Friday, July 8, 2011

United Refining/Bought 100 HSE:CA at 26.59 CAD/Bought 50 GJS at 16.9 in Roth IRA/Bought 100 of the CEF EXG at 10.61 in Regular IRA/Sold 50 of 100 GSBC at 19.27

I mentioned in an earlier post that United Refining had redeemed a senior bond, maturing in 2013 which I owned at that time, with the proceeds received from a private issuance of a senior secured bond maturing in 2018 United Refining 2012 Bond Redeemed at Par Value  Bought 1 United Refining Senior Bond at 95.5 The 2018 senior secured bond has now been registered with the SEC and can be purchased by individuals.  Prospectus

The 2018 bond is a 10.5% coupon first priority, senior secured bond. The collateral for the notes is a mortgage lien, subject to certain exceptions, on United's refinery at Warren, Pennsylvania and a pledge of the capital stock of a pipeline subsidiary. United has other assets. (see pp. 7, 44-48). I am simply monitoring the trading of the 2018 and have no interest in it at above par value. The Cusip # is  911358AKS. The 2018 bond is rated B3 by Moody's rates  and B by S & P, well into junk territory. This is a link to the FINRA Information on this new bond. 

If I do see 1 bond available for purchase at below par, I will first review United's latest earnings report for this private company before entering an order. I did briefly review the last filed Form 10-Q for the Q/E 2/28/11. The search term at Fidelity is not "United Refining" but "United Refng".

I thought that this was a good article, found at Seeking Alpha, explaining why Hewlett-Packard (HPQ) may be a good value stock for patient investors.

The ADP private payroll report showed an increase of 157,000 jobs in June.  adpemploymentreport.pdf

The P.M. London gold fix was $1527.5.

1. Bought Back 100 Husky Energy on the Toronto Exchange at 26.49 CAD Yesterday (Canadian Dollar (CAD)) Strategy (see Disclaimer): I have bought and sold Husky shares at higher levels. Stocks & Politics: Sold Viterra to Buy 100 Husky at 28.99 Canadian (February 2010); Sold HSE:TO at 30.48 CAD (April 2010).

The ordinary shares can be bought on the pink sheet exchange. HUSKF  I have bought shares only on the Toronto exchange using my CAD stash. The price on the U.S. exchange is higher than the price that I paid in Toronto because the CAD is now worth more than the U.S.D. (see CADUSD exchange rate). Since I am a very long term holder of Canadian Dollars, I am not concerned about exchange rates. The owner of HUSKF would need to be concerned, however, since a fall in the CAD versus the USD will negatively impact the price of HUSKF shares.  The converse is also true. For example, assume the CAD fell to .9 USD from the current 1.04 rate and Husky was selling at 26.49 on the Toronto exchange, its host market. Under those assumptions, I would expect to see HUSKF at around $23.93 versus its current price of around $27.75. So my price in CADs of 26.49 could remain the same but the exchange rate differential could result in a much lower price for HUSKF assuming a decline in the value of the Canadian dollar versus the USD. An investor needs to completely understand how exchange rates impact the value of their investments.

I will generally discuss the impact whenever I buy an ADR. See, generally, International Trading and Currency Risks (July 2010 Post); Strong U.S. Dollar + Weak Market=Time to Start Looking Overseas (June 2010)(dollar is now weak); Bought 100 AXAHY at 14.69ADDED 50 NABZY AT 19.51 (National Australia BankAdded 70 RHHBY at 34.07-Completing Round Lot/ Swiss Franc-Euro).  If I owned only Canadian securities and all of my cash was sitting in CADs, then I would start to look outside Canada for investments to buy in countries with weaker currencies.That would include the U.S., where the Dollar has been weak for several months against most major currencies.  U.S. Dollar Index (DXY) That chart is starting to show some stabilization at around 75.

Husky pays a good dividend, currently around 30 cents per quarter which is one reason for buying it. In my Canadian Dollar strategy, I am searching for yield on my CADs. I will take the distributions in CADs from all securities purchased under this strategy, thereby increasing the CAD stash constantly, as most of the Canadian ETFs that I own pay monthly dividends. Husky pays quarterly.  Husky Energy - Dividend Information The next ex date will be in August, with a pay date of October 1, assuming Husky continues the same time line as the past.

Husky is of course an energy company. Husky Energy - About Husky

Husky has recently been aggressive in bidding for oil-drilling rights in the central Mackenzie Valley area in Canada's Northwest Territory.  Reuters

HSE.TO closed yesterday at 26.51 CAD.

2. Bought 50 of the TC GJS at $16.9 in the ROTH IRA Yesterday (see disclaimer): GJS is a Synthetic Floater in trust certificate form. The underlying security owned by the trust is a fixed coupon senior Goldman Sachs bond maturing in 2033. This GS bond has a 6.125% coupon and matures on 2/15/2033.  FINRA The owner of GJS does not receive the fixed coupon payment, however. GS pays the trustee that amount, and the trustee swaps those funds with the swap counterparty who delivers to the trustee the amount payable to the owners of GJS.

GJS Prospectus:
Underlying Bond Prospectus:

The swap agreement creates a floating rate at .9% over the three month treasury bill rate paid monthly on a $25 par value. The maximum rate is 7.5%. As with other TCs, the TC matures at the same time as the underlying bond. If GS survives to pay off the 2033 bond at maturity, then the owners of GJS will receive the $25 par value at that time. Assuming this occurs, it will add to the YTM given my purchase at a large discount to par value.  The GJS coupon at a 6% 3 month treasury bill would be 6.9%, paid on the $25 par value, by way of an example. By buying the security at a discount to par value, the current yield is of course juiced.

This security is selling at a large discount due to its low current yield. There is no minimum amount, which is the case with a number of other synthetic floaters that I own in the ROTH IRA. The 3 month treasury bill rate is currently near zero. The lack of interest in this security is understandable given the current yield.

When and if the FED ceases its JIHAD against savers, and treasury bill rates are allowed to rise to non-artificial levels, the coupon on GJS will rise. At some point, the rise in the coupon will cause investors to bid up the price of this security. Hopefully, I will not have to wait until 2033 to receive a price close to par value.  Before the FED started its JIHAD, this security was selling near its par value in 2006 and 2007. GJS Historical Prices  Synthetic Fixed-Income Securities Inc. Floating Rate STRATS Series 2006-2 for Goldman Sachs Group Secs , GJS 

At a 4% 3 month treasury bill rate during an applicable computation period, the coupon would become 4.9% and the yield at a total cost of $16.9 would then be 7.24% (.04% + .009% spread=.049% multiplied by $25 par value=$1.225 annualized rate divided by $16.9 cost=7.24%)

Like the other synthetic floaters, GJS has a maximum rate. This security will not pay more than 7.5% on the $25 par value. With the float, the maximum rate would be hit when the 3 month treasury bill is at 6.6% or greater during the applicable computation period. So there is no benefit to T Bills rising to above that level since GJS would be stuck at 7.5%. At the 7.5% maximum rate, the effective current yield for GJS  would however result in a much higher effective yield of 9.4% to the purchaser at a total cost of $16.9.

I have bought and sold this security for small profits and I am close to playing with the house's money on it.

GJS ROTH IRA 2009 +$244.53
GJS 2009 +$168.15
GJS Roth IRA 2010 + 68.04
Total = $480.72. Given the low T Bills bills in effect during my prior ownership periods, the interest payments have been negligible and an insignificant part of my total return.

Some of the prior trades are discussed in the following posts: Bought 100 GJS at 10.5 (April 2009); SOLD GJS at 13.06 (August 2009); Bought 100 GJS AT $13 (October 2009); Sold 100 GJS in the Roth IRA at $15.6 (November 2009); Bought: 50 GJS at 14.6 (August 2010); Sold 50 GJS @ 16.20 (October 2010). Since I started to trade the synthetic floaters in the spring of 2009, I have leaned more heavily on those that pay the higher of a minimum rate or some percentage float over a short term rate.  

Assuming GS remains creditworthy, I am inclined to hold onto these shares until I could sell them at a price higher than $22 which will require at a minimum an end to the JIHAD against savers and a rise in the 3 month treasury bill to somewhere north of 4%. This is not going to occur anytime soon, which is an understatement of course.

In January 2007, GJS was selling at around $23.5 and the 3 month T Bill was then yielding a tad over 5%.  The data can be downloaded at the FED's web site. FRB: H.15 Release--Selected Interest Rates--Historical Data

TRUST Certificates: Links in One Post Duplicate Post
Floaters: Links in One Post

3. Bought 100 of the stock CEF EXG at 10.61 in Regular IRA Yesterday (see Disclaimer): I had enough cash to buy 100 shares of this stock CEF that pays quarterly dividends. The current quarterly dividend, which went ex dividend in May, is 28 cents per share. Assuming a continuation of that rate, the yield at a total cost of $10.61 would be about 10.7%. Eaton Vance Tax-Managed Global Diversified Equity Income Fund, EXG Stock Quote  This brings me up to 200 shares in the IRA accounts: Item # 7 Stocks & Politics: Bought 100 EXG at 10.57 in the Roth IRA (April 2011). I do not have much to add to the discussion contained in that post.

This is a link to the Morningstar page. When I last bought this fund, Morningstar rated it 4 stars, and now has it at 3 stars. In recent times, the distribution has been supported by a return of capital, which I view negatively.  Hopefully, the fund will start to harvest capital gains sufficient to cover the payout. The Morningstar page also shows several dividend cuts. The Near Depression period took away the option of supporting the dividend with capital gains.

This is a link to the last SEC filed shareholder report for the period ending in April 2011: Tax-Managed Global Diversified Equity Income Fund As shown in that report, the fund does write call options on major indexes.  The expense ratio is shown at 1.05%. As of 4/30/11, the fund is showing a significant unrealized capital gain of over 700 million  on its common stock positions (see page 7).

4. Sold 50 GSBC at $19.27 on Wednesday (Regional Bank Stocks' basket strategy) (see Disclaimer): I just pared this one to sell my highest cost shares bought at $18.55. I am keeping the shares bought shortly thereafter at $17.27. The primary purpose of this kind of trade is just to lower my average cost basis for the remaining shares while harvesting a profit.

I will discuss the remaining trades from Thursday in the next post. 


  1. Hi!

    Who actually owns the obligations of "Synthetic Fixed Income" at the moment?


  2. David: I am not sure that I understand the question. In this post, I discuss a synthetic floater GJS. This security is a trust certificate traded on the stock exchange and is characterized by me as an Exchange Traded Bond. That certificate, in this case GJS, represents an undivided interest in an unsecured senior fixed income Goldman Sachs bond maturing in 2033 owned by a trust.

    The owner of the GJS does not receive a fixed coupon however. As with other exchange traded synthetic floaters, the GJS owner receives the interest payment created by a swap agreement between the trustee and a brokerage company. The trustee receives the interest payment from GS and swaps it with the brokerage company for the amount due the owners of GJS which is .9% above the 3 month treasury bill, now likely to be near zero according to yesterday's FED statement for another two years. If the swap agreement was terminated for whatever reason, such as the bankruptcy of the swap counter party, then the owners of GJS would be paid by the trustee the fixed coupon amount of the underlying bond owned by the trust.

    Par value is $25. The interest payment for GJS is computed on that constant par value. When the bond matures or is redeemed by GS, the trustee will receive the redemption proceeds and will pay the owners of the TC their par value.

    These types of securities are owned by me only in a retirement account due to complex tax issues associated with the swap agreement.

    You may want to consult my Gateway Post on Synthetic Floaters. I would also recommend reading the prospectus. The link to the Synthetic Floater Gateway Post is found at the start of Item # 2.

  3. Hi!

    Thanks for answering so quickly.

    GJS was originally issued by a company called "Synthetic Fixed Income", which was then a subsidiary of Wachovia. Even though the trust was collateralized and more or less independent, the holder might have worried about losing money if Wachovia had gone bust, or gotten into certain related legal difficulties.

    Wachovia no longer exists as an independent company. If I remember correctly, parts of it are now owned by Wells Fargo and parts by Citigroup. Who owns the obligations of "Synthetic Fixed Income"?

    Thanks again.

  4. David: The obligation to pay the owners of GJS rests with the trustee. In the event GS does not pay the trust bond interest on its 2033 bond, then the trustee will not pay the owners of GJS. The owners of GJS are the beneficial owners of the bond. And, consequently assume the credit risk of a GS default.

    If the swap counterparty goes bankrupt, then the trustee will pay the fixed coupon interest of the 2033 bond to the owners of GJS which would be a better deal for them.

    The original creator of the trust is not relevant in this scenario. Wachovia was acquired by Wells Fargo. Citigroup bid was trumped by them. If WFC goes bankrupt, then the only relevance is that the owners of GJS would receive the fixed coupon of the underlying bond owned by the trust.

    This in fact happened with a security JBK, which I owned, which also was a synthetic floater created by Lehman ABS which went bankrupt. As explained in numerous posts, which can be found using the GOOGLE search box to the right, I explained that the bankruptcy of Lehman, the swap counterparty, caused the trustee to start paying the owners of JBK the fixed coupon rather than the float which was a better deal for them. I realized that early and recognized a nice capital gain after buying shares at less than $17.

    It would be helpful for you to review the history of JBK.

    Again, the obligation to pay runs from the trustee for the owners of GJS. The trust owns the bonds. The swap counterparty pays the trustee the amount due the owners of GJS and the trustee pays the swap counterparty, probably WFC, the amount received from GS. If the swap counterparty goes bankrupt, then the trustee treats that agreement as void as in the case of JBK and pays the owners the amount received for the fixed coupon bond owned by the trust.

    If you have not read the prospectus yet, I would recommend doing so. You may want to read my Gateway posts on Trust Certificates.