Wednesday, August 31, 2011

Junk Bond Ladder Table/BAC/Bought: 1 Terex 8% Senior Subordinated Bond Maturing on 11/15/2017 at 96.947 and 1 United Rentals 8.37% Senior Subordinated Bond Maturing 9/15/2020 at 91.5/Bought 50 CBLPRC at $24.36/Bought 50 of the CPI Floater ISM at $20.62

I mentioned in Monday's post that I would limit my junk bond buying to just one per month for the next three months. In today's post, I discuss two purchases made last Monday. Technically, those purchases were made in August and were not subject to the foregoing restriction which comes into play on 9/1. 

As noted by Krugman in his NYT column, a majority of GOP tribe members are hostile to science. A recent poll showed that only 35% believed in evolution. ( GOP candidates on evolution:  Daily Intel)

Bank of America announced on Monday that it was selling 1/2 of its stake in China Construction Bank to unnamed buyers for $8.3 billion, providing it with more of an equity capital cushion. This will provide the bank with $3.5 billion in Tier 1 Common Capital under Basel I. The after tax gain on this transaction is approximately $3.3 billion. SEC Filed Press Release I own BAC's common, equity preferred floaters originally issued by Merrill Lynch, "principal protected" senior notes issued by BAC and Merrill whose coupon is linked to a performance of an index, and trust preferred stocks originally issued by Delaware Trusts associated with Countrywide (CPP, a TC) and MBNA (KRBPRE and KRBPRD).

Consumer confidence went way down in August, falling to 44.5 from the 59.2 reading in July.  That was one bad number.

The Case Shiller price home price index increased 3.6% in the second quarter, after falling 4.1% in the first quarter of 2011. However, the national index for home prices declined 5.9% since the second quarter of 2010 and are now at 2003 price levels. The index for the 20 metropolitan areas shows a 4.5% year-over-year decline. The largest one year decline is in Minneapolis at -10.8, then Portland at -9.6 and Phoenix at -9.3%.  None of the 20 metropolitan areas showed an increase in price year-over-year.   

1. Bought 1 Terex 8% Senior Subordinated Bond Maturing on 11/15/2017 at 96.947 Last Monday (Junk Bond Ladder Strategy)(see Disclaimer): I am keeping an eye on Terex (TEX) for a possible common stock purchase. TEX traded over $90 in 2007 and hit $38 earlier in 2011, before sinking to its current price. TEX Interactive Chart

I noticed that this Senior Subordinated bond was available for purchase last Monday in a small 1 bond lot, so I picked it up instead. 

With a better economy, Terex has potential. It makes and markets various types of machinery and equipment, including aerial platforms, cranes and compact construction equipment. Profile | The company lowered its F/Y 2011 E.P.S. guidance in late July:  Terex 

The current consensus estimate is for an E.P.S. of 53 in 2011 and $2.1 in 2012. Analysts 

This is a link to the FINRA information on this bond:  FINRA 

According to FINRA, this subordinated bond is currently rated at B3 by Moody's and B by S & P. A more senior bond, maturing in 2016, is rated slightly higher at Ba3 by Moody's. For Terex, there is a more senior unsecured bond issue in the original principal amount of $300 million. That bond matures on 6/1/2016 and is rated Ba3 (still junk) by Moody's. That more senior bond is selling over its par value. FINRA I believe Terex drew down on a secured credit facility to finance the recent share purchase of Demag Cranes AG, spending approximately €779 million in cash.  SEC Form 8k  So, there is a lot of debt more senior in priority than the subordinated 2017 "senior" bond that I purchased on Monday.

In the capital structure, a better name for a senior subordinated bond would be junior bond. There will generally be more senior unsecured and secured debt, and no bond more junior than the "senior subordinated" bond. 

This is a link to the last quarterly report: TEX-6.30.11-10Q Long term debt is discussed beginning at page 22.

This is a link to the prospectus: Interest is paid semi-annually in May and November.

My confirmation states that the current yield at my cost is 8.184% and the YTM is 8.470%. 

2. BOUGHT 1 United Rentals 8.375% Senior Subordinated Bond Maturing on 9/15/2020 at 91.5 Last Monday (Junk Bond Ladder Strategy) (see Disclaimer): United Rentals (URI) is a publicly traded company that engages in equipment rentals in 531 locations. Profile | Like Terex, I would expect that the results will improve with a more healthy economy than now.  The current consensus E.P.S. estimate is for $1.39 in 2011 and $2.47 in 2012. Analysts If the U.S. has entered or is about to enter a recession, those estimates will likely prove to be too high.  

This is a link to the FINRA Information on this bond: FINRA 

According to FINRA, this subordinated bond is ranked Caa1 by Moody's and CCC+ by S & P. Fitch has it at a "B". 

This is a link to the prospectus:  Interest is paid semi-annually in March and September. 

This is a link to URI's last filed Form 10-Q. The debt is discussed in 6 starting at page 14. The company is highly leveraged.

My confirmation states that the current yield at my cost is 9.074% and the YTM is 9.670%. 

3. Bought Back 50 CBLPRC at 24.36 on Monday (see Disclaimer): CBLPRC is a cumulative equity preferred stock issued by the REIT CBL Properties (CBL).  I have a lot of respect for the downside risks of REIT preferred stocks. REIT CUMULATIVE PREFERRED LINKS IN ONE POST/Advantages & disadvantages When this type of security is selling near its $25 par value, there is no or insignificant upside potential and the downside risk can be  huge, as shown by their price action during the Near Depression period.  I bought this same security at near $10 (October 2008: Buy CBLPRC). While I have successfully traded it, I will not be a long term holder of the shares purchased last Monday.  Instead, I will flip them for whatever profit can be realized on the shares after collecting one or more dividends. Bought 50 CBLPRC at 21.87 SOLD CBLPRC at 24.25 Bought 100 CBLPRC @ 24.36 Sold: 50 CBLPRC at 25.36 My largest percentage gain was on the purchase of the common shares at $3.7 LATE DAY TRADES: GCI, CBL, FR, SLG, NYT, NWSA (Nov. 2008 Post), later sold  @ 18.04 (November 2010). 

CBL owns retail malls and "open-air" centers, including several large malls in middle Tennessee. 

This preferred stock pays cumulative dividends at a 7.75% coupon on a $25 par value.  There is a stopper provision found at page S-11 of the prospectus: Preliminary Prospectus Supplement CBL is paying a common stock dividend.  

The yield at a total cost of $24.36 is around 7.95%. 

This is a link to the firm's website: CBL & Associates Properties, Inc.

The company recently reaffirmed 2011 guidance. SEC Filed Press Release 

This is a link to its last filed Form 10-Q.  

Dividends are paid quarterly. 

4. Bought 50 of the CPI Floater ISM at $20.62 Last Monday (see Disclaimer):  ISM is a CPI floater, similar to OSM in many respects.  Both ISM and OSM are senior bonds issued by SLM, also known as Sallie Mae, with $25 par values. Both pay interest monthly, going ex interest on the 12th of each month.   The differences between the two securities are summarized below: 

ISM matures on 1/18/2018 and has a 2.05% spread over CPI:
OSM matures on 3/15/2017 and has a 2% spread over CPI: 

I have had concerns about SLM since I started to purchase these notes back in late 2008, when OSM was trading near $10. 

Last Monday, ISM was trading around 40 cents per share cheaper than OSM, even though ISM has a slightly higher spread over CPI.  This may be due to nothing more than the light trading in these securities or it may be a discount applied to ISM due to its longer maturity. SLM Corp. CPI-Linked Medium Term Notes Series A 2017 (OSM) closed Monday, 8/29/11, at $21.01. SLM Corp. CPI-Linked Medium Term Notes Series A 2018  (ISM) closed at $20.62, which would give it a higher yield than OSM based on price and the slightly higher spread.

I have bought and sold both notes.  I currently own just 100 of OSM of with an average cost of less than $16 per share.   

The interest payment for September will be $.1193, calculated using the following computation:

May 2011 CPI: 225.964
May 2010 CPI: 218.178
Difference: 7.786
Divide 7.786 by May 2010 CPI 218.178=.0357%
Add .0205 to .0357%=.0562%
Multiply .0562% by $25 par value=$1.405
Multiply $1.405 by 31/365= $.1193 

I can also calculate the penny rate as far ahead as the November 2011 payment (using data at stlouisfed.)

July 2011 CPI: 225.922
July 2010 CPI: 218.011
Difference: 7.911
Divided 7.911 by 218.011=.0362%
Add Spread of .0205 to .0362%= .0567%
Multiply .0567% by $25 par value=$1.4175
Multiply $1.4175 by 31/365= $.1204             

There are 31 days in both the September and November pay periods. There will be 30 days in the October monthly period since September only has 30 days. The multiplier for October would be 30/365.  Since the percentage increase in inflation is increasing, the penny rate goes up from September to the November pay period. 

A major concern about SLM is that the government has ended the FFELP program. So that student loan is just gone, at least until the Congress changes its mind, if ever. SLM is continuing to issue private student loans, but those loans no longer have the government guarantees. I did review a recent Credit Suisse report, dated 8/25/11, that claimed the current low interest rate environment is benefiting SLM, at least when the floor interest rate on the FFELP loans is higher than the prevailing interest rate. The CS analyst believes that spread adds $3 in value to the stock, along with $9 in value from the portfolio cash flows from the huge amount of FFELP loans on the balance sheet. That report is available to Charles Schwab customers.  

5. Junk Bond Ladder Table as of 8/30/11: This table is starting to give the OG the shakes. Just glancing at it requires him to breathe into a paper bag for an hour:

The general idea is to break-even on the bonds, recognizing that some defaults are inevitable.  Hopefully, when most of these bonds mature in the 2014 to 2017 time frame, I will be able to deploy the proceeds into purchases of investment grade corporates, constructing a similar ladder, with much higher yields than prevailing today.

I had two more trades on Monday and I will discuss only one of those in the next post. The other one was the repurchase of a double short at the close last Monday, a rule violation by our LB.  Double short stock ETFs are only to be purchased when the VIX falls below 20 in an Unstable VIX Pattern. The ^VIX did fall 9.27% on Monday, but closed at 32.29.  OG noted that he was not allowed to violate any of LB's stinking rules. RB added that it was going to violate all of those stinking LB rules as soon as it became Head Trader.  LB disagreed with the assertion that it violated any Rule, such a claim is frivolous on its face. While LB does not wish to engage in an extended discussion with Nitwits, a recent modification to the trading rules for the Unstable VIX Pattern, #3,928,302,454,842 (A)(1)(b)(iii), allowed for such a trade under the current circumstances. 

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