Tuesday, July 24, 2012

When Does a Capital Treatment Event Occur?/NXY/SOLD 50 SYBT at 24.31/ Bought 50 VFH at $31.16/Earnings: SYBT PBCT CCNE

China seems to have the same objective as our RB when it comes to Canada. CNOOC will acquire the Canadian energy company Nexen (NXY) for $27.5 (USDs) per share in cash, a 66% premium to NXY 20 trading day volume-weighted average share price. I do not own the common shares. For a time, I owned NXYPRB, an exchange traded junior bond issued by NEXEN. Bought 50 NXYPRB @ 25.15-Sold 50 NXYPRB at $25.5. This one has a 7.375% coupon on a $25 par value, with a maturity in 2043. It can be called now. Prospectus Supplement Those shares declined 28 cents to close at $25.3. Nexen Inc. 7.35% Sub Notes 2043 I suspect that the decline was due to some investors pricing the greater potential of an early call.

Normally, I would not buy a bond with a maturity after 2039, sort of an arbitrary cut-off date on the interest risk issue. For the OG, the option of holding a bond maturing after 2039 to maturity is not a realistic one. On many occasions, an exchange traded bond will be delisted when the issuer is acquired by another company. Another possibility is that CNOOC will call the bond after the merger. CNOOC has a higher credit rating than NEXEN and would have no difficulty in refinancing this bond at a lower rate.  CNOOC sold some ten and thirty year bonds back in April that were rated Aa3 by Moody's. The Nexen 2043 junior is rated junk at Ba1 by Moody's.

Nexen's common stock is owned by a Canadian energy ETF that I own. I am familiar with two Canadian energy ETFs. The Guggenheim Canadian Energy Income ETF had a 1.33% weighting in NXY. I own shares in XEG, an offering by IShares Canada that had a 3.43% weighting in NXY. I own 200 shares of that ETF, bought on the Toronto exchange, primarily for diversification and potential long term gains for this sub-sector of energy stocks. I have a positive view of Canada's energy stocks over the long term, meaning the next ten or more years. I have some ENY in family member accounts and in a testamentary trust for the same reason.

I thought that Penn State football was extremely fortunate to avoid a death penalty, lasting for at least one year. I remember that SMU football was given the death penalty after recruiting violations. The Tulane University President shut down the Tulane basketball program after a 1985 point shaving scandal.

Basically, at my core, I am a conservative, admittedly an old-fashioned one who actually believes in the Bill of Rights.

Are the values expressed in the First Amendment hard core, immutable conservative values?

The First Amendment is not a grant of rights but is instead a restraint on the government interfering with the free exercise of those rights that the founding fathers believed naturally belong to human beings (natural rightsJohn Locke and Thomas Hobbes)

The United States Constitution - The U.S. Constitution Online - USConstitution.net

You would think that would have some appeal to conservatives, a point to keep in mind when I later discuss a recent incident in Tennessee.

I am not the kind of conservative who would be welcomed in the modern day GOP. The vast majority of republican politicians, particularly those inhabiting the House of Representatives, are not conservatives, not even close, but something else entirely. The reactionary forces, including racists, have always called themselves conservatives. Every racist that I have known referred to themselves as conservatives.

Many republicans would probably be best characterized as reactionaries with rigid ideological beliefs formed without much effort, if any, to learn accurate information. Due to rigidity of their beliefs and a complete lack of interest in challenging them, they are incapable of learning anything worthwhile from experience. Any information inconsistent with the belief is rejected as false simply because it is inconsistent. Why learn anything, when truth is embodied in about ten cliches, probably less than that? "Government is the problem", just by way of example. That sounds like it might contain a germ of a thought, more like a single cell organism struggling to form a thought. 

In the last gubernatorial election in Tennessee, I voted for the republican Bill Haslam, viewing him to be closer to a traditional republican than other republicans politicians normally viewed as unenlightened and ignorant extremists. Senator Corker, who is up for re-election this November, is viewed as a non-crazy traditional republican, and I will vote for him. I also voted for Lamar Alexander, the other Republican senator from Tennessee. Michele Bachmann: Sarah's Soul Sister (October 2008). I will not vote for Mitt, viewing him as a pathological liar with no core principles, other than a desire to say whatever was necessary to secure the GOP nomination and to become President.   Obama is the default choice-again. At least the republicans are not likely to nominate a Know-Nothing Sarah clone, someone like Michael Bachmann or my representative, as their V-P. 

Now, in my usual roundabout way, I am now going to discuss the reason for bringing up the Bill of Rights today.

Recently, the TBs in Tennessee have gone into apoplexy after the Republican Governor's administration hired a well qualified attorney, who happens to be a Muslim, to be the International Director for the Tennessee Department of Economic and Community Development. The lady in question, who was born in Waverly, Tennessee (hardly a hot bed for liberalism), graduated from Vanderbilt and also received a J.D. from Vanderbilt. She clerked for a judge on the U.S. Sixth Circuit Court of Appeals. She was a White House fellow and worked for many years with a prestigious international law firm.  Republicans were appalled and took out an ad in the Nashville, Tennessean claiming that Haslam had abandoned conservative republican principals, which apparently does not include freedom of religion, one of the core conservative values embodied in the Bill of Rights. Haslam right to hire Muslim | timesfreepress.com

{Really, only the Second Amendment, as properly interpreted by the current Court, is needed to preserve our liberty anyway. Might as well forget about those other liberal rights such as freedom of religion except for Southern Baptists and other proper Christian denominations of course, maybe even the Methodists too. Everybody needs to just arm themselves with as many automatic weapons as they can afford to buy, yeah man, carry two or three concealed weapons, mount a machine gun on the top of our homes, possibly even a grenade launcher, flamethrower and mortar in the garage will be necessary to protect our liberty from Obamacare-with all of those weapons purchased by mail order, of course}

The republican chapter most up in arms about the Haslam administration hiring a gay person and a Muslim is of course the one from Williamson County Tennessee. Hardly surprising to anyone in the know. HQ is located in the most republican part of that county, the SUV Capital of the World.

While I have not conducted a poll of all republicans in Williamson, I believe that most of them are birthers based on my large sampling on that issue. Their state representative, Glen Casada, joined a lawsuit seeking to challenge Obama's constitutional right to be President, being a foreign born Muslim and all that other bad stuff too. 

Many voters realize that Gore lost the election to George Jr. in 2000 due to a narrow loss in Florida after the Supreme Court stopped the recount. It may not be generally known that Gore really lost the election because he failed to carry Tennessee, his home state and where he had been elected as a U.S. Senator and Congressman before becoming Vice President under Clinton. New York Times The Tennessee loss was a narrow one. There has never been any serious question about the accuracy.

If Gore had carried Tennessee, he would not have needed Florida to win. He would have been President, and there would have been no Iraq War in my opinion. In the 2000 election, Bush received 38,901 votes in Williamson County and Gore received 18,745 votes. I voted for Gore since I did not believe George Jr. was capable of exercising good judgment based on securing the best and most reliable information, a common affliction among TBs who form opinions easily based on misinformation consistent with their preconceptions.

TBs can be anyone, including liberals and Democrats. It is more of a tag that defines an unwillingness to sift through information from a variety of sources, particularly original source material, and to distinguish the reliable from the unreliable and the material from the immaterial. It is immaterial for non-TBs whether the information fits into previously fabricated belief systems, including those held over an extended period of time. The first inquiry is whether the evidence is material, relevant and reliable.  Phrases applicable to non-TBs would include inquisitive, thoughtful, analytical, discerning, and open-minded.

1. Capital Treatment Events and TP Redemptions: When Does a Capital Treatment Event Occur Within the Meaning of the Prospectus: Apparently, the banks believe that a recent notice of proposed rulemaking, published by the Federal Reserve on June 7, 2012, is sufficient to trigger a "Capital Treatment Event" within the meaning of a prospectus. An example of that belief is expressed by TCF Financial when it announced the redemption of its trust preferred. A similar statement was made by Citigroup and in a June 8th press release issued by SunTrust. Their legal beagles seem to be on the same page, but would a court agree when confronted with that argument being used to avoid a make whole payment?

I would be interested to see the legal authority supporting that position, when the rule does not start the phase out of TPs as Tier 1 equity until 1/1/13. The issue is "when" does a Capital Treatment Event occur within the meaning of a given Prospectus. That could become an important issue when a bank redeems a TP with a make whole provision in July 2012, as JPM did, and attempts to avoid the make whole provision by invoking the Capital Treatment Event exception. 

I am not questioning that avoidance when the redemption occurs after 1/1/13, provided the TP would no longer qualify under the phase out rule. Some TPs could be considered Tier 1 equity capital through the remainder of 2013, all of 2014 and even into 2015. Is the opinion of the bank's attorney binding on the court when that attorney is making a mixed law and fact judgment that inures to the benefit of his client and harms other parties?

I am just posing a few questions, rather than providing an answer on this one. I have posited the need for legal research on this timing issue in connection with the GJN redemption. If the redemption of that security is going to be litigated,  then the plaintiffs might as well question everything touching that redemption, including the amount of JPM's payment to the trust. The Egregious Swap Termination Fee Paid to the GJN Swap Counterparty

Added 8/4/2012: I discuss this issue in more detail at the end of a 8/3/12 post: GJN-Wells Fargo. The definition of a "capital treatment event" can be found at page A-6 of the GJN Prospectus. JPM only has a 90 day window to redeem after a capital treatment event and avoid the make whole payment. That window starts when JPM makes a "reasonable determination" that there is more than an insubstantial risk that it will no longer be able to treat the liquidation amount of the TP as Tier 1 equity capital. 

2. Sold 50 SYBT at $24.31 Last Thursday (Regional Bank Basket Strategy)(see Disclaimer): I was not impressed with the earnings report. S.Y. Bancorp Reports The bank reported an E.P.S. of 44 cents per share, up from 43 cents in the year ago quarter.

Since I had a good percentage profit over a relatively short time span, I decided to harvest the gain. I will also receive one quarterly dividend:

2012 SYBT 50 Shares +$107.58
After this report, Raymond James downgraded the stock to market perform from outperform, apparently based on valuation. That report had no impact on my sell decision.

3. Bought  50 of the ETF VFH at $31.16 Last Thursday (see Disclaimer): After selling some small positions in my regional bank basket, including the one discussed above, I decided to buy back the Vanguard Financial ETF (VFH) as a parking place for the proceeds. By buying this ETF in my Vanguard brokerage account, I do not pay a brokerage commission.

Sponsor's webpage: Vanguard - Financials ETF - Overview The expense ratios is listed at .23%.

VFH has over 500 securities compared to 80 stocks owned by the SPDR Financial ETF (XLF) The later ETF is limited to financial stocks included in the S & P 500, whereas VFH will include mid and small cap companies in this sector. Both ETFs would include banks, insurance companies, REITs, and investment management companies (e.g. TROW). Both ETFs include Berkshire Hathaway.

I thought that it would be useful just to compare the weighting for the top 10 holdings of each ETF:

VFH Top 10 Holdings as of 6/30/12

XLF TOP 10 as of 7/18/11

I have previously bought and sold VFH twice:

2011 VFH 100 Shares +$403.28
Sold 100 of the ETF VFH at 34.88 (February 2011). I subsequently became less brave, buying just 50 shares, and disposing of them shortly thereafter for a smaller gain:

2012 VFH 50 Shares +$92.47
Sold 50 VFH at $31.05 (February 2012)

Vanguard Financials ETF declined 27 cents in trading yesterday to close at $30.35.

4. PBCT (ownRegional Bank Basket Strategy): People's United Financial reported second quarter net income of $64.8 million or 19 cents per share, up from $51.1 million or 15 cents in the year ago quarter. During the second quarter, PBCT repurchased 4.5 million shares at a total cost of $54 ($12 per share). Operating earnings were reported at 20 cents per share.

The consensus estimate was for 19 cents.

PBCT has a network of 416 branches in Connecticut, New York, Massachusetts, Vermont, New Hampshire and Maine.

As of 6/30/12, the net interest margin 3.95% (down from 4.15% a year ago); the efficiency ratio was at 61.5% on a consolidate basis (62.4 for bank); originated NPLs were 1.67% of total originated loans; he tangible equity to tangible asset ratio was 11.5%; the total risk-based capital ratio was 15.6%; tangible book value was $8.76 per share; operating return on average assets was .97%; and the return on average tangible assets was 1.01%.

PBCT was a recent add to the regional bank basket strategy: Bought 100 PBCT at $11.47

People's United Financial closed at $11.37 yesterday, down 14 cents. According to Marketwatch, the dividend yield at that price is 5.63% with the next ex date on 7/30/12.

5. CCNE (own: Regional Bank Basket Strategy)CNB Financial Corporation reported net income of $4.3 million or $.35 per share, up from .32 in the year ago quarter. For the quarter, the return on average assets was 1.01%.

The consensus estimate was for 34 cents, with only two analysts contributing to that number.

As of 6/30/12, the total risk based capital ratio was 14.96%; the Tier 1 based ratio was 13.7%; the tangible equity to tangible assets ratio was 7.53%; NPAs stood at 1.08% to total assets; and the net interest margin was 3.47%.

Bought 50 CCNE at $11.06 (June 2010)

CNB Financial closed at $16.44 yesterday. 

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