Wednesday, December 7, 2011

First Niagara Dividend Slash/BAC Privately Negotiated Exchange Offers/Sold 200 of the Bond CEF NMO at $13.81/

The ISM services index fell to 52 in November from 52.9 in October. The consensus estimate was 54%.  The new orders component rose slightly to 53.

The OECD reported that the gap between rich and poor continues to accelerate in developed countries.  Bloomberg

Goldman Sachs believes the world will avoid a global recession in 2012. (interview with Abby Cohen at

General Electric (own 497+) was upgraded to outperform yesterday by Bernstein.  The target price for GE common stock was raised to $21 from $19.

The Australian central bank reduced its benchmark rate by .25% yesterday to 4.25%. Monetary Policy Decision That central bank is concerned about a slowdown in global growth.

In Afghanistan, a woman who is raped is put in jail by the authorities. One key to her freedom is to marry the rapist. CBS News

Jon Corzine, just another Master of Disaster, reportedly rebuffed efforts to control risks at MF Global. WSJ

The head of Vanguard's fixed income division characterizes the inability to fix the U.S. budget problems an "abomination", which is in my judgment unduly polite to the Washington politicians. Fortunately, the world is focusing on the European sovereign debt problems rather than the dysfunction in Washington, but that will change.

1. Bank of America Exchange Offer:  Bank of America filed an Form 8-K earlier this week, stating that it had agreed to exchange certain of its equity and trust preferred for common stock and senior notes. The foregoing SEC form indicates the face amount of each equity and trust preferred issue so tendered by institutions in privately negotiated transactions. This filing does not specifically  indicate the conversion ratios. The exchange includes $314 million in face amount of equity preferred securities and $1.035 billion in trust preferreds. The securities exchanged for those preferred stocks were 125,528,595 million common shares and $442.2 million in senior notes with varying short term maturities ranging from 2014 to 2019. The TPs would have longer maturities.

This SEC filing refers to an earlier filing, made in mid-November, whereby BAC reported the exchange common and senior notes for the listed amounts of equity and trust preferred securities as shown in that filing. Form 8-K

When BAC broached the possibility of this kind of exchange in its last 10Q filing, it mentioned then that the offer, when and if made, would not exceed 400 million common shares. Potential BAC Exchange for Preferred Securities (11/4/11 Post).

As a result of the foregoing privately negotiated exchanges, the total common shares issued in these recent exchanges totals 311,011,300. This is getting close to the up to 400 million shares suggested in the 10-Q filing. I am not aware of any public exchange offer being made.

The foregoing SEC filing does not indicate whether or not BAC will make a public exchange offer.

2. Sold 200 NMO at $13.812 Last Monday (see Disclaimer): NMO was my last leveraged municipal bond CEF.   My position in NMO was recently purchased at $13.03. Last Friday, the net asset value was $13.54 per share, so this CEF had moved from a discount when I purchased it to a premium. I have no interest in holding these bond funds when they start to sell at a premium to their net asset value per share.

NMO page at the Closed-End Fund Association.

Daily pricing information of Nuveen CEFs can be found at Nuveen Closed-End Funds - Daily Pricing. On 12/5/11, the net asset value per share was $13.56.

3. First Niagara's 50% Dividend Slash and Destruction of Share Value by the Current Board and CEO (own: Regional Bank Stocks' basket strategy): FNFG's stock price has declined over the past several months in response to the CEO's plan to pay $1 billion to acquire HSBC branches, primarily for the purpose of increasing FNFG's concentration in the declining growth markets in and around Buffalo. According to the 2010 Census Buffalo's population declined 10.7% since 2000 and 54.9% since 1950. Erie County lost 3.2% the the 2000-2010 period.

Last night, the bank decided to inflict more pain on its shareholders by halving its dividend. According to First Niagara, this move will save the bank $100 million in capital during 2012. SEC Filed Press Release I would not put it that way. Instead, I would just say that it is another 100 million dollar hit to the FNFG's already suffering shareholders. Perhaps the top management will take a similar percentage cut in their take home pay.

The negative reaction by the market to this acquisition is shown by the substantial stock price decline: FNFG Interactive Chart FNFG announced this acquisition on Sunday July 31, 2011, Reuters. The shares closed the previous Friday at $12.25. FNFG Historical Prices

Earlier in 2011, the stock price touched $15 before the Board's value destruction process began in earnest.  I would not now anticipate a return to that level for several years.  I will hold onto my shares, based on the belief that the bank will eventually recover from the recent damage inflicted upon it.  However, a continuation of boneheaded and idiotic decisions will cause me to re-evaluate that decision. More value destruction decisions are certainly possible with the current Board.

I discussed the market's negative reaction to the CEO's dilutive acquisition of HSBC branches in several prior posts: First Niagara Downgrade (10/25/2011 Post); Item # 2 FNFG

In addition to the recent decline in the share price and the 50% haircut on the dividend, the Board of First Niagara has found it necessary to inflict more pain by issuing 450 million dollars of common stock, plus any over allotment up to an additional $33.75 million, at the currently depressed price to fund the acquisition of these HSBC branches, thereby diluting their existing shareholders and likely driving the share price down further in the coming weeks. The bank will also be offering $650 million in preferred stock and notes. Reuters A large equity preferred stock offering would likely keep restrain growth in the common share dividend in my opinion, as earnings are used to pay the higher in priority preferred dividends.

Since I have to be concerned about future Board decisions likely to adversely impact the share price,  I will vote against both the re-election of all FNFG Board members and all matters pertaining to executive compensation, continuing for as long as I own the shares or the entire Board and the CEO are replaced which is unlikely to happen given the passive nature of most shareholders. The vote on executive compensation is advisory now. I would urge all other individual shareholders to do the same.  Once incompetence has satisfactorily been established, it would not be reasonable to assume competence in the future.

I would expect the common shares to continue their decline in response to the most recent developments. I may add to my position when and if the shares decline below $7.

The bank attempts to make the case for its strategy in this filing made in conjunction with the press release announcing the 50% dividend reduction and the large stock offering: Exhibit 99.2

The CEO John Koelmel called this acquisition a "strategic home run" in the last earnings conference call, further calling into question his ability to make sound judgments. Transcript - Seeking Alpha

Mr.  Koemel's became CEO in December 2006 when the stock was hovering near or over $12 per share.  Forbes values his compensation package at over $3 million for 2010.  The annual dividend rate in 2007 was 54 cents and will be 32 cents in 2012. Anyone with a  brain, measured with an IQ five above plant life, can see that both the dividend and share price are going decidedly in the wrong direction, and only a fool would view these recent developments in a positive light.

On the positive side, due to the share price destruction caused by the CEO and the Board, a self inflicted wound permitted by passive shareholders, I will be able to buy shares at lower prices with what is left of my dividend. 

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