Monday, May 14, 2012

Greece & China/JZJ/Earnings: FTE, Harland Clarke, UNUM, SYY/Bought 1 Sears Holding 6.625% Senior Secured Bond Maturing 2018 at 90.50-Roth IRA

I neglected to mention in last Friday's post that the trust certificate JZJ, which contains a senior AT & T bond, went ex interest last week for its semi-annual distribution. The price of this security quickly made up for the value of that interest payment and more. JZJ Historical Prices This TC is vulnerable to a redemption by the owner of the call warrant. In fact, there was a partial call back in 2010 that resulted in the redemption of 82 shares. A similar TC with the same underlying AT & T bond was redeemed in full at par value plus accrued interest, Proceeds Received from Full Call of JZE and Partial Call of JZJ:

After the partial call of JZJ, I was left with 118 shares which I still own and see no reason to sell:

Added to Long Bond Positions: Bought JZJ at 17.5 December 2008

Both the TC JZJ and the underlying security are paying their respective minimum coupons. Both coupons will increase by .25% for each downgrade of AT & T's debt.  For JZJ, the minimum coupon is 6.375%. Both the TC and the underlying bond mature in 2031 (FINRA information on underlying bond). Trust Certificates: New Gateway Post

China's industrial growth rose 9.3% in April from a year ago, the slowest rate of growth since May 2009.

Over the weekend, the People's Bank of China lowered its reserve requirement by .5% effective 5/18/12. This action will free up funds for lending.

Fitch downgraded JPM debt by one notch last Friday due in part to the risk governance issues raised by the recently disclosed huge trading loss. When the story about the London Whale first surfaced in April, Dimon told analysts that the story was a "tempest in a teapot"  MarketWatch

A story in the WSJ claimed that Chesapeake Energy has incurred about $1.4 billion of liabilities in previously undisclosed liabilities, which will have to paid over the coming decade. I have no position in that firm and would not even consider a purchase for as long as Aubrey McClendon continues in a position of influence. The Board of Directors also needs to be removed in its entirety. CHK fell $2.37 last Friday to close at $14.81.

Reuters reported over the weekend that Ally Financial is about to put its troubled Residential Capital mortgage unit into bankruptcy.

The latest effort to form a government in Greece failed over the weekend. Alexis Tsipras, the head of the "SYRIZA" coalition, is advocating that Greece tear up its recent agreement with the EU on austerity. Tsipras favors a repudiation of the Greek government's debt. He believes that the EU will continue to funnel billions into Greece after the Greek government rejects all austerity measures. In fact, he believes that the EU will be begging the Greeks to take more money. And he is telling the Greeks that they can reject austerity and keep the EURO. Reuters If no government is formed by May 17th, new elections will be called, which would likely cause even more losses for the two parties that supported the austerity measures. CNN  Only a complete idiot would ever loan the Greek government money.

Alexis Tsipras is a former Communist who now prefers to call himself a radical leftist.

Both the NYT and the The Washington Post published stories earlier this week about an episode in Mitt Romney's past. While attending a prep school, Romney led a gang of his buddies on a hunt for a young, allegedly gay man who had long hair. Romney was carrying a pair of scissors as the young men searched for their prey. Once they found him, the gang tackled the young man, and held him down while Romney cut off his long hair. The young man was screaming for help and crying. The participants were interviewed by the Post and all had the same account, with one calling it a "vicious attack". Romney does not remember that "prank", ABC Newsbut apologized for his "pranks" that "might have gone too far". The Washington Post

Another incident involved Romney walking a blind person into a door and then laughing about it. NYT

The latest misrepresentation by Romney on Obamacare is examined in a recent article.

1. France Telecom (own 200 common shares): France Telecom reported a 2.8% decline in first quarter revenues to €10.922 billion. Operating cash flow declined -10.7% to €2,335 billion. Earnings before interest, taxes, depreciation and amortization declined 8.1% to €3.43 billion. The company lost 615,000 mobile customers in France due to intense competition  The attrition rate did level off at the end of the quarter. On a worldwide basis, FT had a 5% increase in customers to 225 million, with 166 million wireless customers. The company reiterated its earlier guidance of €8 billion in operating cash flow for 2012, down from €9.3 billion in 2011. France Telecom Form 6-K WSJ

I have recently acquired 200 shares in two 100 share lots. Added 100 FTE at $13.17 (4/23/12 Post); Bought Back 100 FTE at $14.82 (3/15/12 Post). I had previously sold out of my positions at over $20 per share:  Sold: 50 FTE at 21.75 (9/2010); Sold: 50 FTE @ 23.18 (October 2010); Sold 50 FTE AT 22.27 (February 2011).

France Telecom ADS (FTE) declined 33 cents last Friday to close at $13.43.

2. Harland Clarke (own 3 2015 senior unsecured bonds: Junk Bond Ladder Basket Strategy): HC reported a net loss for the Q/E 3/31/12 of $22.9 million on revenues of $413.8 million. The loss was due primarily to an "after-tax net charges of $44.7 ($73.2 million before tax) for non-cash fair value adjustments related to the MacAndrews Acquisition, including significant non-cash interest expense." SEC Filed Press Release Adjusted EBITDA was $102.8 million in the first quarter, down 3.3% from the 2011 first quarter. 

As of 3/31/12, the company had drawn $1.702 billion on its $1.9 billion secured credit facility. HCHC-2012.3.31-10Q

I have been surprised by the improvement in the bond price over the past several weeks. I am back to break-even.

3. Unum (own Trust Certificate PJR): UNUM reported an adjusted E.P.S. for the first quarter of 73 cents per share, missing the consensus estimate of 76 cents. The company expects 2012 earnings to grow at the low end of a 6% to 12% range. Operating income for UNUM US was $205.9 million for the first quarter, up 5.8% from the first quarter of 2011. There was a 20.7% decrease in the operating income of UNUM UK due to higher claims. Colonial Life reported a 4.8% in operating income to $69.7 million. UNM.3.31.2012

After trading the trust certificate PJR, I currently own only my lowest cost shares. This trust certificate represents an undivided beneficial interest in the assets owned by a trust which are Unum senior bonds maturing in 2028. TC Prospectus

Bought 50 PJR at $16.92 (July 2009). Those shares are still owned, but I have sold my highest cost shares.

50 PJR Unrealized Gain +$438.5 as of 5/11/12
Merrill Lynch Depositor Inc. PreferredPLUS 7.4% Trust Ctf. Series UPC-1 for UnumProvident Corp  (PJR) closed at $25.65 last Friday. As shown at that linked page, the next semi-annual ex interest date is 6/12/12. TCs trade flat.

Trading Activity: ADDED TO PJR at 20.7 October 2009Bought 50 PJR in ROTH IRA at $23.61 May 2010Bought 50 PJR in ROTH IRA at 24.88 October 2010Sold 50 PJR at 25.79 May 2011Sold 100 of the TC PJR at 25.76 December 2011(see snapshots at Trust Certificates: New Gateway Post)

I have never owned Unum's common shares. The Barrons' columnist Sandra Ward attempts to make a case for buying the common in this week's issue. The common shares, UNM declined 8 cents last Friday to close at $21.68.

4. Sysco (own common: Bought SYY at $19.46 March 2009): Sysco reported another sluggish quarter with uninspiring earnings. For its fiscal third quarter 3/31/12, SYY reported GAAP E.P.S. of 44 cents, unchanged from a year ago. Net earnings were $260 million. Adjusted E.P.S. was reported at 49 cents per diluted share, up from 48 cents. Sales increased 7.6% to $10.5 billion.  The consensus estimate was for 43 cents.

The earnings growth rate for SYY has slowed from historical levels. If the slower rate of growth continues, then the rate of growth for the dividend will also slow from historical growth levels. In an earlier post, I examined the historical rate of dividend growth which showed a relatively rapid doubling of the dividend. The historical dividend data can be found at Sysco's website.

Based on the dividend payment dates, the annual rates for selected years, just to show how fast the dividend was doubling historically, are as follows:

2009= $.96
2003= $.44
1999= $.195
1994= $.09

The most recent increase in the dividend was just one cent per quarter or 3.85%, Sysco. At that rate of growth, the dividend would take over 18 years to double.

At the current rate of $1.04 per year, the dividend yield at a total cost of $19.46 would be about 5.34%. However, based on the current growth in earnings, I can no longer reasonably expect a doubling in that yield in five or even ten years.

I view the rate of dividend growth to be extremely important in a Common Stock Dividend Growth Strategy.

For the F/Y ending 6/12, the current estimate is $1.91 per share and $2.04 for the 2013 F/Y. SYY Analyst Estimates Possibly, a continuation of that rate of earnings growth would support another 3% to 4% annual increase in the dividend later this year.

Sysco declined 28 cents in trading Friday to close at $27.6.

5. Bought 1 Sears Holding 6.625% Senior Secured Bond Maturing 10/15/2018 at 90.5 Last Monday (Junk Bond Ladder Strategy)(see Disclaimer): I am not optimistic about Sears long term. I was encouraged by its recent announcement that the first quarter loss will be narrower than previously expected by the company and the analysts. Press Release dated May 1, 2012 The company reported that it "expected" results for the first fiscal quarter to show net income between $155 to $195 million, which includes $235 million, after tax and minority interest, of gains from store sells that generated $440 of cash proceeds. The net loss for the first quarter of 2011 was $165 million. A discussion of this release can be found at

The stock rallied in response to this release, Forbes, but the stock has since lost most of that one day gain occurring after this release. SHLD Historical Prices Looking at the bond prices, the ghouls that inhabit bond land have significant doubts about long term survivability.

I have noted improvements in its advertising message over the past several weeks.

I am more comfortable owning this senior secured note, compared to an unsecured one issued by Sears. This is not to say that I am comfortable owning either. The security for the 2018 bond consists of credit card receivables and inventory, and would be junior in priority to the secured revolving credit faculty, as more fully explained in the Final Prospectus

This is a snapshot of the summary description of the collateral and priority compared to other secured liens:

This is a snapshot of information about this bond:

I already own this bond in a taxable account, Bought 1 Sears Holding 6.625% Senior Secured Bond Maturing 10/15/2018 at 83.25 (September 2011). I noted in that post that Moody's had a Ba2 rating and S & P rated this bond at BB. Sears' debt has been downgraded since that purchase. Currently, according to FINRA, this bond has a "B2" rating from Moody's and a "B" from S & P.

According to my confirmation, the YTM at my total cost is 8.532%.

The unsecured Sears' senior bonds are rated lower. An example would be the 6.875% senior unsecured bond maturing in 2017 that is rated Caa1 by Moody's and CCC+ by S & P (3 notches below the senior secured for Moody's and two for S & P). The YTM of that bond is about 3 percentage points higher than the 2018 secured bond.

I will generally conduct bond searches at FINRA to see how a bond being considered for purchase compares to other similarly rated bonds, maturing at about the same time, on a current yield and YTM basis. This will give me a clue about the risks placed on the subject bond that may not be consistent with the ratings.

I will use the "advanced bond search", which can hopefully be found at this link: FINRA. If not that search capability can be accessed at the main bond page at FINRA by clicking the blue tab in the red box.

A Cincinnati Bell senior unsecured maturing in 2017 has the same rating of "B" from S & P. That bond was selling at 105-106 last Monday with a YTM of around 6.4% based on its maturity date and 8.25% coupon. This tells me that bond investors have more concerns about Sears than CBB and other similarly rated bonds maturing in 2017 and 2018. Those concerns may be overblown but only time will tell.

I  also looked at how the market is pricing bond with the Ba2 and BB  ratings, the grades before Sears debt downgrades, and maturing near the same time. I just wanted an idea of how much appreciation potential the Sears' senior secured bond might have in the event of ratings upgrades back to the September 2011 level, which also assumes that bond investors agree that Sears deserves such an upgrade.

I have owned a Commercial Metals unsecured senior bond with a 6.5% coupon maturing in July 2017, FINRA, which is currently rated Ba2 by Moody's. Bought 1 Commercial Metals 6.5% Senior Bond Maturing 7/15/2017 at 94.75 That bond with a slightly lower coupon than the Sears senior secured and was selling in the 103-104 range last Monday, providing the purchaser with a YTM of around 5.7%.

Another senior unsecured bond, issued by Vulcan Materials and maturing in November 2017, is rated Ba2 by Moody's and BB by S & P, identical to the Sears' secured bond ratings back in September 2011. That Vulcan bond has a 6.4% coupon and was trading in the 104-105 range last Monday.

I looked at a Frontier Communications senior unsecured bond, with a 8.125% coupon, and maturing in October 2018. It is also rated Ba2 by Moody's and BB by S & P. That bond was trading at over 106 last Monday.

The common shares, SHLD, closed at $54.68 last Friday.  

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