Monday, August 29, 2011

PFK/Bought 100 WLFCP at $10.32/SOLD 30 USBPRH AT 21.84/Second Quarter GDP Revised to 1% Growth/Bought 1 Senior Secured 11.25% Apria Healthcare Maturing on 11/1/2014

Randall Forsyth wrote a positive column about junk bonds. Barrons He argues that junk bonds, mortgage REITs and high-dividend stocks are "well-suited" to a low growth world.  I thought that the mortgage REITs were down some last week in response to a possible  program that would allow underwater homeowners to refinance their Freddie and Fannie mortgages at lower rates.  NYT

While I am continuing to add to my junk bond ladder in small amounts, I am going to cut back new adds to just one bond per month for the next three months. I want to see some positive economic news, and do not anticipate a good jobs report this Friday.

Second quarter U.S. GDP was revised to 1%, though the composition of that anemic number improved some from the last report. Consumer spending increased .4% compared to a .1% gain in the previous estimate.  The reduced estimate was mostly caused by weak exports and a smaller increase in inventories. The prior estimate was 1.3%. News Release: Gross Domestic Product and Corporate Profits The price index for domestic purchases increased 3.3% in the second quarter. Excluding energy and food, the price index for those purchases still increased 2.6%, up from 2.4% in the first quarter. The overall price index increased by 3.2%.

Bernanke's speech was a non-event. Bernanke, The Near- and Longer-Term Prospects for the U.S. Economy--August 26, 2011 He did blame Congress for some of the current weakness.  NYT  He clearly placed the ball with Congress, mentioning "fiscal" 15 more times than "monetary".

1. Bought 100 of WLFCP at $10.32 and Sold 30 USBPRH at $21.84  last Thursday (see Disclaimer): WLFCP is a cumulative equity preferred stock that pays qualified dividends on a monthly basis. The coupon is 9% on a $10 par value. 

The issuer is a publicly traded company called Willis Lease Finance Corporation (WLFC), which is involved in the leasing of jet engines.   

The monthly dividend of $.075 per share was recently declared by Willis Lease.

Willis Lease recently reported net income of $2.7 million or 31 cents per share for the 2nd quarter of 2011. 

I have bought and sold this issue, with the last two sales occurring earlier this year.  My realized gains so far this year are $202.09 plus the dividends. (see snapshot at Item 2 Sold 100 WLFCP at $11.35). In addition to that linked post I have discussed this security in the following posts:  Sold 100 of the 200 WLFCP (March 2011); Bought 100 WLFCP at 10.1 (January 2010 Post);  Bought 100 WLFCP @ 10.33 (November 2010 Post). I may add another 100 in the event this security falls close to its par value.  


This is a link to the last filed SEC Form 10-Q.  When investing in this type of security, it is important to also examine the firm's debt, which is of course more senior to this equity preferred stock. Willis has a lot of debt. (see pages 17-19 of 10-Q).  

I am improving my cash flow without dipping much into my cash stash. So I financed the buy of WLFCP mostly by selling the lower yielding USBPRH at $21.84, recently bought at $18.12Advantages and Disadvantages of Equity Preferred Floating Rate Securities  Floaters: Links in One Post

2. Bought 1 Senior Secured 11.25% Apria Healthcare Bond Maturing on 11//1/2014 (Junk Bond Ladder Strategy)(see Disclaimer): Apria Healthcare is a highly leveraged private firm that provides home respiratory and infusion therapy. The company lost $9.437 million in the Q/E 6/2011 on $576.348 million in net revenues, compared to net income of $3.366 million in the year ago quarter on $518.178 million in net revenues. Form 10-Q

This company has two publicly traded senior secured notes maturing on 11/1/2014. The other one has a higher coupon but is junior in priority to the one that I bought last Friday. The prospectus for both notes can be found at Prospectus dated August 16, 2010. The description of the two notes starts at page 163. The difference in priority would come into play in the event of a bankruptcy filing as explained in great detail starting at page 179.

This is a link to its 2010 Form 10-K. Th debt is discussed starting at page 83.

This is a link to the firm's website: Home

I bought what is called the Series A bond, the more senior one in priority. This is a link to the FINRA Information on that bond: FINRA According to FINRA, that bond is rated currently at Ba3 by Moody's and BB+ by S & P.

The other senior secured bond, more junior in priority, is rated lower at B3 and BB-. FINRA

My confirmation states that the current yield at my cost is 11.315% and the YTM is 11.458%. I paid the seller $37.50 in accrued interest.

3. Exchange Traded Bond PFK (own): PFK is a senior bond issued by Prudential that matures in 2018 at $25 and is currently selling at a premium to its par value.  Prudential Financial Inflation linked Retail Medium Term Notes, PFK pays a monthly interest rate tied to a 2.4% spread over CPI. The CPI calculation for PFK is slightly different from the two exchange traded CPI floaters, OSM and ISM, that originate from SLM.  PFK will use a fixed day count of 30/360, whereas the SLM floater will use day counts of 30/365 or 31/365 depending on the number of days in a monthly payment period. I show how the penny rate is calculated for OSM in item # 1 Added to OSM at 18.47.

I will now show how the interest rate is calculated for PFK which has a higher spread and a different day count.

All of these securities use the unadjusted CPI for All Urban Consumers. That data can be found at the stlouisfed.  All of these securities will calculate CPI over a 12 month period, with a three month lag.

The WSJ dividend page shows that PFK will go ex interest on Tuesday, 8/30/11, and the payment date is 9/10/11. The penny rate for that September payment is shown at $.12437 per share.

This is how that number is calculated:

May 2011 CPI:   225.964
May 2010 CPI:   218.178
Difference: 7.786
Divide 7.786 by May 2010 CPI of 218.178: .0357%
Add Spread of .024% to .0357%= .0597%
Multiply .0597% x. $25 par value=$1.4925
Multiply $1.4925 x. 30/360= $.12437 penny rate for September 2011

PFK Prospectus:  Pricing Supplement No. 122 dated March 31, 2006

Floaters: Links in One Post

Bought 100 PFK at 18.47 (June 2009); Bought 90 PFK in IRA $18.94  (June 2009); Added 50 PFK at $17.83 (August 2009); Added 50 PFK in Roth at 20.88-Averaged UP (January 2010). Comparing Prudential Floating Rate Bonds Tied to CPI and Fixed Rate Coupon Bonds Maturing in 2018 (July 2009).

100 PFK Total Cost Per Share $18.55

100 PFK Total Cost Per Share Roth IRA=$19.52

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