Wednesday, November 30, 2011

AMR Bankruptcy/Fitch on U.S. Debt/Bought 1 ArvinMeritor 10.625% Senior Bond Maturing on 3/15/2018 at 96/Bought 100 of CHW at $7.18

Fitch completed its most recent review of U.S. debt.  WSJ  Reuters  CNBC  Fitch changed the outlook to negative from stable and warned that its rating would be downgraded without a credible plan to tackle the nations deficit by 2013. I do not see Congress coming to such an agreement during 2012.

According to Bloomberg, Moody's has placed under review the subordinated debt from European banks for a possible downgrade.

A report at  Bloomberg claims that Hank Paulson gave hedge fund managers non-public material information about the government's plan to wipe out the common and equity preferred shareholders of Fannie Mae and Freddie Mac.

1. Bought 1 ArvinMeritor (now Meritor) 10.625% Senior Bond Maturing 3/15/2018 at 96 Last Monday (Junk Bond Ladder Strategy)(see Disclaimer): Meritor's stock is publicly trade under the symbol MTOR. The current consensus E.P.S. estimate for the F/Y ending September 2012 is $1.41. MTOR Analyst Estimates  For MTOR's 4th fiscal quarter, ending 9/30/11, the company reported net income of 38 million from continuing operations (excluding a loss of 7 million from discontinued operations). Revenues rose to $1.217 billion from 941 million in the year ago quarter.  Adjusted EBITDA was $97 million, up $22 million from the same period a year ago.  Free cash flow was $23 million for the quarter.  As of 9/30/11, the company had $217 million in cash. Long term debt stood at $950 million.

Link to Reuters profile page

Link to Key Developments at Reuters  As noted on that page, MPOR recently lowered its guidance for the current fiscal year.

The company does have asbestos issues, discussed at pages 52-53 of its recently filed 2010 Annual Report: meritor_10k. 

This is a link to the FINRA information on this bond: FINRA The bond is currently rated well into junk territory. S & P gives it a CCC+ whereas Moody's gives it a B3 rating. Fitch is at B-.

This 2018 bond is referenced and discussed in Meritor's last filed SEC Form 10-Q at page 78.

This is a link to the prospectus: SEC Filing

My confirmation states that the current yield at my cost is 10.976% and the YTM is 11.342%.

I am assigning a 7 risk rating: Personal Risk Ratings For Junk Bonds

2. Bought Back 100 of the CEF CHW at $7.18 Last Monday (see disclaimer):  I have bought and sold this CEF twice in 2011. Bought 100 CHW at 7.2 (September 2010)-Sold 100 CHW at $8.41 (January 2011);  Bought: 150 CHW @8.2 -Sold 150 CHW at $9.04 (May 2011). 

2011 CHW 100 Shares +112.7 Taxable Account

2011 CHW 150 Shares +111.1 Roth IRA

Total 2011 Realized Gain= $223.8 plus dividends. 

Calamos Global Dynamic Income Fund is a balanced fund weighted more in equity than in bonds, as shown at page 8 of the last SEC shareholder report.  The fund does use leverage. 

Morningstar currently rates CHW at three stars. The average three year discount according to Morningstar is -12.84, so it is not unusual for this fund to sell at over a 10% discount to its net asset value. 

On 11/27/2011, the closing share price was $7.05, with the net asset value per share at $8.23, creating a discount to net asset value of -14.34% as of that date.  On Monday, the day of my purchase, CHW closed at $7.19, with a net asset value of $8.49, creating a discount of -15.31. Yesterday, the fund closed at a -15.57 discount to its $8.54 per share net asset value. 

The current monthly dividend is 5 cents per share.  Assuming a continuation of that rate, the yield would be around 8.33% at a total cost of $7.18. 

CHW page at the Closed-End Fund Association.  This is not a serious buy.  Possibly, I am being too pessimistic about the near term future of the market, so I bought a 100 shares of this balanced fund that pays a good dividend.

3. AMR Files for Bankruptcy (own 1 bond): The news release by American Airlines states that the company "begins  legal process in United States to improve competitiveness".  SEC Filed Press Release This bankruptcy filing was not a surprise after the pilots union refused to submit a generous offer to their members for a vote.  AMR Bankruptcy?  AMR has the highest labor costs among the major airlines. While AMR has been negotiating with the major unions since 2006, it has not been successful.  BusinessWeek NYT  I would now expect significant jobs cuts during the reorganization.

I will not include my loss in Realized Gains Junk Bond Ladder Strategy until I am able to quantify it.  I have no idea what I will receive in exchange for my one senior bond. One possibility would be the receipt of common stock when and if AMR emerges from bankruptcy. Sometimes, stock warrants are also given in addition to shares of common stock in the reorganized company. Another possibility might be an exchange for another bond with a different maturity, lower principal amount and/or lower coupon. A total wipe out is also possible. I expect a significant percentage loss on this one bond position. The 2016 unsecured senior AMR bond was trading yesterday mostly in the 10 to 20 range. Fitch opined yesterday that the unsecured senior note owners will likely recover next to nothing.  Bloomberg I see no reason to disagree with that assessment.

AMR's common shares made a race toward zero in yesterday's trading. Generally, the existing common shares are cancelled during a bankruptcy and become worthless.  I do not own, and have never owned the common shares. I mentioned in an earlier post that Morningstar anticipated this bankruptcy and had reduced its price target for the common shares to zero.

If AMR dumps its pension plan on the Pension Benefit Guaranty Corporation, which is an option for it, there would be a significant cut in pension benefits.  MarketWatch A statement from the PBGC yesterday claimed that AMR employees could lose $1 billion in benefits with a termination of that plan. Statement from PBGC Director Josh Gotbaum on AMR Corp. Bankruptcy WSJ  The PBGC disclosed a few weeks ago that it had a $26 billion dollar deficit. PBGC Reports Record $26 Billion Deficit for 2011

While the expected loss on my 1 AMR bond position is not material, it did provoke an admonition by Headknocker and a trading rule change from our Great Leader. From this point forward, when the LB assigns an extreme risk rating on a bond (i.e. 8 or higher), the purchase price can not be above 50% of par value. In addition, no Head Trader shall ever again buy any security issued by an airline,  even secured debt.

LB pointed out that the Old Geezer was without question responsible for this one bond purchase.  Bought 1 AMR 9% Senior Bond Maturing 9/1/5/2016 at 99.375 As shown in that post, LB called the OG a nitwit for even considering the purchase of this bond.   

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