Monday, August 15, 2011

GDO/Bought 50 of CPP at $21.4/Bought 1 Windstream 7.75% Senior Bond Maturing 10/15/2020 at 98

The Commerce Department reported a .5% increase in retail sales for July, and revised the two prior months up. .pdf  A report on consumer sentiment showed a new three decade low. NYT

Keycorp (KEY) has called for redemption three trust preferred stocks (KEYPRA, KEYPRB, KEYPRD). The redemption will be at their $25 par values plus accrued interest. SEC Filed Press Release KEY had over 15 billion in assets as of 12/31/2009 and will have to phase out the use of TPs as TIER 1 capital.  I have owned KEYPRA and KEYPRB. Bought KEYPRA at $7 (October 2008); Bought 50 of the TP KEYPRB at $17.74 (November 2009); Trust Preferred Securities: Links in One Post

Western Asset Global Corporate Defined Opportunity Fund (GDO), which is a significant position, lowered its monthly distribution rate from 13 cents to 12.75 cents. Many individual investors will react negatively to a dividend reduction, even when such a reduction is necessary to reduce or eliminate a return of capital distribution. I see no benefit to receiving a dividend supported by a return of capital.

The  National Conference of State Legislatures found that Texas depended more than any other state in plugging its deficit with Obama's stimulus money. For its F/Y 2010, 97% of its budget deficit was filled with federal stimulus money. Federal Recovery Act State Budget Update The state used $6.4 billion in funds from the Recovery Act to plug a $6.6 billion deficit. Now that the money is gone, Texas is severely cutting back on education, child care, medicaid and other social programs, rather than increasing taxes or using part of the state's rainy day fund.

Michelle won the Iowa straw poll. I have heard that many want a dream ticket of Rick Perry and Michelle, either one at the top of the ticket, with Sarah as Secretary of State.

Rick's hair and manner remind me of the former Governor Rod Blagojevich.  I wonder whether they are twins.

The has an article exploring Rick Perry's crony capitalism.

With the Fed's Jihad against the Saving Class likely to continue for another two years, Randall Forsyth explores some options for yield hungry investors. One option discussed by him is Mortgage REITS. In the weekend, Ben Levisohn called Mortgage REITs "massively risky".

The S & P 500 index fell 16.6% between 7/22 and 8/10.  This index closed at 1345.02 on 7/22/11 and at 1120.76 on 8/10.

I am gradually increasing my exposure to exchange traded bonds, which had been reduced by close to 40 thousand primarily due to bond redemptions and to profit taking.  At the moment, I am concentrating on buying some bonds back that were sold at higher prices. I large number of exchange traded bonds, discussed in the blog, have been redeemed, so my choices in that arena are much more limited than in 2008 and 2009. TRUST Certificates: Links in One Post Updated PostExchange Traded Bonds.

1. Bought 50 of the Trust Certificate (TC) CPP at $21.40 Last Thursday (see disclaimer): CPP is a TC containing a Trust Preferred (TP) originally issued by Countrywide Capital III. The TC represents a beneficial interest in that TP and the TP represents a beneficial interest in a junior bond originally issued by Countrywide. When you cut through the legal layers, CPP is in effect a junior bond from Countrywide, later acquired by Bank of America. This security has the same credit rating as TP's originally issued by Bank of America. It will typically trade, however, at a higher yield than other BAC TPs.  I suspect that some investors are turned off by the multiple legal layers and the Countrywide name.

{As discussed below, there is an issue of successor liability being litigated now, but it is not 100% totally clear to me whether that legal issue has any bearing on the debt issued by Countrywide and assumed by BAC (see also NYT referring to BAC assuming 16 billion in Countrywide debt securities and guarantees;; page 192 of BAC's 2010 Annual Report:  10-k which expressly mentions this TP; and 8/12 article from Thomson Reuters)

Based on closing prices from last Thursday, when I bought CPP, this is a summary of the price, current yield (provided by Marketwatch), and maturity dates for some other BAC TPs:

BAC Capital Trust IV 5.875% Cap. Secs., BAC.PU 7.43% at $19.78 Maturing 2033
BAC Capital Trust I 7% Capital Secs., BAC.PW 7.89% at $22.17 Maturing 2031
BAC Capital Trust II 7% Capital Secs., BAC.PV 7.91% at $22.12 Maturing 2051
BAC Capital Trust X 6.25% Cap. Secs., BAC.PB 7.62% at $20.5 Maturing 2055

CPP has a 8.05% coupon on a $25 par value. The TC and the underlying security mature on 6/15/2027, a shorter time frame than the other BAC TPs.  Interest payments are made semi-annually in June and December. That is a disadvantage compared to the normal quarterly payments for a TP. At a total cost of $21.4, the current yield is around 9.4%.

The underlying security is a typical trust preferred. Interest payments may be deferred for up to five years, with a typical stopper clause found at page S-31. Any deferred payment accrues interest at the coupon rate. The junior bond owned by the trust will be the most subordinated debt on the bank's balance sheet, but will be senior to common stock and equity preferred stock. In order for BAC to defer paying the interest on that bond, it would first have to eliminate the common stock and all equity preferred dividends, as well as defer any cumulative equity preferred stock dividends.

The underlying security is currently rated Baa3 by Moody's and BB+ by S & P. Bank of America | Investor Relations | Fixed Income Investor Relations I am more inclined to agree with the junk rating.     

My last transaction for this security was to sell shares at $24.9. (Item # 1 July 2010 Post) 

FINRA Information on the Underlying Bond: FINRA The underlying bond is infrequently traded. This security does have a BAC symbol associated with it now: BAC.IEF 

More information about BAC equity preferred and trust preferred stocks can be found at Investor Relations and at (free site, registration required). 

I bought CPP in a taxable account since I already have two BAC TPs, originally issued by MBNA Capital, in the ROTH IRA. I recently sold one of those,  SOLD 50 KRBPRE @ 25.96 (May 2011 Post), in that same taxable account. This kind of exchange in effect gives my a much higher yield while decreasing my dollar exposure to BAC TPs.

I was only able to buy CPP due to the prior disposal of KRBPRE. I have a maximum limit of $10,000 to the securities from one firm. I am bumping up against that limit with BAC due to my ownership of its senior notes (i.e. "principle protected notes" issued by BAC or Merrill Lynch), TPs, equity preferred stock, and some common shares. That limitation is like a circuit breaker, limiting my losses in the event I do not properly estimate the potential for a catastrophic failure. As a result, I am spread out into a large number of securities, close to 400, throughout the capital structure (common stock to secured debt), in a large number of companies. While I have not suffered losses from companies like Fannie, Freddie, Enron, Worldcom, Lehman, and so on, it is probably only a question of time before I am caught holding worthless paper, and the rule on exposure will keep my losses minimal in case I fail to anticipate the danger.  I obviously do not have the time to monitor everything closely, and there is no real protection for individual investors victimized by fraudulent and deceptive accounting anyway.

Due to concerns about BAC's financial health, which are legitimate, both its equity preferred and trust preferred stocks have fallen recently more than other similar securities from other large U.S. financial institutions.

BAC does not need to dispose of its large stake in China Construction Bank  to shore up its capital position. There were some news reports last week that BAC may sell part of its stake.  Bloomberg

BAC will have to phase out the use of its TPs as TIER 1 capital.

The 1997 Prospectus for the underlying TP from Countrywide Capital III can be found at  The underlying security is redeemable at a premium to its par value: see page S-54 of the prospectus.

In the event of a FDIC of BAC, I would anticipate that the TPs would become worthless or very close to it. Regular Preferred and Trust Preferred

Trust Preferred Securities: Links in One Post

There is a question whether or not Bank of America has successor liability for Countrywide's actions according to these articles: FierceFinance and  BofA Successor Liability (a copy of the Federal District Court decision regarding no BAC successor liability for alleged fraud by Countrywide can be found at amlawdaily.pdf) The issue is now in litigation. While that federal district court ruled in favor of no successor liability, that decision may me modified or reversed on appeal, and there is apparently an opposing decision in NY. Those issues appear to involve the alleged fraudulent activities of Countrywide before the acquisition, however, rather than Countrywide's debt existing at the time of the acquisition which news articles say was assumed by BAC.

I would attempt to research that issue in more depth if I was going to take more than a 100 shares position of CPP. If I was going to research in more depth that issue, which is not going to happen, I would look for a filing dealing with the express assumption of this debt by BAC. The underlying TP in CPP is expressly mentioned in BAC's Annual report in a section listing TPs issued by BAC or one of its predecessor companies, which only suggests, rather than proves, that successor liability has been established by an express debt assumption. Page 192 of Bank of America's 2010 10-k.

Bond indentures will frequently require the acquiring company to assume the debt. Such a provision can be found at pages S-33 to S-34 of the CPP Prospectus:

I just have not seen that specific documentation for this TP, so I can not make categorical statements on the issue of BAC's liability for the Countrywide junior bond owned by the Trust and Countrywide's guarantee relating to that trust's obligations. I would be surprised to hear a BAC claim that it was not responsible for Countrywide's debt existing at the time of the acquisition, but I have been surprised many times in my life about a lot of things.  For whatever reason, legitimate or not, it is clear that the TC CPP sells at a discount to other BAC TPs.

2. Bought 1 Windstream 7.75% Senior Bond Maturing 10/15/2020 at 98 Last Thursday (Junk Bond Ladder Strategy(See Disclaimer): I have discussed WIN in several recent posts, including last Wednesday when I bought 2 senior bonds maturing in 2018.  Bought 2 Windstream 7% Senior Bonds Maturing on 3/15/2019 at 96

This is a link to the Prospectus and the FINRA Information for this 2020 bond:

Prospectus: SEC

My confirmation states that the current yield at my cost is 7.844% and the YTM is 7.934%.

The common shares closed at $11.87 last Friday, yielding close to 8.42% at that price. I own 300 shares of the common, with an unrealized gain at that price of around $70. I intend to sell those shares at some point and just go with my three bonds.

3 Intel (own): Wells Fargo's analyst David Wong reiterated his outperform rating on Intel, and a valuation from $26 to $32, for the reasons summarized in Tiernan Ray's Barrons blog. At last Friday's closing price of $20.65, Intel has about a 4.2% dividend yield.  INTC A snapshot of my Intel purchases can be found at Item # 4 Snapshot of Intel Purchases with Cash Flow All of these purchases have been with cash flow, and started in October 2008. I am reinvesting the dividend to buy additional shares.

4. Cenveo, Cincinnati Bell and Dillards (own bonds: Junk Bond Ladder Strategy):

Cenveo (CVO) reported net sales for the second quarter of $495.2 million and NON-GAAP operating income of $40.6 million. Its adjusted EBITDA was $57.6 million in the second quarter. The GAAP E.P.S. was just one cent. SEC Filed Press Release

CVO's debt is listed in note 6 at page 20. Cenveo10-Q A description of its businesses can be found starting at page 53.

The one analyst providing an earnings estimate predicts a 2011 E.P.S. of 45 cents and $.55 for 2012. Bought 1 Cenveo 7.875% Senior Sub Bond Maturing 12/1/2013 at 97.5

Dillard's (DDS) reported a net income for its second quarter of $17.6 million or 32 cents per share, up from 10 cents in the year ago quarter. Comparable store sales increased 6%. Bought 1 Dillards 7.75% Senior Bond Maturing 5/15/2027 The Dillard's common shareholders reacted negatively to this report, taking the stock down over 18% last Friday. There were no trades in the bond.

Cincinnati Bell (CBB) reported net income of $10.9 million or 6 cents per share, up from 3 cents, on a 9% increase in revenues to $367.5 million.  Adjusted EBITDA was $137 million, a rise of 6%. Bought 1 Cincinnati Bell 8.375% Senior Bond Maturing 10/15/2020  Bought 1 Cincinnati Bell Bond Maturing 2018 at 94  The common shares closed last Friday at $2.98. Cincinnati Bell Inc., CBB 

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