 and $2.22 in 2012.  RRD Analyst Estimates  The last earnings report for the Q/E 3/11 was not comforting, with diluted earnings per share at $ .16, down from $.25 per share in the year earlier quarter. However, that quarter included some charges and the non-GAAP number was 33 cents per share for both the first quarters of 2010 and 2011. Press Release  The common share dividend is $.26 per quarter. If that is maintained, and it needs to be reduced by at least 50% in my opinion, that is another negative for a bondholder.   Form 10-Q The long term debt is shown in note 14 at page 18 of this last filed Form 10-Q.

Some readers may recognize this 2029 bond as the underlying security in the Trust Certificate PYS, which I have bought and sold. Bought 50 PYS at 20.01 Add 50 PYS at 19.59 Sold 50 PYS at 20.76 Sold  50 PYS @ 24 Bought 50 PYS at 22.6 Sold 50 of the TC PYS at 23.2 I no longer own it.  My total profit generated by trading small positions was $236.78, mostly from sales in 2010:

I had also collected $118.14 in interest payments, for a total return connected with this 2029 bond of $354.92.  That is one reason why I decided to buy back a small position, and the purchase of the bond was a slightly better deal than buying back PYS.  The TC has a $25 par value and a slightly lower coupon at 6.3%.  On 5/16, the day of my purchase of this bond, PYS closed at $22.73, PPLUS TRUST SERIES RRD-1, PYS.  At that price, the current yield is about 6.89%.

My confirmation shows that the current yield at my cost is 7.081% and the YTM is 7.274%. The TC would most likely be easier to sell however.

Needless to say, this was a very marginal purchase. The price has continued to trend down some since I made my purchase. But, what can I say? The Fed's 3+ year JIHAD against savers and all responsible Americans has resulted in most of my better bonds being called by the issuers or the owners of the call warrants for trust certificates.

5. Junk Bond Table (Junk Bond Ladder Strategy): HK is becoming somewhat concerned about the amount of his capital now devoted to this particular strategy.  Knowing the LB reacts poorly to criticism, HK suggested gingerly to the LB that some consideration may be given to the overall risk level posed by this strategy.  LB thanked the HK for his input and noted that this expression of concern will be given the consideration that it deserves.

This is the most current junk bond table that does not include the 2 Edison Mission bonds bought in the ROTH IRA account, which is held at another broker. Added 2 Edison Mission 7.75% Bonds Maturing 6/15/2016 @ 86.12 in Roth Inclusion of those bonds would lower the average maturity, and raise the yield, a tad, and I neglected to add the RRD bond just bought:

The green numbers for 2021 and 2022 represent interest payments of $1076 associated with bonds maturing after 2022.

There are several good reasons why I prefer to avoid Vanguard when making bond purchases. One reason is that I can not sell online what I buy.  Another is revealed by the confirmation on the two Edison bond purchase, made by mistake in one of the OG's senior moments:

A $50 commission significantly eats into potential profits for small purchases, while making losses worse.  That level of commission is simply not consistent with providing discount brokerage services in today's market. It is also extremely inconsistent with Vanguard's philosophy of providing low cost options for investors. In short, there is no justification for it. At least Vanguard allows for the online purchase of junk rated bonds. Several brokerages only permit the online purchase of investment grade corporate bonds. I wonder whether those firms have looked recently at the yields on those bonds. I examine what is available everyday. To receive a 6% yield on even a low tier BBB investment grade corporate bond, you have to go out at least 20 years in time. At Fidelity this kind of search can be carried out at this page: 

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