Monday, October 17, 2011

Closed End Fund Table/Bought 50 of the TC HJO at 24.90-Roth IRA/S & P Upgrades Travelport Bonds/Tax on Repatriated Foreign Earnings of U.S. Corporations/RNST Addition/Bought 50 SLGPRC at $24.4-Roth IRA/Added 1 Pactiv 6.4% Senior Note Maturing in 2018

Large American corporations, sitting on a ton of cash and having exported jobs overseas, have convinced many politicians that they need a tax break to bring cash back into the U.S. from overseas which will be used by them to create jobs in the U.S.  The Federal Reserve reported that non-financial U.S. companies had over $2 trillion in cash as of 6/30/11. WSJ That number excludes money held by foreign subsidiaries. Many of those companies are issuing debt at abnormally low rates now just to increase their cash hoard. Those companies maintain, with a straight and earnest face, that the magic elixir for job creation in the U.S. is more tax breaks for them. Yes, what they need is more cash, maybe $4 trillion in cash will do the trick, and then everything will be find. And the GOP politicians and their apparatchiks like Stephen Moore can be seen regularly carrying their water on Fox "News" and other "conservative" publicity outlets promoting this agenda. 

A few years ago, Congress temporarily lowered the repatriation tax, provided the companies use those funds to hire Americans. The companies promised to do so. The companies did take advantage of that deal by bringing money from overseas back to the U.S. Did they use those funds to create jobs as promised and required by the law. Well, for anyone with their eyes open and operating with a clear and open mind, you already know the answer to that question. The companies used the money to increase compensation for the already ridiculously overpaid executives and to buy back stock. Several studies have confirmed that conclusion. The most recent one was published last week by the U.S. Senate.  The Hill   

For most of American history, stockholders realized that it was necessary to extract cash from the corporation in the form of dividends to prevent management from expropriating the cash for their own use or wasting it on some acquisition or scheme that would either lose money or provide an inadequate return on that capital.  This started to change about three decades ago as corporate executives, analysts and financial publications managed to convince the investing public that it was far better to keep the money with the corporation so that it could allegedly be put to better use. One result of that successful campaign was the growing disparity of compensation to management and the other folks who worked for the company. In the U.S., the CEO's pay has grown to 142 times that of the employees.  

I was updating my regional bank table and noticed that I was 50 shares short on Renansant (RNST). I added 50 shares at $13.85 on 9/1/11 and neglected to mention it. That brings my total, excluding shares purchased with reinvested dividends, up to 150 shares. I am not keeping track of reinvested dividends in that table.  For RNST, my last dividend bought 2.0102 shares at $12.73. Renasant Stock Quote

S & P downgraded Spain's sovereign debt by one notch to AA-.

The BALTIC DRY INDEX closed at 1257 on 8/9/11 and is moving closer to 2200, almost doubling in 10 weeks.

I received an email notice that Travelport's senior unsecured bonds were raised to CCC+ from C by S & P.

I own 1 bond maturing in 2014 and 1 maturing in 2016.  Travelport's senior subordinated bond maturing in 2016 was raised to CCC by S & P.

S & P believes that there is sufficient liquidity to make interest payments over the next 12 months. 

1. AVERAGED DOWN: Bought 1 Pactiv 6.4% Senior Bond Maturing on 1/15/2018 at 77 Last Wednesday (Junk Bond Ladder Strategy)(see disclaimer): This was an average down from my prior purchase of one bond at 91.5 last April. As previously noted, Pactiv was acquired by the serial acquirer, and heavily indebted, Reynolds Group Holdings,  a private company controlled by the New Zealand billionaire Graeme Hart.

This is a link to the Reynolds Group Holdings website: Home Before the acquisition, Pactiv senior bonds were rated investment grade and are now rated well into junk due to their inclusion in Reynolds Group. 

The latest acquisition by Reynolds Group was of Graham Packaging for $25.5, which closed in September, and was financed by Reynolds taking on even more debt.

This is a link to the FINRA information on this bond. Moody's has it rated at Caa1.

My confirmation states that my current yield is 8.226% and the YTM is 11.470%. 

I previously increased my risk rating of this bond to 7 based on the increase in leverage resulting from the Graham acquisition.  Tenneco Packaging and Pactiv Bond-Increasing Personal Risk Ratings 

I now own 4 Pactiv bonds. The other two are named Tenneco Packaging, which was the name for Pactiv before it was split off from Tenneco. Bought 1 Tenneco Packaging Bond Maturing in 2027 Bought 1 Tenneco Packaging Senior Bond at 92.8 Maturing in 2025

I hope to sell 1 of the longer dated Tenneco Packaging bonds before the end of 2011. I am very uncomfortable owning four of these bonds.  

I added another 2018 Pactiv bond in anticipation of selling either the 2025 or 2027 bond later this year or early in 2012. I will need to wait at least 30 days to avoid any possible application of the wash sale rule. 

2. Bought 50 SLGPRC at 24.4 Last Wednesday-Roth IRA (see Disclaimer):  SLGPRC is a cumulative preferred stock issued by SL Green Realty, a large REIT owning primarily office buildings in NYC. SLGPRC has a 7.625% cumulative quarterly dividend on a $25 par value.  Prospectus 

See Map of Properties at this REIT's website: Properties | SL Green Realty 

I was surprised how cheaply that I was able to purchase the common stock (SLG) during the Near Depression period. I included it in two scatter purchases with cash flow. Scatter Purchases: GCI, CBL, FR, 25 Shares of SLG at $23.35, NYT, NWSA November 2008 and Add 25 SLG at around $15 January 2009. I later sold those shares: 

I also had some success trading SLG's preferred stocks, when I was able to purchase them at a substantial discount to their $25 par values:

2010 SLGPRC Realized Gain 30 Shares Regular IRA=$377.63

When buying a REIT preferred stock near its par value, I do not anticipate much, if any, capital appreciation in the shares. I would be pleased to receive several quarterly dividends and to exit the position at a $1 or greater profit on the shares.  Obviously, as shown by my purchase prices during the Dark Period, there can be significant downside risks. 

At a total cost of $24.4, the yield is around 7.81%.

SL Green Realty Corp. 7.625% Cum. Redeem. Pfd. Series C: stock quote at Marketwatch

3. Bought 50 of the Trust Certificate HJO at $24.90 Last Wednesday-ROTH IRA (see Disclaimer): HJO is a trust certificate representing a beneficial interest in the assets owned by a Grantor Trust administered by an independent trustee. This particular trust owns Trust Preferred securities issued by Aon Capital A and guaranteed by Aon Corporation, a publicly traded insurance broker. Aon Capital sells the trust preferred securities to raise money to buy junior bonds issued by Aon.  In effect, when an investor cuts through the multiple legal layers, HJO is in effect a junior bond issued by Aon.  The TP is rated Baa3 by Moody's and BBB- by S & P.  FINRA

HJO has a 6.875% coupon on a $25 par value. HJO matures on 1/1/2027.  Prospectus Interest is paid semi-annually in June and December. At my cost, the current yield and the YTM is close to the coupon rate of 6.875%. In the Roth IRA, that is in effect a tax free yield from an investment grade bond.  Money will double at that rate in 10.42 years. Estimate Compound Interest

The underlying security has a 8.205% coupon. It is not unusual for a TC to have a different coupon than the underlying bond. Trust Certificates: New Gateway Post The difference will impact the number of bonds bought by the trust to support the TC's coupon.

I have owned other TCs that contain this same Aon Capital TP.  Three of them, DKK, KVF and KVW, have been called by the owners of their respective call warrants.

I still own shares in another TC, KTN, which contains this same TP as its underlying security. There is no call warrant attached to KTN. It has a coupon identical to the underlying security and is currently trading over $27 per certificate.  Structured Products Corp. 8.205% Credit-Enhanced CorTS, KTN I bought those shares during the Dark Period. TRUST CERTIFICATE AON BOND KTN ORDER FILLED 100 shares at $13.1 October 2008 KTN add at less than $14 November 2008 Sold 50 of 150 KTN at 28.17 September 2010

The largest two prior realized gains, for TCs containing this 2027 Aon TP, were on 50 shares of KTN sold in 2010 and 100 shares of KVW redeemed earlier this year:
2011 KVW Realized Gain 100 Shares $884.01

2010 KTN 50 Shares Realized Gain +692.52

I also have realized gains in KVF and DKK.

I have an unrealized gain of over $1300 in my remaining 100 shares of KTN, 50 of which were bought in the Regular IRA:

50 KTN Regular IRA Average Total Cost Per Share=$14.16

50 KTN Taxable Average Total Cost Per Share =$13.26

I do not expect much, if any, capital appreciation in HJO since it was bought near par value. There is certainly downside risks due to a rise in interest rates, a change in Aon's credit ratings, or panicked selling in an illiquid market which occurred frequently with TCs during the Dark Period. I bought HJO for its income distribution. The cash in my retirement accounts earn nothing now of course. I will invest the cash flow to buy more income generating securities, creating a compounding effect over time.  The KTN shares currently held in the regular IRA has been generating a 14.49% annualized yield since their purchase in 2008.

The current consensus estimate is for an E.P.S. of $3.4 in 2011 and $3.81 in 2012.

Link to last filed quarterly earnings report:  Aon Form 10-Q for the Q/E 6/30/11 Aon earned 75 cents per share in that quarter on $2.811 billion in revenues.
The underlying security in HJO is a typical TP. Trust Preferred Securities: Links in One Post

MS Structured Asset Corp. SATURN Aon Capital Security Backed Series 2005-2 6.875% Deb. Cl A: quote

4. Closed End Fund Table: I did not include IMF and WIW, two recently added CEFs that invest in inflation protected bonds, when I posted this table last week. The only other revision was the shares received last week in CSQ from reinvesting the dividend. This is what the CEF portfolio looks like now:

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