Tuesday, November 8, 2011

Moody's and Eastman Kodak/Earnings: Colt Defense, First Data, Harland Clarke. Select Medical (SEM)/Sold 1 Supervalu 8% Bond Maturing 2016 at 104.125

The TBs are blaming the "liberal" news media for the travails of Herman Cain, standard operating procedure for them, as a fourth woman, Sharon Bialek, came forward yesterday to accuse him of sexually inappropriate conduct. CBS News NYT The TBs were incensed when Gennifer Flowers came forward to make accusations against the serial philander Bill Clinton, though that "alleged" affair was consensual. The most recent poll of GOP voters shows Cain and Romney tied for the GOP Presidential nomination. CNBC  One dominant characteristic of TBs is that hypocrisy is second nature to them, easier than breathing, though they lack the self awareness to realize it.

Italian bond yields rose yesterday to the highest level since 1997.

Based on an analysis of data originating from the Census Bureau, the Pew Research Center found that the wealth gap between young and old has reached a record level. Pew Research Center This study compared the net worth of a households ages 65+ with those under 35. The gap reached 47 to 1 in 2009, and I suspect it as grown some since that year. This is a link to the full report:  Pew

A report from Moody's states that Eastman Kodak could run out of money in the U.S. in 2012 without an infusion of more capital. (summarized in Forbes and The Economic Times) I mentioned in my last post on EK that the company most likely needed to have a successful sale of its digital imaging patents in order to survive to pay off its 2013 senior bond. Eastman Kodak Bonds: Update on Third Quarter Earnings Report I also agree with the Moody's analyst that another 500 million in senior secured debt would be a negative for the senior unsecured bond owners. I am not optimistic about being paid par value on my two 2013 bonds.

Kodak disclosed yesterday that it closed the sale of its Image Sensor Solutions business, which included a 263,000 square foot facility in Rochester. Kodak News Release EK did not disclose how much it received in this transaction. It may have been included in the $120 million number, mentioned by the CEO during the conference call,   Transcript - Seeking Alpha, which included three transactions, the other two being patent licenses.  

In this post, I will be discussing earnings reports from companies where I only own a bond. It is extremely important to review these earnings reports in order to form a judgment about whether the company will survive to pay off the bond at maturity. My judgment may differ from other investors who take the time to read these reports.

1. COLT DEFENSE (own 1 bond: FINRA): I feel somewhat better about my 1 bond after reviewing Colt's third quarter report. SEC Form 10-Q for the Q/E 10/2/2011 Colt reported net income of $3.405 million on revenues of $58.877 million. The company still has a net loss for the current year of $241,000. In the year earlier quarter, Colt reported a $6.72 million loss on revenues of $30.685 million. The company reported cash and cash equivalents of $38.418 million as of 10/2/11, down from $61.444 million on 12/31/2010. Inventories increased from $31.641 million at the of 2010 to $42.325 million as of 10/2/11 (see page 19 for discussion of cash use). A significant part of the revenue increase for the last quarter came from international sales, which increased $16.4 million, as Colt started to make shipments on a large international order.

2. First Data (own 1 bond: FINRA): First Data was taken private in a leveraged buyout and was consequently loaded up with a clearly excessive amount of debt. These transactions serve no useful purpose and endanger the viability of successful corporations. I view First Data bonds to be extremely risky, and are deservedly rated well into junk territory. Without that leverage buyout, and the associated debt, First Data bonds would be investment grade in my opinion.

First Data reported a loss of 54 million for its third quarter. Interest expense on its debt was $466.7 million. SEC Filed Press Release

3. Harland Clarke (own 3 2015 bonds: FINRA):   Harland reported third quarter net income of $46.6 million. However, a non-cash gain of $19.5 million was included in that number resulting from "changes in the fair value of contingent arrangements". SEC Filed Press Release I would exclude that gain from the reported $46.6 to arrive at $27.1 million. In the year ago quarter, the company reported net income of $27.6 million. Given that check printing is known to be a declining business, I thought that the results were okay.

I am not comfortable with my 3 senior unsecured bond exposure to Harland, but I do not yet have the shakes. Harland does have a potentially troublesome amount of debt. As of 9/30/11, the total long term debt, net of current maturities, was $2.186 billion (note 11 at page 13, HCHC-2011.9.30-10Q) Of that amount, $1.723.5 billion was from a senior secured credit facility that would have a higher claim on Harland's assets than the unsecured senior notes. The company had $204.9 million in cash and cash equivalents at the end of the 2011 third quarter.

4. Sold 1 Supervalu 8% Bond Maturing in 2016 at 104.125 Last Thursday (Junk Bond Ladder Strategy)(see Disclaimer): This reduces my exposure to just two SVU bonds, and one of those matures in 2014. Previously, I mentioned that I would keep the two shorter bonds, and sell off the longer dated maturities. I did sell two longer dated Albertson bonds at a profit. This sale has less to do with SVU than an adjustment made in my junk bond ladder strategy.

I have made an adjustment in this high risk strategy based on a slight increase in my estimate of potential defaults. The goal of the strategy is to break-even on the bonds. The reason for taking the risk is the large spread between my average yield on those bonds and the yield on "BBB" rated corporate bonds. My total return would be good provided I can avoid a net loss on the bonds.

There are two ways to generate profits to offset the expected losses from defaults. First, I can hold the bond bought at a discount to par value until maturity and receive par value, assuming the company has survived.  I will not make much on the bonds bought near par value. Second, I can sell some bonds for gains. The adjustment in the junk bond ladder strategy is to sell bonds bought near par value on pops above par value. I will be focusing on those with lower current yields at my cost.  A corollary of that adjustment will be to reinvest the proceeds in similarly rated bonds selling at a larger discount to par value, where I at least have more profit potential in the bond that could be used to offset expected losses.

The SuperValu bond sold last Thursday was bought at 98.73. Bought: 1 SuperValu Bond at 98.73 (December 2010 Post).

FINRA information on 2016 bond.

5. Select Medical (own 1 bond: FINRA): SEM reported GAAP earnings of 17 cents on $694.131 million in revenues for the third quarter. SEC Filed Press Release The consensus estimate was for 18 cents on $677 million in revenues. The company expects 2011 revenues to be in the range of $2.76 to $2.8 billion, a GAAP E.P.S. of $.62 to $.68, and an adjusted E.P.S. in the range of $.75 to $.81. The long term debt stood at $1.397418 billion as of 9/30/11, up from $1.28139 billion as of 12/31/2010. The debt is discussed at page 12 of the last filed 10-Q.  I own the 7 5/8% "senior subordinated note" that has been paid down to $345 million from $611.5 million as of 12/31/2010, with borrowings under Select's "senior secured" credit facility. 

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