Thursday, March 1, 2012

Sold 2 Edison Mission 7.75% Senior Bonds Maturing in 2016 at 73.25/KWK CLGX ARCC RRD/S & P Downgrade Colt Defense Senior Unsecured Bond

A Greek official asserted that Greece is trying to instill "trust" in its creditors after defaulting on its debt obligations in a "voluntary restructuring".   CNBC  Pimco's El-Erian believes that the latest bailout of Greece will "likely" fail.  CNBC

Based on a review of my recently received 1099s, I can confirm that the distributions made by the following equity preferred stocks were classified as qualified dividends: WLFCP, GSPRA, GSPRD, BMLPRJ, BMLPRL, BMLPRH, AEB, MSPRA, METPRA, SCEDN, STDPRB, ZBPRC, ZBPRA, HBAPRF AND HBAPRG. Of those securities, my largest unrealized gain is in MET.PA which is trading now near its par value. That security hit a low of $8.8 in November 2008. One of my first posts discussed it:  LIBOR AND THE MET LIFE FLOATING RATE PREFERRED STOCK (10/5/2008 Post-The Second Post)

For REIT equity preferred stocks that I owned in 2011, I did not see any part of their distributions classified as qualified dividends. Occasionally, I will note a small fraction so classified.

R.R. Donnelley & Sons Company (own bonds) announced that it was commencing a tender offer for its 2014 and 2015 bonds. For the 4.95% coupon 2014, which has an outstanding principal amount of $600 million, the maximum amount subject to the tender is $300 million. The tender offer for the 5.5% 2015 note, with $400 million outstanding, is subject to a $50 million maximum.

I discussed in 2009 the purchase of 3 ten year U.S. treasury inflation protected bonds directly at auction. Those securities were bought in the ROTH IRA. My broker did not charge a commission for submitting my non-competitive bid. It is impossible for me to garner much excitement about a treasury note with a 1.875% coupon, even with the inflation protection, but the market is really excited about that rate given the Fed's Jihad Against the Saving Class. I could now sell those notes for more profit than I could realize in interest payments from now until the note matures in 2019:

3 TIP Bonds Maturing 2019 Unrealized Profit +$792.46
If an investor wanted to buy a ten year TIP today, the coupon yield would be near zero.  Bloomberg

PepsiCo (own) was ex dividend yesterday.

S & P downgraded the 2017 unsecured senior Colt Defense bond to CCC+. TEXT-S&P cuts Colt Defense issue-level rating Their concerns are similar to my own which were expressed in a recent post: Colt Defense The report did mention that Colt would receive a 5% royalty in the event the U.S. government selected another supplier for the M4.

The Chicago PMI rose to 64 in February with the new order component accelerating to 69.2 from 63.6 in January.

The government revised its 2011 4th quarter real GNP to 3% from the prior 2.8% estimate. News Release: Gross Domestic Product

It did not take much to start a stampede out of gold and silver yesterday, just a few hardly surprising comments from Bernanke. Kitco WSJ There may be a lot of bullish gold investors, but many of them will head for the hills at the first sign of trouble. As noted in prior posts, I started to sell gold and silver bullion last September, when gold spiked over $1900 and continued my selling into this year.

1. Quicksilver Resources (own common as LT and 1 Bond-FINRA): Quicksilver Resources (KWK) reported adjusted earnings per share of zero for the 4th quarter, two cents worse than expected by the consensus estimate. GAAP net income per share was 28 cents. The common stock fell 6.09% on the day of this release to close at $5.71. Quicksilver's revenues were down 10% compared to the 4th quarter of 2010 but production was up 6%. The company expects a sequential decline in production during the current quarter. Given the low natural gas prices, none of the foregoing could be considered surprising or unexpected by investors. 

Reading the summary made by Reuters of this report, an investor would conclude that there was nothing whatsoever of a positive nature, which would be an incorrect conclusion.  The company replaced 165% of its production in 2011. Substantially all of its investments made in 2011 were funded with cash flow. The company raised $273 million in capital by selling its remaining interest in BreitBurn. 

The problem is the current low natural gas price and KWK's debt load. The company said that its 2011 production was weighted 81% in natural gas. I discussed recently the efforts being made to increase oil production. While oil production is relatively low now, Quicksilver does anticipate a 62% increase in 2012 compared to 2011. 

The common shares of Quicksilver Resources have fallen both days after this earnings report. The stock closed yesterday at $5.55, declining 27 cents in trading. The stock closed at $6.19 on 2/23/12, KWK Chart.

2. CoreLogic (own 2 senior bonds: FINRA): CoreLogic (CLGX) reported adjusted 4th quarter earnings of 23, nine cents better than the consensus estimate. CLGX ended the quarter with cash of $259.3 million and debt of $908.3 million. The company expects to reduce its debt by $100 million during the first six months of 2012 through scheduled and voluntary principal payments. For 2012, CLGX anticipates adjusted revenue of $1.425 to $1.475 billion and an adjusted E.P.S. of $.95 to $1.05. The current consensus estimate is for $.95. 

CLGX issued $400 million in 7.25% senior notes due in 2012 last May. There is a subordinated note maturing in April 2012 with an outstanding principal amount of $34.768 million as of 9/30/11. (CLGX-9.30.11-10Q at p. 16). I own the 2028 senior debenture which is also the underlying security in the trust certificate PJS. Bought 1 CoreLogic 7.55% Senior Bond Maturing 4/1/2028 at 84.95

The common shares, CLGX, rose 36 cents in trading yesterday to close at $15.36.

3. Ares Capital (ARCC)(own): Ares Capital Corporation, a BDC, reported 4th quarter adjusted E.P.S. of 48 cents (39 cents consensus), and GAAP net income per share of 58 cents. The Board increased the quarterly dividend by 1 cent per share to 37 cents. As of 12/31/2011, net asset value per share was reported at $15.34, up from $14.92 as of 12/31/2010.

In an earlier post, I mentioned that only a fraction of the dividends paid by BDCs will be classified as qualified dividends.  I checked my 1099 for 2011 and calculated that 5.32% of ARCC's distributions were classified as qualified dividends.

For Prospect Capital, the percentage was higher at 15%.

For all of my purchases of BDCs, particularly those with dividend yields over 10%, my goal is simple to capture one or more dividends and to sell the position at any profit. My position is ARCC is now barely profitable. Bought: 50 LXPPRD at 23.28, 50 of the BDC ARCC at 16.17 and at $16.3 (January 2011 Post). I sold my highest cost shares, bought at $16.89, last May at $17.7.

Ares Capital rose 15 cents in trading yesterday to close at $16.67. The next ex dividend date is 3/13. The dividend yield at a total cost of $16.67 is about 8.9% according to Marketwatch.

4. Sold 2 Edison Mission 7.75% Senior Notes Maturing in 2016 at 73.25 Yesterday-ROTH IRA (Junk Bond Ladder Strategy)(see Disclaimer): Given the interest in this bond, I decided to discuss this trade and EME's earnings release before turning to other trades made on Tuesday and Wednesday, which will be discussed in subsequent posts. 

Late yesterday, S & P reduced its ratings on EME's senior unsecured debt to CCC+ from B- and kept its outlook as negative. TEXT I am raising my risk rating to 9- from 8. Personal Risk Ratings For Junk Bonds This would be further into what I call the extreme risk category. Moody's had reduced several weeks ago its rating to Caa1 so S & P's downgrade brings the rating in line with Moody's.   

Due to the decline in power prices and new environmental regulations, EME has decided to shut down several midwestern coal plants. EME plans to shut down its Fisk power station by the end of this year and the Crawford station by the end of 2014: 

Given the firm's debt load, maturity schedule, adverse merchant power prices, and new environmental regulations, I decided to sell two of my remaining three EME senior unsecured bonds for a small loss. 

I have discussed the new environmental rules in earlier posts: Item # 3 Edison Mission Bonds 

EME's net loss for the 4th quarter was $1.060 billion, which includes a $1.047 after tax charge due to impairments. (page 114)

This loss was doubly embarrassing to the OG who bought the bonds by mistake, as explained in Added 2 Edison Mission 7.75% Bonds Maturing 6/15/2016 @ 86.12 in Roth. I did receive about 10 months of interest that reduced the total loss some. I do not view this bond to be appropriate for ownership in a retirement account where I mistakenly bought it. 

I was more than able to offset this loss with realized gains in other securities sold in the Roth this year.  I still own 1 of these bonds in a taxable account. I am likely to stay with that one until later this year or early next year.

While the two bonds were sold during the trading day Wednesday and before the earnings release and the S & P downgrade, I did know that the earnings would be released after the close and that the media had already reported on the plant closures. Reuters That report was not commented upon by EME but was the subject of a news release by the Sierra Club.

Added 6/6/12:  I raised the risk rating for EME bonds to 10- for the detailed reasons given in a subsequent post, Item # 1 Risk Rating Raised on Edison Mission Bond to 10- from 9-Edison Mission has hired Kirkland & Ellis recently to assist the company in assessing its options.

Added 8/19/12: See subsequent post on potential bankruptcy option Stocks, Bonds & Politics: Edison Mission Statement SEC Form 10-Q on Bankruptcy Option at Item # 5

Added 11/28/12: Edison Mission failed to make the interest payments due on 11/15/12. ‎EME 8-K SEC Filing

Added: As expected, the reported on 12/15/12 that EME was preparing to file for bankruptcy, noting that EME would likely be in bankruptcy for some time.

Added: On 12/18/12, EME filed for bankruptcy as expected. SEC Form 8-K 

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