Tuesday, May 31, 2011

Personal Risk Ratings For Junk Bonds/MBC/Bought 50 GSBC at 18.55/The Flowering of Extremism in Tennessee

After noting that the "principal protected note" MBC experienced a maximum level violation, I ceased paying any attention to it.  MBC Reverts to the 3% Minimum Payment (4/4/2011 Post) The maximum level violation caused a reversion to the 3% minimum coupon payment.  I noted last Friday that this payment was received by me on 5/27.  The annual interest payment was $30 per 100 shares.  I own 200 shares of this senior note issued by Citigroup Funding.   Bought 100 MBC at 9.84 Bought 100 MBC at 9.78 Par value is $10, payable in 2014. 

When an investor ventures into this type of security, it is important to calculate the values for the current coupon period.  This senior note pays the greater of 3% or up to 30% per year based on the percentage increase of the Russell 2000 Index.  Now, that sounds pretty good, but there is a catch.  If the Russell 2000 index closes one day above a 30% increase, then the investor receives 3%, no matter what happens thereafter.  So, if Citigroup survives until 6/9/2014, the worst that can happen to me is to receive the 3% annual coupon payment, and then I will make a couple of bucks when this $10 unsecured senior note matures since I bought all of my shares at below par value.  

I now have to calculate the starting value of the Russell 2000 for MBC's third coupon period.  This period started on May 20, 2011.  The period ends at the close of trading on May 21, 2012. (see page PS-2 Final Pricing Supplement)

According to YF, the Russell 2000 closed at 829.06 on 5/20/2011:   ^RUT Historical Prices | Russell 2000  The maximum permissible increase is 30% in that index during a coupon period. This places the maximum level for the 3rd coupon period at 1,077.778 for the Russell 2000 Index (rounded to 1,077.78?).  So, if there is a close in the Russell 2000 on or before 5/21/2012 above that maximum level, say 1079 just on one day, the coupon for the third period would be 3%. However, say there was no such maximum level violation at anytime and the index closed on 5/12/2012 at 1076, then the coupon for the 3rd period would be 29.78% (ending value 1076 minus 829.06 starting value= 246.94 dividend by the starting value of 829.06=29.78%)

The ten year treasury note closed last Friday with a yield of 3.07%.

Norfolk Southern sold $400 million dollar of 100 year bonds, maturing on 5/23/2111, with a 6% Coupon.  Prospectus   Form 8-k  The bond is rated at BBB+ by S & P. FINRA  Another NSC bond maturing in 2097 is trading at a substantial premium to its par value with a 7.9% coupon. FINRA Another 6% coupon NSC bond maturing in 2105 with a 6% coupon is now trading at a small premium to its par value. FINRA  Madness?

Expressed on an annualized basis, real GDP growth in Canada for the first quarter grew 3.9%, after expanding 3.1% in the 4th quarter of 2010.   The Daily, Monday, May 30, 2011. Canadian economic accounts  In case anyone needed to be reminded, the Canadian statistics agency pointed out that growth in the U.S. was 1.8%.  Canadian Dollar (CAD) Strategy

This article at  Roll Call  discusses how the Democrats in Illinois, who control the state legislature, are redrawing congressional district maps to win back at least the four seats lost to the GOP during the last election.

1. Flowering of Extremism in Tennessee: The GOP is now in charge of Tennessee's state government and their members have been busy passing laws deemed extremely important to their party. It is always interesting to me what the TBs view as important. I mentioned earlier that the first order of business, one of their most cherished dreams, was to pass legislation permitting guns to be carried in bars and into state parks.

The GOP has now succeeded in enacting another, long sought after goal, requiring voters to show an acceptable photo identification to vote. Worse than a poll tax | timesfreepress.com Many spurious reasons were used to justify that requirement. For example, it was noted that the election commission had found several thousand felons on the voting roles, who were not eligible voters. Those names were purged from the roles.  Then, some liberal commie pointed out that felons lawfully have picture driver licenses, the required picture identification under the GOP's proposal.  Since facts do not matter, the GOP nonetheless continued to use that justification.

The GOP's real purpose was to disenfranchise the poor and the elderly, who do not have driver's licenses.  The mere fact that those folks largely vote for Democrats has nothing to do with the reasons for the bill according to the state GOP. The Tennessee Attorney General weighted into the fray, stating that the GOP was violating the State and U.S. Constitutions (2011/04/photo-i.d.-ag-opinion.pdf), which probably solidified GOP support for the legislation.

Before the passage of this law, a voter had to produce their voter registration card. When I voted, there was a careful examination of the signature on my voter registration card with the signature that I have to make in front of a poll worker.

The Tennessee GOP also recently stripped teacher's of their collective bargaining rights. timesfreepress.com The teacher's union was part of the vanishing Democrat coalition in Tennessee, and it was time for pay back. The LB just said that maybe this will slow down the property tax increases on HQ.

As reported in a weekend article in the Nashville Tennessean, many in the Tennessee GOP view their GOP state representatives as way too moderate since they failed to pass measures allowing guns to be carried onto campuses and requiring creationism to be taught in schools. {The former Governor of Minnesota who is running for the GOP nomination for President, Tim Pawlenty, believes that "intelligent design" needs to be taught in schools. YouTube} The general idea is to turn the public schools into Americanized versions of the Madrassas. GOP leaders in Tennessee promised to try harder next year.

Possibly next year, our teachers will be able to tell the youngsters how Adam and Eve walked with the dinosaurs, taking the kids on field trips to the creation museum in Kentucky for their science lessons.   Creation Museum  And we can all hope that our first graders will be able to exercise soon their Second Amendment gun rights by being allowed to bring their AK-47s to class.  A liberal in Tennessee is someone who believes that 1st graders should not be allowed to carry machine guns to class.

And for the tens of millions of TBs in America, it is certainly good news that Justice Roberts and Alito are moving the Supreme Court ever closer to elevating the States' Rights doctrine into the supreme law of the land, while degrading the importance of the Supremacy Clause.  The general idea is to make it far easier for the states to violate federal law with impunity.  The reactionaries, misidentified as conservatives, need one more vote as noted in the NYT to resurrect States Rights as a dominant legal doctrine.  The case in question, showing their reactionary proclivities to overturn a century or so of Constitutional law, can be found in the dissenting and concurring opinions in Virginia v. Stewart,  Virginia Office for Protection and Advocacy v. Stewart /Dissent of Justice Roberts and Alito and the concurring opinions of Thomas and Kennedy,  Concurrence in that case.

2. Rating Risk in the Junk Bond Ladder Strategy:  I mentioned to a reader that I will classify my junk bonds into three tiers:

Category 1: Extreme Risk  Rating 8 - to 10 +
Category 2: Substantial Risk Rating 5- to 7+
Category 3: Significant Risk Rating 1- to 4+

Please note that the word "safe" is not used to describe any of these categories.  I view all of them to have varying degrees of danger attached to them.  I have been forced into the junk bond ladder strategy by Uncle Ben, as I continue to adapt to the Fed's Jihad against savers, designed with the intent of making those who had no responsibility for causing the Near Depression to pay for the sins of others and to enrich the Masters of Disaster, who in their quest for ever greater sums of money, would sacrifice the welfare of hundreds of millions to satisfy their unquenchable thirst for money.    

My classifications will not be in alignment with the credit ratings.  Instead, I am making a gut, personal judgment based on my review of factors which I consider to be important.  No sensible person would hire me to make these ratings.  But, I have to rely on my own judgment when making decisions on what to buy and how much exposure to accept.  The forgoing is meant to be my personal guidelines on credit risks. 

I will make the credit risk assignment based on the following:

(1) the amount of debt and the maturity schedule of that debt in relation to the free cash flow; 

(2) whether the company is making any progress in paying down the debt and/or improving profitability and revenues;

(3) the likelihood that the firm will survive to pay off the note and the shortness of the maturity comes heavily into play for this factor;

(4) the amount of assets compared to the debt, excluding goodwill and other intangibles, and recognizing that assets may be worth significantly less than the amount shown on the balance sheet; 

(5) the priority of the debt, which includes an assessment of the amount of more senior debt, particularly secured debt, and when that more senior debt comes due. 

(6) and the assignment will be influenced by the possible recovery in the event of a default, so a senior subordinated bond issued by a highly leveraged company will receive a higher score than senior debt from the same issuer.

I will attempt to show subsequent changes in the risk rating at the end of this section.  Some of these bonds will be sold, and I will not make adjustments to the risk rating when I no longer own the bond. 

I will change the classification for a particular bond when I digest new material developments, usually generated by a quarterly report filed with the SEC.  For the bonds currently owned, this is how I classify them now:

Category 1: Extreme Risk-The Highest Risk of a Potential Default (RATINGS 8 - TO 10+)
1 AGY Second Lien Maturing 2014 (rated at 9+) (risk rating increased to 10+, see below)
1 AMR Senior Maturing (rated at 8+) Filed For Bankruptcy 11/29/11
1 First Data Senior Sub Maturing 2016 (rated at 10)
1 General Maritime Senior maturing 2017 (rated at 10+) FILED FOR BANKRUPTCY 11/17/11
1 Gray Television 2nd Lien Senior maturing 2018 (rated at 8)(added November 2011)
1 Knight Ridder Senior Maturing 2017 (rated at 10 -) 
1 Reddy Ice Second Lien Maturing 2015 (rated at 9+) (risk rating increased to 10+, see below)
1 Solo Cup Senior Subordinated (rated at 9+)  
3 Travelport Bonds  (2 seniors maturing in 2014 and 2016 rated at 9, and the 2016 senior sub at 10) (risk ratings increased to 10- for the senior bonds and 10+ for the senior subordinated) 

Based on these assignments, I have ended up with too many Travelport bonds given my assessment of the risk.  

Category 2 Substantial Risk-but less risk of default than the ones in Category 1(RATINGS 5- TO 7+)
3 Albertson's Long Bonds (rated at 7+ see below)
1 Appleton Paper 2nd Lien Maturing in 2016 (rated at 6+) (risk rating increased to 8, see below)
1 Apria Healthcare Senior Secured "A" Series maturing 2014 (rated at 6-) (raised to 7+, see below)
1 Apria Healthcare Senior Secured "B" Series maturing 2014 (rated at 7) (added November 2011)(raised to 8+, see below)(raised to 9+ see below)
1 ArvinMerior Senior maturing 2015 (rated at 7)(added January 2012)
1 ArvinMeritor Senior maturing 2018 (rated at 7)(added November 2011)
1 Belo Senior Maturing in 2027 (rated at 6)
1 Borden Chemical Senior Bond maturing  2016 (rated at 6+)
1 Boyd Gaming Senior Sub maturing 2016 (rated at 6)
1 Boyd Gaming Senior maturing in 2015 (rated at 5) (added October 2011)
1 Brunswick Senior Maturing in 2023 (rated at 5+)
1 Cascades Senior Maturing 2017 (rated at 5) (added Aug 2011)
1 Cenveo Senior Sub Maturing in 2013 (rated at 5-)
1 Colt Defense Senior maturing in 2017 (rated at 7 -) (raised to 8- and then to 9+, see below)
1 Cooper Tire Bond Maturing in 2027 (rated at 5)
1 Cricket Communications Senior (rated at 6+) (added June 2011)
1 Dillards Senior Maturing in 2027 (rated at 6+) 
1 Edgen Murray Senior Secured (rated at 5)
1 Edison Mission Senior Bonds Maturing in 2016 (rated at 6+)(risk rating increased to 8 then to 9-,  and then to 10- see below) 
2 Exide Technologies Senior Secured Maturing in 2018 (rated at 7-)
3 GMAC Senior Bonds Maturing between 2017-2019  (rated at 6)
1 Harlan Clarke Senior Maturing in 2015 (rated at 6)(currently at 3 bonds)
2 HCA Bonds Maturing in 2023 and 2025 (rated at 6+)
1 Mueller Water Senior Subordinated (rated at 7-) (added June 2011)
1 Norcraft Maturing in 2015  (rated at 6+) (added March 2012)
1 Penn Virginia Resources Senior Maturing 2018 (rated at 6) (added August 2011)
1 Select Medical 7.625% Senior Subordinated Bond Maturing 2/1/2015 (rated at 7+)(added August 2011)
2 Radioshack 2019 (rated at 7) (risk rating raised to 9)
3 Tenneco Packaging Senior Bonds (two maturing in 2018 rated at 5, the others maturing in 2025 and 2027 at 7) (risk rating increased see below) Added 1 2018 in October 2011
1 Terex Senior Sub Maturing in 2017 (rated at 7-) (added August 2011)
1 Texas Industries Senior (rated at 7) (added July 2011)
1 United Refining Senior Secured Maturing in 2018 (rated at 6)
1 United Rentals Senior Sub (rated at 7+)(added August 2011)
1 USG (rated at 7) (bought back 8/17/2011)
2 Vulcan Senior Bonds maturing 2018 and 2021 (rated at 6)  
1 Wendy's Bond Maturing in 2025 (rated at 5+)
1 Goodyear Tire Senior Maturing 2020 (rated at 5+)  

Category 1: Risky but  viewed now as  less likely to default compared to the two previous categories, subject to change (RATINGS 1- TO 4+)
1 Albertsons Senior Bond Maturing in 2030/1 Albertsons Maturing 2027 (rated at 4 - ) Risk rating raised to 7+, see below)
3 Cincinnati Bell Senior Subordinated Bonds Maturing 2018 (rated at 4-)
1 Cincinnati 2020 Senior (rated at 3)  
1 Commercial Metals Senior (rated at 4)  
2 CoreLogic Senior 2028 (rated at 3) Risk Rating Raised to 5 (see below)
1 Eastman Kodak Senior 2013 (rated at 4) (risk rating raised to  10+ from 9 on 9/30/11, see below) FILED FOR BANKRUPTCY JANUARY 2012 
1 J.C. Penney 2020 Senior (rated at 4)
1 Macy's 2030 Senior (rated at 3)
1 MeadWestvaco Senior 2032 (rated at 3 -)
1 Nextel 2015 (rated at 4+) (added August 2011) Risk Rating Raised to 8 see below-Sprint 
2 OfficeMax Senior 2016 (rated at 3)
1 Quicksilver Resources 2016 Senior Sub (rated at 3) Risk Rating Raised to 6 (see Below)  
2 R.R. Donnelley Senior Bonds Maturing in 2017 and 2029 (rated at 3)
1 Sears Holding Senior Secured Maturing in 2018 (rated at 4 -)
2  SuperValue Senior Bonds Maturing in 2014 and 2016 (rated at 2+)  Risk rating raised to 6- see below 
1 Warner Music 2014 (rated at 4) (redeemed by issuer August 2011)
3 Windstream Senior Bonds Maturing in 2019 (2) and 2020 (1) at 4 (added August 2011) Sold All Winstream 
1 Sprint Nextel 2017 (rated at 4+) (Risk rating raised to 8, see below)

My credit risk ratings are based on my gut judgment on the relative risk of not being paid back my principal in full at maturity.

Tenneco Packaging 2025 and 2027 raised to 8+/Pactiv 2018 Raised to 7:  Tenneco Packaging and Pactiv Bond-Increasing Personal Risk Ratings
Reddy ICE risk increased to 10+ from 9+ on 8/12/2011 Reddy ICE
Edison Mission risk increased to 8 from 6+ on 8/12/2011 based on last earnings report and new environmental regulations recently issued by EPA. Risk rating increased to 9- for reasons set forth in 3/1/12 Post Sold 2 Edison Mission 7.75%. Risk rating increased to 10- for the detailed reasons given in Item #1 Risk Rating Raised on Edison Mission Bond to 10- from 9-
CoreLogic risk increased to 5 from 3 on 8/17/11 based on 2nd quarter earnings report
Quicksilver Resources risk increased to 6 from 3 on 8/25/11 based on several recent adverse developments:  QUICKSILVER RESOURCES (KWK)
Travelport risk ratings increased to 10+ for the senior subordinated and 10- for the senior bonds, due to a failure to resolve the PIK bond maturity issue, see Travelport.
Eastman Kodak risk rating raised to 9 after it drew $160 on its credit facility. EK  The rating will be lowered in the event there is a successful outcome on the sell of its patents or a huge settlement in the ongoing ITC case against Apple and RIMM.  Based on developments on 9/30/11, the risk rating was further increased to 10+ from 9  Eastman Kodak (EK) Bonds-Own 2013 Senior Bond)
Sprint Nextel risk rating was raised to 8 based on its presentation to analysts summarized in this WSJ article.
AGY Holdings risk rating raised to 10 based on the third quarter earnings report and the need to borrow money to pay the 11/15/11 interest payment. Item # 4  Earnings: AGY Holdings  Risk Rating raised to 10+ 3/30/12 after reviewing SEC Filed 2011 Annual Report
Appleton Papers risk rating raised to 8, see Item # 1  Appleton Papers
Apria Healthcare risk ratings raised after reviewing 2011 Annual Report on 3/30/12. Item # 3  Apria Healthcare Risk rating raised again, Item # 1 Apria
Colt Defense risk rating raised to 8- after reviewing 2012 first quarter report: Colt Defense The rating was raise to 9+ after I learned that Colt had lost the contract to supply the M4 to the U.S. Military, Colt Defense-Raising Risk Rating to 9+
SuperValu risk rating raised to 7+ on the long bonds and 6- on the short/intermediate term bonds (2014 & 2016) after an unexpectedly bad earnings report. SuperValu's Earnings and Debt Problems-Raising Risk Ratings for SVU Bonds
RadioShack risk rating raised to 9:  Increasing Risk Rating on RSH Bond to 9 from 7

3. Bought 50  Great Southern Bancorp (GSBC) at $18.55 on Friday (Regional Bank Stocks' basket strategy)(see Disclaimer): GSBC is another small cap bank that is growing.  At a $18.55 price, the dividend yield is about 3.9% and the market capitalization is around $251 million.  The consensus earnings estimate, made by 3 analysts, is for an E.P.S. of $1.5 in 2011 and $1.78 in 2012. GSBC Analyst Estimates  This bank is headquartered in Springfield, Illinois, and has branches in Missouri, Kansas, Iowa, Arkansas, and Nebraska: www.greatsouthernbank.com LocationsBranches.pdf The bank has 76 branches. Great Southern Bank

The bank still has 58 million in government preferred stock on its balance sheet.  While I can not be certain, it appears to me that this bank does not need the capital and is using it as a cheap source of funding.  The current dividend on the government's preferred stock is 5%, but that rate will rise to 9% five years after its issuance, or the later part of 2013.

Before the rate rises the bank needs to redeem the preferred.  Equity preferred stock dividends, like common stock dividends, are not deductible, unlike interest payments on debt obligations. The bank discusses a possibility of transferring that obligation to the Treasury's Small Business Lending Fund, through participation in the Small Business Jobs Act passed in 2010. (see page 44 Form 10-Q)  While I am not familiar with legislation, the bank claims that the initial dividend rate would be 5%, but could fall to as low as 1% depending on the amount of small business lending.  This would appear to extend the period of time to late 2015 before the rate is bumped to 9%.  The bank has submitted an application for inclusion in the SBJA program but has not decided whether to participate assuming it is later approved for participation. I would assume this community bank could find enough small businesses in its service area that it could make enough loans to at least approach the 1% dividend rate, if it chose to do so.  

The bank reported diluted earnings per share for the first quarter of 36 cents, up from 34 cents in the first quarter of 2010.

The current dividend rate is 18 cents per quarter which can not be raised prior to 12/5/2011 or the bank's repayment of the TARP funds (page 45). The bank did not reduce its dividend during the Near Depression period.  However, the current annual rate has been in effect since the 2008 calender year. The annual rate was at 25 cents in 2011, and was raised every year before hitting the 72 cent plateau in 2008.

As of 3/31/2011, the net interest margin was excellent at 5.05%; the tangible equity to tangible assets ratio was at 7&; the tier 1 total risk-based capital ratio was 16.7% and the total risk-based capital ratio was 16%; NPAs to total assets was at 2.47%; NPLs to total loans was at 1.9%; and the efficiency ratio was at 57.49%.  SEC Filed Press Release  The bank plans to open two or three branches in 2011.

The capital ratios for year end 2008, 2009 and 2010 can be found at page 162  2010 Annual Report.

As noted in the 2009 Annual Report and the last filed Form 10-Q at pages 17-19, GSBC has expanded its geographic area by FDIC assisted acquisitions of failed banks in Kansas and Iowa.  Those acquisitions increased the full service branches from 39 to 72 in 2009:  2009 Form 10_K 

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