Thursday, June 9, 2011

Google Search Widget Deleted from Blog Due to its Non-Functionality/Alon Krotz Refinery Restarts-No Flooding Reported/Liberty Media and its Bondholders/SOLD 200 BKK at 15.20/Added 200 MMT at 6.8 in Roth IRA

I have decided to remove the google search box from the blog since it is no longer functioning, and Google has been unable to fix the problem for over a week.  If the Google search box widget is ever repaired so as to work again, I will restore it in the upper right hand corner of the blog.  The search box at the top left corner works, but I find it to be unsatisfactory.  Anyone interested in finding a discussion on a particular topic can perform a regular google search outside of this blog.  Or, a better search result would be to use the Advanced Search at Google and fill in the box "Search within a site or domain" with my main blog address:

If you are interested in a discussion of security, using only the symbol, the search will turn up references to that symbol just in my blog.  I did a search for "MTY" and came up with ten pages of references.   I still prefer the google widget but it just does not work anymore.

This article at CNN highlights the basic problem inhibiting a resumption of normal, sustainable growth in the U.S. economy-too much debt.  This has been a frequent topic of this blog for the past two years.  I most recently discussed the problem in a post a few days ago:  Stocks & Politics: Jobs (see also What Will Produce Growth after the Age of Leverage? (September 2009 Post); Underlying Cause of the Current Long Term Bear Market is Too Much Debt (June 2010 Post).

Alon commenced operations at its Krotz Springs refinery after shutting down operation in mid-May in anticipation of possible flooding resulting from the opening of the Morganza Spillway.  The flooding did not materialize. I sold my 2 Alon Krotz Refining bonds at 107 due to profit taking in my Junk Bond Ladder Strategy.  That transaction had nothing to do with the potential flooding of the refinery since I did not know of the potential problem at that time.  SOLD 2 Alon Refining Krotz Springs Bonds @ 107 I do check on the pricing of that bond everyday and do not intend on re-initiating a position unless the price falls to below par value. My prior purchase was at a total cost of  98.8. Item # 5 Bought 2 Alon Krotz bonds (November 2010 Post).

1. Liberty Media (own senior bonds in TC form only):  John Malone has a long history of favoring stockholders over bondholders. Basically, Malone's strategy has been to spin out assets from Liberty Media, a disaggregation strategy, that leaves the bondholders with less security for their loans while enriching Liberty's shareholders.

The latest salvo in this long standing policy is Liberty's attempt to spin out Liberty Starz group  (LSTZA) and Liberty Capital Group (LCAPA), leaving the Liberty bondholders with a claim only against the assets of Liberty Interactive Group (LINTA). The primary asset of LINTA is QVC which has a large amount of debt attributed directly to it (see page I-21,  Form 10-Q). Apparently, this latest divestiture plan was the last straw for some bondholders who started to complain that Liberty's latest plan constituted a default of the bond's indenture.  Liberty filed a declaratory judgment suit in Delaware and received a favorable ruling from the lower court, and that decision can be found at .pdf.

The trustee under the bond indenture has appealed this unfavorable decision to the Delaware Supreme Court.  While the outcome of this litigation is uncertain, a common sense view would favor a reversal. The legal issue is whether all of the divestitures have to be aggregated to determine whether or not Liberty has disposed of "substantially all" of its assets.  The lower court found that the total number of divestitures should not be aggregated, for reasons that I find unconvincing given the history recited by the court, particularly the facts which show Liberty has been pursuing a clear disaggregation strategy for a long time, clearly disadvantaging its bondholders while favoring its stockholders.

After reading the decision, I would have to agree with the trustee's position and would hope that the Delaware Supreme Court will reverse the lower court's decision. To affirm the lower court would in effect allow any firm to dispose of most of its assets over time, claiming that each disposal has to be examined in isolation from all the others, ultimately leaving the bondholders holding a near empty bag years after the original loan was made to company.  In short, the lower court decision in effect would render useless as a practical matter any bond indenture protection prohibiting the divestiture of "substantially" all of the assets unless the divested company assumed Liberty's obligations under the bond indentures.  Of course, Malone's approach is to free the assets from that debt burden in order to enhance their value for the shareholders, who of course voted for the divestiture free from that liability.  

Malone's obvious and long term approach to disfavoring bond owners has led me on occasion to sell my small stakes in two Trust Certificates, PKK and PIS, whose underlying securities are two different senior bonds issued by Liberty.  SOLD 1/2 OF PIS POSITION Sold Remaining shares in the TC PIS Sold PKK at 24.1  The realized gains in the prior PIS position was relatively small:

PIS Roth IRA 2009 +324.47

PIS Taxable 2009 +$159.97

When I made those sales, I expressly did so based on my view of the way John Malone treated bondholders, an opinion which has only been strongly reinforced once again by his latest efforts to separate assets from potential claims by existing bondholders.

I have traded two TCs whose underlying security is a senior Liberty Media bond: 

PKK Prospectus: (8.5% coupon-Matures 7/15/2029)(FINRA: underlying bond)
PIS Prospectus: (8.75% coupon-Matures 2/1/2030)(FINRA: underlying bond)

After suffering several bond redemptions, I did buy back some of the PIS shares near par value.  Bought 50 PIS at 24.88 in Roth IRA (December 2010 Post); Bought 50 PIS at 25 (October 2010 Post).

For the reasons mentioned, I am a weak holder of Liberty Media debt and hope to exit these after collecting a few interest payments and selling the position at break-even or better, a $1 gain on the shares would be satisfactory.  I will even be a weaker holder if the lower court's decision is affirmed.

2. Sold 200 of the Leveraged Municipal Bond CEF BKK at 15.20 (see Disclaimer):  These shares were sold at break-even, and I did manage to collect several monthly dividends.  Bought  200 BKK @ 15.11 (November 2010 Post). This sale is part of my ongoing effort to reduce my already small position in leveraged municipal bond CEFs. I am using GTC AON LIMIT orders to lighten up on leveraged municipal bond funds.

The tax free yield of BKK at a total cost of $15.2 price is close to 4.92%, and this fund has the advantage of being a term bond fund with a scheduled liquidation date of 2020.   Since the term date reduces my interest rate risk, compared to a non-term intermediate municipal bond fund, I may re-enter this position, provided I become more comfortable with the credit risk associated with American municipal and state governments and can buy the shares back at below $14.75.

I of course own all municipal bond funds in taxable accounts.

3. Added 200 of the Bond CEF MMT in the Roth IRA at GTC AON Limit Order at $6.8  (see Disclaimer):  MMT is a taxable bond CEF that uses some leverage.  It went ex dividend yesterday for its current monthly distribution of $.044. Distributions MFS Multimarket Income Trust At a total cost of $6.8 per share, the current dividend yield would be around 7.76%.  Under current U.S. law, the dividend is not taxed when paid into the ROTH IRA retirement account, nor will it be taxed when withdrawn, which hopefully will never occur for me anyway.  As a consequence, although MMT is a taxable bond fund, I view it as a tax free bond fund when held in the Roth IRA that generates tax free income in that account.

This brings me up to 1000 shares of MMT.  I am not reinvesting the dividend.

This fund is not an investment grade bond fund.  A majority of its assets are in "high yield corporate" bonds, a euphemism for junk.  As of 4/30/11, the effective average maturity was at 8.07 years, and the average effective duration was 5.4 years, both of those factors are relevant in evaluating interest rate risk in a bond fund.   The weightings by bond ratings can be found at the sponsor's web page:  MFS Multimarket Income Trust

The fund is currently rated 4 stars by  Morningstar.  It is selling at a discount to its net asset value.  The NAV information can be found daily at the and at the CEFA.

This is a link to the last filed SEC Form N-Q, which lists the fund's holdings, as of 1/31/2011.

This is a link to the last filed SEC shareholder report, the annual report for the period ending in October 2010:  MFS MULTIMARKET INCOME TRUST N-CSR/A  The borrowings are described in note 6 at page 59. At the close of the October 2010 period, the fund had borrowed 100 million dollars to buy bonds, and the weighted annual interest rate was 1.54% for the fiscal year.

The MMT shares finished at $6.76 yesterday.  As of yesterday's close, the net asset value per share was $7.37, adjusted for the ex dividend, and the discount was at -8.28.

I basically exchanged 200 MMT for 200 BKK, which effectively increased my after tax yield, while increasing my growing cash allocation.

The recent action in large cap technology stocks is adding to the angst of the OG and is more consistent with a an economic downturn more severe than the a temporary soft patch.

I would remind readers, for whatever it is worth, that Louise Yamada  recently said that S & P 1300 was an important support level for the market.  Yesterday's close was at 1279.56.  Historical Prices | S&P 500 INDEX 

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