Tuesday, June 19, 2012

Bought 1 Telecom Italia Capital 6.375% Senior Bond Maturing 11/15/33 at 80/Sold 100 PSEC at $11.36/Sold 52+ GABC at $19.62

Spain's ten year bond is now yielding over 7%. After the Greek election on Sunday, this bond fell in price yesterday and rose in yield. ES 10Y Govt Bond Benchmark Bill Gross argues that Spain's debt is not "safe".  Spain's central bank reported yesterday that bank deposits declined 2.5% in April, compared to March, and bad loans as a percentage of total loans rose to 8.72%, the highest level in 18 years.

The latest commentary from Bill Gross can be found at Investment Outlook.

1. Sold 100 PSEC at $11.36 Last Friday-Regular IRA (See Disclaimer): PSEC is the symbol for the high yielding stock of the BDC Prospect Capital Corp..

When held in a retirement account, my objective for any BDC is harvest one or more dividends and to sell at any profit. 

2012 Regular IRA 100 PSEC +$39.6
I held 50 of those 100 shares for slightly over a year, collecting 12 months dividends paid by this high yielding security.

I consider this investment to be a success due to harvesting a 11%+ dividend yield without suffering a loss on the shares.  

I am also de-risking in the retirement accounts. I recently sold 100 shares of PSEC in the ROTH and bought in their place 50 shares of a Prospect Capital senior exchange traded bond. Bought 50 PRY at $23.58 (6/5/12 Post); Sold 100 PSEC at $10.83-Roth IRA (6/1/12 Post) S & P currently has a BBB rating on Prospect's senior unsecured debt with a negative outlook. 

In that kind of de-risking, I am willing to accept less income for a higher priority security, swapping common stock shares sold at a profit for shares of a senior bond. Dividend on common stock can be reduced or eliminated, whereas a senior bond's interest payments can not be reduced, deferred or eliminated short of bankruptcy.

Prospect Capital closed at $11.36 yesterday. I still own 219+ in a taxable account, where I am reinvesting the dividend.

2. Sold 52+ GABC at $19.62 Last Friday (Regional Bank Basket Strategy)(see Disclaimer): This transaction was primarily motivated by profit taking. GABC is also one of my lowest yielding regional bank stocks. Based on the current quarterly dividend of 14 cents per share, the dividend yield at a total cost of $19.62 would be approximately 2.85%. Sixteen of the stocks in the regional bank basket have dividend yields over 4% at their respective current prices, and none were lower than 3% other than GABC.

Most of the gain realized on this small GABC position was a long term capital gain.  

2012 GABC 52+ Shares +$111.71 ($109.06 LT)
These shares were bought at $17.05. Bought 50 GABC at 17.05 I would certainly consider buying the shares back at that price. For the 2012 first quarter, this bank reported earnings of 44 cents per share, up from 37 cents in the year ago quarter. Item # 2 GABC As of 3/31/12, the efficiency ratio was good at 57.79%, and the non-performing loans were less than 2% of total loans.

German American Bancorp fell 46 cents to close at $19.07 yesterday.

3. Bought 1 Telecom Italia Capital 6.375% Senior Bond Maturing 2033 at 80 Yesterday (see Disclaimer): I would view this bond to be at best a borderline investment grade.  According to FINRA, this bond is currently rated at Baa2 by Moody's and BBB by S & P.

This is a partial replacement for the 200 shares of GFW, an exchange traded senior bond, that is being called by the issuer. Redemption of GFW GFW matures in 2033 and is currently rated Baa2 by Moody's.

Telecom Italia Profile Page at Reuters

TI is the largest provider of telecommunication services in Italy, and has significant operations in Latin America (Brazil, Argentina and Paraquay). I would be concerned about the Argentina operations given the government's move toward a Hugo Chavez approach to private business interests.

This bond was first sold in a private offering. A Prospectus was later filed with the SEC,  Amendment No. 1 to Form F-4. Telecom Italia Capital is a wholly owned subsidiary of Telecom Italia, which guarantees the notes as provided for in the prospectus. Interest is payable semi-annually on May 15th and November 15th of each year.

The bond has a make whole provision in the event TI redeems it before maturity, which is inapplicable to a Tax Redemption.  In the following snapshot, the 2033 note is referred to as the Series C Note:

Prices Optional Redemption
I have previously flipped another Telecom Italia Capital bond. Bought 1 Telecom Italia Capital 5.25% Senior Bond Maturing 11.15.2013 at 96.429 (12/22/11 Post)- Sold 1 Telecom Italia Capital 5.25% Senior Bond at 101.328 Maturing 11/15/2013 (2/22/12 Post)

The common stock of Telecom Italia is traded in the U.S. under the symbol TI.

A transcript of the 2012 first quarter earnings call is available at Seeking Alpha.

SEC Filed Press Release Announcing 2012 First Quarter Results: Telecom Italia - 6k For the 1st quarter, TE reported net income of €720M on revenues of €7.392B.

2011 Annual Report Filed with the SEC: Form 20-F

The current yield on this bond is 7.97% at a 80 total cost. Using the Morningstar Bond Calculator, I came up with a YTM of 8.48%. I have not yet looked at my confirmation.

To pick up more than a 8% YTM on a Telecom Italia Capital (TIC) bond, I had to go out at least twenty years in maturity. Some of the other available TIC bonds with current (6/18/12) YTM's over 8% are:

2034 6% Coupon
2036 7.2% Coupon
2038 7.721% Coupon

The 2033 maturity gave me almost the YTM of the 2038 bond with close to a five year shorter maturity. 

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