Wednesday, September 28, 2011

Bought 50 SUSPRA at $25.25 ROTH IRA/Sold 100 BAF at $14.3/The EU is Running Out of Time

I would not make the assumption that Europe will successfully resolve its sovereign debt problems. While the market has had a decent rally over the past two trading days, based on the hope of more meaningful actions by the EU, the longer term problems associated with too much debt would still remain even with a successful resolution of those problems.  The market seemed to realize that point as the rally yesterday faded into the close.  NYT

The debt deleveraging process will likely restrain growth in Europe and the U.S. for several more years. GDP growth in developed markets will not be supported by fiscal stimulus, but will instead be retarded by government austerity and anemic private demand.

And, it remains to be seen whether a shock and awe bailout program will actually be implemented in Europe. Time is running out.  The market will not wait much longer before the sovereign debt of many EU nations is trashed, and short term funding for several European banks, particularly those heavy into PIIGS sovereign debt, dries up in a flight from risk.  That later risk, a liquidity event, has already started to develop, as money market funds refuse to roll over maturing short term obligations originating from several European banks.  Bloomberg reported a few days ago that U.S. money market funds had cut exposure to European banks to the lowest level since Fitch started to compile such a survey in 2006.  It would be reasonable to predict a continuation of that liquidation until the EU does something to guarantee those short term loans.  It does not matter whether that is a rational fear or not. The fear exists and is influencing conduct on a global scale. Words will not calm it.

I previously predicted that the long term stock bear market will last another two years. I would also anticipate the volatility associated with an Unstable Vix Pattern to continue into 2012. This pattern is a dangerous one for most individual investors, particularly those facing situational risks requiring the liquidation of stocks to meet necessary expenses. 

The sale of new homes fell 2.3% in August. The average price for those homes fell 8.7% from July. /new_residential_sales.pdf

Both the 20 and 10 city Case Shiller home price indexes rose .9% in July, compared to June.  However, on an annual basis, the 20 metropolitan index shows a 4.1% decline. Minneapolis leads the decliners with a 9.1% decrease in home prices year-over-year. (PDF)

The Greek Parliament did approve yesterday a new property tax, a necessary step for Greece to receive the next tranche in bailout funds.  NYT

1. Sold 100 BAF at $14.3 on Monday (see Disclaimer):  I have ended up with too many leveraged closed end funds that invest in municipal bonds. I decided to unload my lowest yielding one, BAF, and to plow the proceeds into anther municipal bond CEF.  I realized a few bucks on the BAF shares and one dividend payment.  Bought Municipal Bond CEFs: 200 NMO at 13.03, 200 MUE at $12.89 and 100 BAF at $13.89

BlackRock Municipal Income Investment QualityTrust (BAF) closed at $14.27 yesterday. 

2. Bought 50 SUSPRA at $25.25 (see Disclaimer): SUSPRA is a trust preferred security that was issued by Susquehanna Capital I, a Delaware Trust.  It currently has a 9.375% coupon on a $25 par value. The proceeds realized from the sell of this TP were used to buy a junior bond issued by Susquehanna Financial (SUSQ) with the same terms as the TP. As with other bank TPs, interest may be deferred provided no payments are being made on a Junior Security. A junior security in this context would be common stock and equity preferred stock. The bond owned by the trust will be junior to other non-TP debt securities but will be senior to common and traditional preferred stock.  

The security can not be called prior to December 2012 unless there is a capital treatment or tax event.  A capital treatment event would be a law that no longer permits the TP to be included in TIER 1 capital.  Quantum Online (QO) maintains that SUSPRA is subject to call now due to the Dodd-Frank law. Many owners of other TPs have learned about that nit after a bank called a TP early that had been selling above par value.  However, I believe that QO is wrong about that assessment as applied to SUSPRA for the following reason. 

Financial institutions with less than $15 billion in assets as of 12/31/2009 can continue to include TPs issued prior to 5/19/2010 as Tier 1 capital.  (section 171(b)(4)(C) of Dodd-Frank Act at page 153: .pdf) (see also: Stocks & Politics: Trust Preferred Securities & Financial Reform; page 5 Walker) As of 12/31/2009, the SUSQ reported $13.689.558 billion in assets. Susquehanna Bancshares Inc--2010 Form 10-K at page 33.  SUSPRA was issued before 5/19/2010. So, it appears to me that this security may still be treated as Tier 1 capital. Consequently, I would disagree with the note at Quantum Online that maintains otherwise.  

Even if I am correct, the TP can still be called on or after 12/12/2012. Given the high rate, a call at par value plus accrued interest is certainly a possibly after that date, assuming no significant deterioration in SUSQ's financial position.  

At a total cost of $25.25, the yield is around 9.28%. Susquehanna Capital I 9.375% Cap Secs. Series I, SUS.PA Stock Quote Since this security was purchased in a ROTH IRA, that is in effect a tax free yield.  Interest is paid quarterly and the security went ex interest in early September for the current quarter's payment. 

This is a link to the prospectus: Final Prospectus Supplement

This last purchase brings me up to 80 shares in the ROTH IRA. I bought just 30 shares in June 2010 at $25.1:  Bought  30 SUSPRA in Roth IRA at $25.1 

SUSPRA does have a few unusual terms. The rate will change from a fixed coupon to a floating rate after 12/12/2037. The floating rate is 5.455% above the three month LIBOR rate. Most TPs allow for a deferral for up to five years. SUSPRA's payments can be deferred for up to 10 years. However, after 5 years in deferral, an alternated payment mechanism is triggered and SUSQ has to make a reasonable able to sell securities to raise funds to make the payments. (see prospectus, starting at p. S-28) Any deferred payment does accrue interest at the coupon rate. If a deferral ever occurs, it would likely result in a severe decline in price for SUSPRA, making those kind of provisions meaningless to many investors as a practical matter.

SUSPRA is currently rated Ba2 by Moody's and BB- by S & P. 

Form 10-Q for the Q/E 6/2011

SUSQ is in the process of acquiring Tower Bancorp for $343 million. Tower shareholders have the option of receiving 3.4696 in SUSQ shares or $28 in cash, with $88 million in the aggregate consideration being paid in cash. (page 41,  Form 10-Q) The bank earned just 9 cents per share for the Q/E 6/11. A smaller all stock acquisition of Abington Bancorp is also pending. The capital ratios can be found at page 54 of the last filed Form 10-Q.

If I can sell this security at some point for a $1 or more profit on the shares, I would view it as a successful investment. The primary purpose for purchasing it is to generate cash flow into the ROTH IRA.

Susquehanna Capital I 9.375% Cap Secs. Series I (SUS.PA) closed at $25.62 in trading yesterday.

I hope to finish discussing my trades from last Monday in the next post. 

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