Monday, June 18, 2012

Redemption of GFW/Redemption of PJR/Added 50 GOV at $21.22/Qwest Proposes to Redeem 2023 Senior Bond

The Swiss Central Bank stated that Credit Suisse needs "to significantly expand its loss-absorbing capital during the current year", adding that the bank consider suspending its dividend or selling more common shares. { at page 5; NYT}

Tax evasion in Greece is notoriously rampant. It is after all easier to spend borrowed money. A few months ago, Greece came up with the idea of collecting property taxes as part of the electricity bill. If there was no payment, then power would be cut off until the bill was paid. So what happened? An estimated 500,000 Greek households refused to pay their bills, power was not cut off, and the state run power company is about to default on a $657.2 million loan payment to the banks. CNBC

Based on the elections results yesterday, the Greeks have apparently decided not to renege on the bailout agreement this month.

The New York Fed's June manufacturing index for NY fell 15 points to 2.3. The new orders component declined 6 points to 2.2. Empire State Manufacturing Survey (overview)

After Nokia's latest earnings warning and another round of job cuts, Moody's downgraded Nokia's debt into junk territory. WSJ The debt was cut by Moody's to Ba1 from Baa3. Both S & P and Fitch downgraded the debt to junk back in April. I do not own any Nokia bonds, but I am monitoring the price of  NOK's 5.375% senior bond maturing in 2019. FINRA I have so far refrained from buying that bond for a number of reasons: (1) I have not seen any ask quotes that allow for a one bond purchase and I do not want to assume the risk of buying two; (2) Nokia's cash burn rate is troubling; and (3) I have not seen any evidence that its turnaround strategy is working.

As noted in this WSJ, some analysts assign a zero value to Nokia's phone business and attempt to value the company solely on its cash position and intellectual property.

So far, I have limited myself to the purchase of 50 shares of Nokia's common shares, bought as a Lottery Ticket. Bought 50 NOK at $2.88-LT Category That purchase is somewhat analogous to playing a hand of blackjack for $100, which LB will do whenever the Old Geezer starts to doze off at the table.

In this post, I will discuss two bonds that are about to be redeemed by the issuer and another that was called last week by the owner of the call warrant. Given the longevity of the Fed's Jihad Against the Saving Class, it is not surprising that I am losing a large number of bonds to calls.

1. Anticipated Redemption of 2023 U.S. West Communications Bond by Qwest: Qwest, a subsidiary of CenturyLink (CTL), filed a preliminary prospectus last week to sell senior bonds. Prel. Prospectus Supplement The proceeds will be used to redeem all of the outstanding Qwest 7.5% senior bonds maturing in 2023:

Use of Proceeds
The redemption price would be 100.34% of the principal amount plus accrued interest to the redemption date. As noted in the preceding snapshot, $484 million in principal amount is outstanding and the company plans to redeem the  entire amount.

I believe that Qwest is referring to the U.S. West Communications 7.5% senior bond maturing in 2023. I own two of those bonds. The amount outstanding is $484 million, FINRA, which matches the number in the preceding snapshot. Bought 1 U.S. West Communications 7.5% Senior Bond Maturing 6/15/2023 at 100Bought 1 U S West Communications 7.5% Senior 2023 Bond at 100.13 -ROTH IRA. So I will just about break-even on the bond and will receive several months of interests at the 7.5% coupon rate. Interest is payable on June 15th and December 15th.

I received last Friday the semi-annual interest payments on those two bonds, held in two separate accounts. The one held in the ROTH IRA was purchased with a $2 brokerage commission, while the other had a $8 commission built into the price.

2. Averaged Down by Adding 50 of the REIT GOV at $21.22 Last Thursday (see Disclaimer): I recently bought 50 shares of this REIT, and have nothing to add to that discussion: Bought 50 GOV at $22.9-ROTH IRA

Government Properties Income Trust (GOV) closed at $21.58 last Friday, rising 33 cents in trading for that day.

The current quarterly dividend is 42 cents per share. At that rate, the dividend yield would be about 7.92% at a total cost of $21.22.

3. Proposed Redemption of GFW: I currently own 200 shares of the exchange traded senior bond GFW. That bond was issued by AAG Holding, an indirect subsidiary of American Financial Group (AFG). GFW has a 7.5% coupon and matures in November 2033. According to AFG's Form 10-Q at page 25, there was 112 million outstanding of that bond, as of 3/31/12.

I noticed early last Friday that AFG had a filed a Final Prospectus Supplement to sell $200 million in a 6.375% senior bond maturing in 2042. AFG stated in that prospectus that it will use the proceeds to redeem 112 million of the 7.5% senior bond. I believe that this new bond will be listed on the stock exchange. I have no interest in buying it given its coupon and long maturity.

Late last Friday, I received an email notice that GFW would be redeemed in full. The notice from Vanguard had July 13th as the redemption date.

This is typical for what is happening now. Corporations are able to extend the maturity of  their debt at lower rates. In this case, AFG replaces a 7.5% bond maturing in 2033 with one maturing in 2042 with a 1.125% lower coupon.

I have bought and sold this bond: Bought 50 GFW at 22.76Bought 50 GFW at 22.63Sold 50 GFW at 25.13Bought 50 GFW @25.04Bought 50 GFW at $24.82Added 50 GFW at 24.9; Sold 50 of 200 GFW at $25.48Added 50 GFW at $25.02.

The sole purpose for the recent adds, bought near bought par value, was for the income generation. Overall I will net a small profit on my remaining 200 shares, entirely from a 50 share purchase made in the ROTH IRA back in February 2010, where my total cost basis was at $22.79.  The remaining 150 will be redeemed a close to break-even:

100 GFW Regular IRA
GFW just went ex interest for its quarterly distribution. Par value is $25.

4. Redemption of PJR: I received last Friday the redemption proceeds and the final interest payment for the TC PJR, which was redeemed at par by the owner of the call warrants.

I netted a $406 long term capital gain on this 50 share position:

2012 Taxable PJR 50 Shares +$406 LT
This brings my total realized gains from trading trust certificates to almost $24,500. (see snapshots at Trust Certificates: New Gateway Post.

This sector of the exchange traded bond market is just about played out. It has been usually successful for me. I have realized almost no losses from these securities. When I first started to buy them in 2008, I was typically able to secure a 3% to 5% yield advantage compared to the yields of the  underlying securities. TCs were clearly being mispriced by the market back in 2008 into the first half or so of 2009. This allowed me to eventually capture unusually a number of large percentage gains with small positions, while harvesting interest payments. Those days are long gone, but it was like shooting fish in a barrel for a year or so.   

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