Monday, June 20, 2011

Tenneco Packaging and Pactiv Bond-Increasing Personal Risk Ratings/BOUGHT 50 BMLPRH at 16.27/

The market had an unconvincing rally last Friday. Apple closed at below its 200 day moving average, falling $4.9 to close at $320.26. This decline by The Market Leader caused a major brouhaha among staff members, as the OG lobbied for another purchase of a double short ETF.

LB asserted that it had already planned for a downdraft in the stock averages by substantially raising cash and adding double shorts only in a manner permitted by its Vix Asset Allocation Model. (e.g.  More on VIX AND ASSET ALLOCATION-November 2008 Post). All of this has been explained over and over again to the OG, who apparently has trouble following the LB's reasoning.  LB has to have the patience of JOB in dealing with the OG.  No one appreciates the burdens that the LB has to bear in this operation, and the OG's dead weight is becoming heavier by the year, in more ways than just one. 

As previously noted in great detail, many times, the Vix Asset Allocation Model does not permit the purchase of double short stock ETFs in an Unstable Vix Pattern, except when the VIX is below 20. The VIX is now hovering over 20.  The OG thought that the decline in the Nasdaq, the overall weak-kneed rally, and the movement in Apple stock below both its simple and exponential 200 day moving averages (Seeking Alpha), were together worth at least another $1000 add to the double short hedge, notwithstanding the Nerd's Model.  LB refused to relent and nothing was done.  LB as the acting Head Trader adhered strictly to its Model, regardless of the concerns expressed by the Old Geezer, who by the way needs to an extra dose of his chill pills.  LB has everything under control, chaos does not exist.  

"Let LB do the thinking OG, maybe the OG needs to play Frank Sinatra's Greatest Hits about 100 times in a row to help settle his nerves and think about something else, like Amour or playing checkers, taking the garbage out which is a task that the OG can excel at, or anything other than making suggestions to the LB, or engaging in useless babble about investments", LB added in his voice showing the deepest concern for the OG, which it could muster at the moment.  There are many positives that the RB will discuss in tomorrow's post, who just said "go all in".

S & P reaffirmed its BB- rating of Belo's senior debt but changed the outlook to positive from from stable, citing reductions in the firm's leverage and "strong liquidity". WSJ Bought 1 Belo Senior 7.75% Senior Bond Maturing 1/1/2027 at 92.5

In an interview with Fortune magazine, Bob Rodriguez sees another financial crisis on the horizon, equal to or greater than the Near Depression, that will be attributable to the U.S. government's balance sheet, unless the U.S. starts making deep spending cuts of 350 to 500 billion a year.  His fund FPA Capital has close to 30% in cash.

The OG was watching a college baseball game over the weekend. Vanderbilt has made its first appearance in the College World Series, and the OG is a fan.  During a commercial break, flipping through channels to see if anything else was interesting, the OG accidently landed on the local PBS channel, and saw what appeared to be a 11 year old girl, Jackie Evancho, singing Nessun Dorma, Jackie Evancho sings "Nessun Dorma": Dream with Me in Concert | Great Performances | PBS, and the OG could not believe what he was hearing.  Amazing! Apparently, she was a contestant in one of those TV talent contests that have never been watched here at HQ.  I later found a clip of her singing "Time to Say Goodbye" with Sarah Brightman on that show: YouTube (see also Jackie Evancho performs "O Mio Babbino Caro" | Great Performances | PBS Video)

1. Tenneco Packaging and Pactiv (own 3 senior bonds)(Junk Bond Ladder Strategy): Tenneco Packaging was the predecessor name for Pactiv, that was acquired in 2010 by the Reynolds Group.  The Reynolds Group is a private company controlled by New Zealand's Graeme Hart that has grown through acquisitions financed by debt.  Reuters The acquisition of Pactiv by Reynolds Group caused all of the Pactiv bonds to lose their investment grade rating and have been deservedly rated in junk territory after this acquisition.  Bought 1 Tenneco Packaging Bond Maturing in 2027 Bought 1 Tenneco Packaging Senior Bond at 92.8 Maturing in 2025  Bought 1 Pactiv 6.4% Senior Bond Maturing on 1/15/2018 at 91.5

I mentioned in a prior post that Reynolds Group needed to apply its cash flow to reduce debt for several years and to abandon further leveraging its balance sheet through yet another large acquisition financed by incurring more debt. Serial acquirers, who load up their balance sheet with ever increasing amount of debt, will increase the risk of a default occurring, particularly during an economic downturn or the occurrence of other events such as customers finding an alternate supplier or a competitor gaining market share with a new product.  

Reynolds is a serial acquirer. The latest target is its announced acquisition of Graham Packaging Co (GRM) for $4.5 billion which includes assumed debt. SEC Filed Press Release GRM was itself a highly leveraged company, with $2.794 billion in long term debt as of 3/31/2011.  Form 10-Q GRM was taken public in 2010 at $10 per share. Final Prospectus Supplement  Reynolds is acquiring GRM for $25.5 per share plus assuming the debt. The private equity firm, Blackstone Group LP owns about 61.3% of GRM. 

As one would expect, the existing Tenneco Packaging/Pactiv bonds fell in price in response to this development.  It would not be surprising to see the rating agencies take some action in response to Reynolds' increase in leverage.  The current ratings are Caa1 by Moody's and B- by S & P.

In response to this latest action by Reynolds, I am raising my personal risk rating for the Tenneco Packaging bonds due in 2025 and 2027 to 8+ from 7, and my rating for the 2018 Pactiv bond to 7 from 5.  Personal Risk Ratings For Junk Bonds A higher rating indicates an increased risk of a default.

2. Bought 50 BMLPRH at 16.27 Last Friday (see Disclaimer): BMLPRH is a non-cumulative equity preferred stock originally issued by Merrill Lynch, which was of course acquired by Bank of America.  After that acquisition, all of the exchange traded floating rate preferred stocks issued by Merrill became BAC obligations and there symbols also changed, all with the first three letters "BML", as in Bank of America Merrill Lynch.  All of the "BML" floaters pay quarterly qualified dividends at the greater of a minimu or some percentage above the three month LIBOR rate on a $25 par value:

BMLPRG   Prospectus Supplement Greater of 3% or .75% above 3 month LIBOR
BMLPRH   Final Prospectus Supplement Greater of 3% or .65% above 3 month LIBOR
BMLPRJ    Final Prospectus Supplement Greater of 4% or .75% above 3 month LIBOR
BMLPRL   Term Sheet   Greater of 4% or .5% above 3 month LIBOR

Prior to the add of BMLPRH last Friday, I owned 100 shares of BMLPRJ, but I have bought and sold this volatile grouping of securities since 2009:

2011 Net Gain BML Floaters To Date +$221.77

2010 Net Gain BML Floaters +$413.64
2009 Net BML Floater +$166.28
All of the dividends paid by this grouping of equity preferred stocks have been classified as qualified dividends by my broker.    

I have discussed in several posts the considerations that would lead me to buy one compared to the others. Item # 1     Bought 50 BMLPRG at 16.04 (January 2011 Post); Item # 6 BMLPRH vs. BMLPRJ  (9/25/2009 Post); Item # 3  Bought: 50 BMLPRH at 16.2 (September 2010).  

The selection involves weighting several criteria:

1. The current yield at my purchase price

2.  At what point will a rise in LIBOR trigger the float provision

3.  What will be my yield at my constant cost number under various three month LIBOR scenarios

While BMLPRJ has a 4% minimum, the price for that security last Friday was around $19.1.  Bank of America Corp. Dep. Shs (Rep. 1/1200th interest of a share of Fltg Rate Non-Cum Pfd Series 4) , BML.PJ  At a total cost of $19.1, with the 4% rate, the current yield would be around 5.23%, which is not bad for a qualified dividend when interest rates are so low.   

BMLPRH has a 3% minimum. At a total cost of $16.27, that translates into a current yield of 4.6%.  The BMLPRH coupon would increase over the minimum when the 3 month LIBOR rate crossed 2.35%. At a 3% LIBOR rate, the coupon would be 3.65% or 5.6% at the $16.27 total cost number , higher than 5.23% current yield of BMLPRJ which would not have increased its coupon yet with the 3 month LIBOR at 3%.   

The advantage in dollar terms would be greater in favor of BMLPRH when spending an equal amount, say $1000, to purchase shares of BMLPRH at $16.27 compared to BMLPRJ at $19.1.

BMLPRH $1000 invested at $16.27=61.46 shares
BMLPRJ $1000 invested at $19.10= 52.35 shares  

At the current minimum payments, these two investments would currently produce-

BMLPRH Annual Per Share $.75 x. 61.46 shares: $46.09
BMLPRJ Annual Per Share $1 x. 52.35 shares= $52.35

When I look at it this way, the current advantage of BMLPRJ is reduced but there is still a current advantage.  

Now, assume a 4% 3 month LIBOR:

BMLPRH Coupon 4.65%= $1.16 rounded x. 61.46 shares= $71.29
BMLPRJ Coupon 4.75%= $1.19 rounded x. 52.35 shares= $62.3 

When the cross over point occurs, the equal amount spent on BMLPRH will always produce a higher dollar amount based on the greater number of shares, even though BMLPRJ has a slightly higher LIBOR float.  That small difference of .1% is not high enough to overcome the income produced by the greater number BMLPRH shares. 

Since I do not know what the future will bring, I will often hold one of the higher current yielding ones and one which would produce a greater yield at higher LIBOR rates.   

Given the volatility of this grouping of securities, I will trade in and out of them, booking profits as I collect dividends.  

The volatility is often linked to perceptions about the credit worthiness of Bank of America.  Since these securities are non-cumulative, a fear about an elimination of the dividend, rational or not, will drive these securities lower in price. A flight to safety would not include this kind of security. I would expect it to decline in the event of a default by Greece for example. The dividends have to be paid as long as BAC continues to pay a common share dividend, currently at 1 cent per quarter. Once that dividend is eliminated, then the equity preferred shareholders could have their non-cumulative dividend eliminated too. Advantages and Disadvantages of Equity Preferred Floating Rate Securities

However, it would be a major step for BAC to eliminate that 1 cent per quarter dividend.  It would signal to the market extreme stress at the bank and would raise questions about the bank's viability.  So, I would not expect that too happen.  If it did, then the equity preferred shares could be trading in the low single digits.   

I am content to trade them, avoiding an exposure of over $4,000 to this grouping at any time, and generally move toward playing with the house's money. That point is reached when the total profits plus dividends exceed my total cost for positions held. The profits on the BML series so far amounts to +$801.69. When I come closer to the magic number, I will take the time to tally up the dividends.  I suspect that at least 70% of that number will have to come from capital gains rather than dividends which have been relatively low due the non-activation of the float provision, as a result of the FED's Long JIHAD Against Savers and All Responsible Americans, just take out that whip Uncle Ben and hit us some more.  

Floaters: Links in One Post

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