Wednesday, May 16, 2012

Trust Certificates JZJ and JZV Interest Payments/CPI/Earnings: HTGC, OMX,CSCO, CWH/Liquidated JQC

An article at Morningstar highlights the importance of fund expense ratios when making long term investments.

I mentioned yesterday that the Trust Certificate JZJ is vulnerable to redemption by the call warrant owner at the $25 par value plus accrued interest. I have discussed the call warrant issue in a number of prior posts. Call Warrants and Trust CertificatesMore on the Call Warrant in TCsCall Warrant Exercised on JZE and JZJ;  Call Warrant Exercise for XFJCall Warrant Exercise for TC XKKCall Warrant Exercised on MJT and MJVKVW Called by Owner of Call WarrantAlert on TC DKW-Exercise of Call WarrantDKK-Called by Owner of Call WarrantKRH-Exercise of Call WarrantVerizon TC XFL: Called by Owner of Call Warrant; Notice Filed for Redemption of Trust Certificate DKF.

The most recently filed Trustee's Distribution Statement for JZJ shows that the trust still owns $24 million in principal amount of the 2031 AT & T bond. Initially, the trust owned $40 million, but the owner of the call warrant redeemed $16 million in principal amount by paying the owners of 640,000 trust certificates $25 per TC plus accrued interest in 2010. Conditional Partial Redemption of Corporate Backed Trust Certificates

The 2031 AT & T senior bond is trading near 143. There are 960,000 JZJ trust certificates remaining after the foregoing referenced partial redemption. The owner of the call warrant could gain control over the bonds by paying $24 million plus accrued interest to the owners of JZJ. Then, after receiving the bonds from the trustee, and assuming a sales price of 143, they could be sold for $34,320,000 or for more than a $10 million risk free profit. 

In short, there is a strong economic incentive for the call warrant owner to redeem JZJ now. That fact will restrain any rational price movement above par value plus accrued interest.

I did receive yesterday the semi-annual interest payments for the Trust Certificates JZJ and JZV:

The European statistical agency reported zero percent GDP growth in the Eurozone compared with the previous quarter. Eurostat.PDF This was a "flash estimate", subject to revision. Many economists define a recession as two consecutive quarters of negative GDP, so the 17 nation Eurozone avoided a recession by that definition with a zero number rather than a -.1%, at least until the next revision in this estimate. I would just refer to the foregoing argument as too technical. Even if the GDP number is not fudged, it is at best an estimate of GDP, and the reality could easily be worse. And, looking at the numbers, the zero number was due largely to the .5% gain in Germany which is a tad comforting.

Greece will hold another election, probably on or around June 17th, that will likely end in either another stalemate or the nutcases achieving enough votes to renege on the austerity commitments. I certainly would not base any action on the assumption that Greece will actually honor its commitments, unless the commitment is to accept billions in free money from the EU with no strings attached including any obligation to repay.

The WSJ reported that Greeks withdrew $898 million from local banks on Monday alone. That seems to be a rational response.

The VIX closed at 21.97 yesterday.

GM cancelled its ads on Facebook.

The seasonally adjusted CPI was unchanged in April. Over the past 12 months ending in April 2012, the CPI has risen 2.3% on a non-seasonally adjusted basis. Consumer Price Index Summary I own two exchange traded CPI floaters, ISM and PFK, that use the non-seasonally adjusted numbers in their respective interest rate calculations. I have liquidated my OSM position. Sold 100 OSM at $23.34 (March 2011 Post). Those CPI numbers can be found at the St. Louis Fed. The computation is explained in a number of posts including the following: Item # 3 PFK.

Bought 100 PFK at 18.47 (June 2009 Post); Bought 90 PFK in IRA $18.94 (June 2009 Post); Added 50 PFK at $17.83 (August 2009 Post); Added 50 PFK in Roth at 20.88-Averaged UP (January 2010 Post-Last Purchase of PFK); Bought 50 of the CPI Floater ISM at $20.62 (August 2011 Post); Bought 50 ISM at 19.5 (Oct. 2011 Post)

1. Hercules Technology (own 100 of the common HTGC and 100 of the exchange traded senior bond HTGZ): For the 2012 first quarter, Hercules Technology Growth Capital, a Business Development Corporation, reported a 16.3% in net investment income to $.24 per share. Distributable net operating income was $12.2 million or 26 cents per share.

During the first quarter, four of HTGC's portfolio companies completed their IPOs (CEMP, BNNY, MACK, and ENPH). Two other companies (Facebook and WageWorks) have filed IPO registration statements. As of 3/31/2012, HTGC held warrant positions in 110 portfolio companies, valued at approximately $32 million, up from $21.5 million as of 3/31/2011.  The effective yield on its debt investments was 14.6%.

Hercules ended the quarter with $178.4 million in liquidity, including $48.4 million in cash. It did not have any borrowings under its credit facilities.

As of 3/31/12, the net asset value per share was $9.76. Among the BDC's that I own, HTGC is selling now at the highest premium to net asset value per share. 

Hercules Technology Growth Capital increased its quarterly dividend by 4% to 24 cents per share.

Bought 100 HTGC @ $9.7Bought 100 HTGZ at $24.63

Hercules Technology Growth Capital (HTGC) rose 9 cents in trading yesterday to close at $11.18. HTGC is ex dividend today.

Hercules Technology Growth Capital Inc. 7% Sr. Notes due 2019 (HTGZ) rose 5 cents yesterday to close at $24.85. That senior bond has a $25 par value.

2. OfficeMax (own two 2016 senior unsecured bondsJunk Bond Ladder Strategy)OfficeMax reported adjusted earnings of 23 cents per share, seven cents better than the consensus estimate, on a .5% rise in revenues.

This report is discussed in an article published at MarketWatch.

On the day of the earnings release, the common stock, OMX, rose 49 cents or 11.14% to close at $4.89.

Bought 2 OfficeMax 7.45% Senior Bonds at 97.494

3. Cisco (own 100+ shares): For its fiscal third quarter ending 4/28/12, Cisco reported adjusted earnings per share of 48 cents (40 cents GAPP) on a 6.6% increase in sales to $11.588 billion. The results were slightly better than the 47 cent consensus estimate on $11.58 billion in revenue. Cash flow from operations was $3, unchanged from the third quarter of fiscal 2011. Gross margin increased to 61.9% from 61.3%. Cash and cash equivalents totaled $48.4 billion. SEC Filed Press Release A summary of investor expectations for the quarter can be found in the Tech Trader Daily blog at Barron's and in an article at MarketWatch.

The shares dived after this release based on Cisco's guidance for the current quarter. The company estimated revenue growth of just two to five percent in the 4th fiscal quarter. This would equate to $11.4 billion to $11.8 billion. The analyst forecast was for 12 billion, so the high end of Cisco's range is significantly below the analyst consensus.

During the conference call, Chambers said that "we sure don't like the trend in the enterprise IT spending".

Cisco Systems closed at $16.54 yesterday.

4. Commonwealth REIT (CWH-own): CommonWealth REIT reported normalized FFO of $.9 per diluted share, up from 85 cents in the first quarter of 2011. As of 3/31/12, 84.8% of CWH's total square feet was leased.

During the quarter, this REIT completed the IPO of Select Income REIT (SIR) by selling 9.2 million shares. The proceeds from that IPO were used to repay a $400 million note issued by SIR to CWH as "partial consideration" for CWH contributing to SIR 251 properties. This transfer includes "substantially all" of CWH's properties in Oahu, Hawaii and 23 suburban office and industrial properties located throughout the U.S. mainland.

CommonWealth Earnings Call Transcript

CommonWealth REIT declined 16 cents to close at $18.39 yesterday.

5. Sold 804+ Shares of JQC at $9.35 Last Wednesday (see Disclaimer): This CEF has undergone a transition from a balanced fund to one that principally owns bonds. I wanted to review the new portfolio before making a decision on what to do with my shares. Portfolio Repositioning at JQC (January 2012) Quite frankly, I forgot to do that until recently. I found the updated portfolio at Nuveen Credit Strategies Income Fund (JQC) Updated Portfolio Holdings as of 4/6/2012. This fund has concentrated holdings in junk rated senior secured loans, which may appeal to some investors. I already own too many junk bonds. The fact that the senior secured bonds are rated junk is a sign that principal is at risk upon a default notwithstanding that security interest. In other words, many of these firms are so heavily indebted that a liquidation or sell would likely bring in less than the principal amount of the debt.

The decision to liquidate this holding was also based on a significant gain in the shares, which included a gain on all reinvested shares:

2012 JQC 804 Shares Realized Gain +$1,060.89
Snapshot of Confirmation
Some of that gain would be attributable to return of capital adjustments to the cost basis.

This fund's discount to net asset value is currently hovering around 5%, JQC - Nuveen Credit Strategies Income Fund. This is significantly lower than the discount prevailing when the shares were purchased by me. In prior purchases, where I noted the discount, it was over 10%. Added to CEF JQC at $6.97 (close to a 18% discount-November 2009);  Bought 200 JQC at 7.88 (over a 12% discount-Decmeber 2010); Added 200 JQC at 8.74 (over 14% discount-January 2011). One purchase was made during the Dark Period when the discount had expanded to almost 28% and the purchase was made at $4.3. AEB AND JQC (October 2008 Post)

This fund has recently switched to monthly distributions from quarterly payments. While I did use several distributions to buy additional shares, as shown in the foregoing snapshot, several distributions were taken in cash.

When a CEF is bought at a discount, it is sometimes possible to make money on the shares by a narrowing of that discount. The most advantageous situation is to have the discount narrow from the time of purchase when the holdings are going up in value, which is the ideal scenario.

The worst scenario is the triple whammy. The discount expands, rather than contracts, at a time that the holdings are going down in value which is made worse by using borrowed money to buy those depreciating assets. An example of the triple whammy was my purchase of shares at $4.3 back in November 2008, when the asset value was plummeting and the discount had expanded to almost 28%, with the effect magnified by JQC's leverage.

The triple whooper is the reverse of the triple whammy. The discount narrows, when the value of the holdings increase, and the fund makes more due to the leverage. JQC uses leverage. JQC Fund Data

Nuveen Credit Strategies Income Fund closed at $9.07 yesterday.

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