Wednesday, September 21, 2011

Bought Back 50 CPP at $21.35/Sold 50 of the TC PIS at $24.83-Roth IRA/

Michelle Bachmann, whose expertise is reality creation, asserted that the HPV vaccine was "dangerous". NYT   PolitiFact | Michele Bachmann says HPV vaccine can cause mental retardation  True Believers (TBs) do not require any factual support for their opinions, which are frequently stated as facts, even when those opinions are bizarre or based on clearly erroneous information.  A TB will routinely phrase their opinions as statements of fact.

While it is not desirable to have an ill informed electorate, it is far more dangerous to have political leaders who hold learning in disdain, as noted by Maureen Dowd in her NYT opinion column.

Steve Forbes believes that the Know Nothing Rick Perry will be our next President.

Another fact checking organization has published an analysis of the false and misleading claims made by GOP candidates in their recent debate. : CNN/Tea Party Debate

Lying works in politics because so many Americans are uninformed and have no desire to acquire and assimilate accurate information. The Road to Political Power: Lying Works;  Accurate Information is Not a Side to an Issue/ W & the Housing Crisis/Lying Works In Politics (December 2008 Post);

Oracle reported after the close yesterday, beating estimates.

Microsoft (owned) hiked its quarterly dividend 25% to 20 cents per share. I am reinvesting the dividend to buy additional shares.

1. BOUGHT BACK 50 CPP at $21.35 Last Monday-CPP is a Trust Certificate Containing a Trust Preferred Security Issued by Countrywide Capital III (see Disclaimer):

This is going to be a complicated discussion.

CPP is a trust certificate representing an undivided beneficial interest in a trust preferred security issued by a Delaware trust. The trust preferred stock, issued by Countrywide Capital III, represents an undivided beneficial interest in junior bonds originally issued by Countrywide Credit Industries, later known as Countrywide Financial. Bank of America later acquired Countrywide Financial. 

CPP has a 8.05% coupon on a $25 par value.  CPP can be redeemed at a premium to its par value (see Annex A, starting at S-53) CPP and the underlying trust preferred security mature on 6/15/2027. Interest is paid semi-annually in June and December. 

I have recently discussed the terms of CPP when I purchased 50 shares at $21.4, sold a few days later at $24

I want to discuss the issue of Bank of America's liability for Countrywide's obligation solely in connection with the trust preferred stock that is the underlying security in CPP. I will not repeat any of the discussion previously made on this subject in Item # 1, Bought 50 of CPP at $21.4  (8/15/2011 Post). I have a few more details to offer on this specific issue. 

I found yesterday a BAC SEC filing listing the obligations assumed by Bank of America when it bought Countrywide. Form 8-K

Among those listed obligations assumed by BAC (Documents for 0001193125-08-230518), there are two references to an indenture dated June 4, 1997:


This is a link to both of those agreements, whereby Bank of America expressly assumes the obligations under that 6/4/1997 indenture. 2nd Supp. Ind. dated as of 11/7/08 to the Ind. dated as of 6/04/97 3rd Supp. Ind. dated as of 11/7/08 to the Ind. dated as of 6/04/97                                        

This is the specific language whereby BAC, referred to as the "Corporation", expressly assumes the obligations of the issuer under the 6/4/1997 Indenture:

BAC Assumption of Indenture Obligations
2nd Supp. Ind. dated as of 11/7/08 to the Ind. dated as of 6/04/97

This is the specific language whereby BAC, referred to now as the "Issuer" of the bond, due to the foregoing referenced agreement, assumes the obligations of the guarantor under the 6/4/1997 Indenture:

3rd Supp. Ind. dated as of 11/7/08 to the Ind. dated as of 6/04/97

So, based on that document, it does appear that BAC assumed CHL's obligations as issuer and Countrywide's obligation as guarantor under the 6/4/1997 indenture, which it was required to do under section 10.2 of that indenture.  The foregoing documents specifically reference section 10.2 of the 6/4/1997 Indenture.  

I found a 6/4/1997 Indenture involving the parties identified in the forgoing documents attached as Exhibit 4.4 to this filing made by Countrywide in 1997. This is section 10.2 of that Indenture:

Section 10.2 June 4, 1997 Indenture  
This indenture is attached as Exhibit 4.4 to the prospectus for the TP issued by Countrywide Capital III: That indenture is for the 8.05% subordinated debenture issued by Countrywide Home Loans and guaranteed by Countrywide with the Bank of New York as trustee. Countrywide Capital III purchased that junior bond with the proceeds from the sale of trust preferred securities. It is that TP that is the underlying security in the trust certificate CPP. Section 10.2 of that indenture at page 58 (snapshot above) does require the assumption of obligations by a successor company. And that is the specific section mentioned in the BAC assumption referenced above.     

While the foregoing gives me more comfort about the successor issue, there is still the credit issues associated with any junior BAC obligation, whether originally issued by it or where it expressly assumed the obligation from a predecessor company. I am willing to shoulder that risk, to a small decree, in exchange for around a 9.43% current yield at at total cost of $21.35. This would be a significantly higher yield than the currently prevailing yield of other BAC TPs with longer maturities and subject to being called at their par values now. 

This is my third entry into this security, having bought and sold it twice before. 

I decided to research this specific issue relating to the TC CPP after BAC expressed an intent to put Countrywide in bankruptcy in the event litigation threatens to cripple the parent. Bloomberg Please note in that article an opinion expressed by Adam Cohen that BAC must stand behind the $16.6 billion in Countrywide obligations expressly assumed by it.

While I am more comfortable about BAC's liability for this particular Countrywide TP, I have to recognize that this security will likely be vulnerable to news similar to what was discussed in the foregoing Bloomberg article. CPP fell in response to that story. All BAC TPs are also subject to concerns about BAC's creditworthiness. I bought a TC containing a $25 BAC TP at $7.51 during the Near Depression, later selling that security for an handsome profit after collecting several interest payments.  Buy of 50 MJH at $7.51 Sold 50 MJH at 23.6 I mention the purchase price of MJH to highlight the danger of bank trust preferred securities.

I am bumping up against my $10,000 in exposure to a single company with this last purchase.  That limit is a circuit breaker to prevent significant losses due to a failure of a single company.  I own securities throughout BAC's capital structure (common, equity preferred, trust preferred and senior notes). For some companies, I am near that limit with just the common stock (e.g. KO, GE).

CPP closed at $21.35 on Monday and at $21.51 yesterday.  Merrill Lynch Depositor Inc. PfdPLUS 8.05% Trust Ctf. CCR-1, CPP Stock Quote

TCs trade flat. If I bought the underlying bond in CPP in the bond market, which is possible to do only with great difficulty, I would have to pay the seller accrued interest.  The last sale of the TP issued by Countrywide Capital III was in August 2011, in a small lot.

This is a link to the FINRA Investor Information on the 8.05% Countrywide Capital III TP maturing 6/15/2027, Symbol BAC.IEF, CUSIP 22237AAB2.  According to FINRA, the ratings are as follows: Baa3 Moody's, BB+ by S & P, BBB by Fitch.  The ratings from Moody's and Fitch are investment grade, though at the lowest level for Moody's.  Bond credit rating - Wikipedia 

2. Sold 50 of the TC PIS at $24.83 in the ROTH IRA Last Monday (see Disclaimer):  I am always a reluctant owner of Liberty Media bond, due to John Malone's continuous efforts to undermine the security of Liberty's bond owners. ITEM # 1 Liberty Media and its Bondholders  The TC PIS has as its underlying security a senior bond issue from Liberty Media. I decided to exit the position near break-even, with a small total return with the interest payments.  Bought 50 PIS at 24.88 in Roth IRA

I recently received the semi-annual interest payment for PIS.

Merrill Lynch Depositor Inc. PreferredPLUS 8.75% Trust Ctf. Series LMG-1 (Issued by Liberty Media Corp.) closed at $24.85 yesterday. 

I also wanted to raise my cash level in the IRAs some, in case better opportunities come along soon.  I have also be de-risking some in my IRAs. The underlying bond in PIS is rated junk.  FINRA 

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