Tuesday, August 7, 2012

Edison Mission Statement SEC Form 10-Q on Bankruptcy Option/Bought 100 APF at $13.58/ Bought 200 of the Stock CEF FUND at $6.34/Earnings: OMX/Sold 154+ FBSS at $13.05

The Mortgage Bankers Association reported last week that its refinance applications index rose again to a three year high. Refinance Applications The average thirty year interest rate for mortgage loans for  $417,500 or less was 3.5%. The average jumbo rate was 4.01%. 

There are a large number of homeowners whose home values exceed their average mortgage balance. For those households, the benefit of refinancing at the current abnormally low rates will be recognized on a monthly basis for up to 30 years. More disposable income will be created by lower mortgage payments.

When the large Saving Class is added to the mix, those households with no mortgages exceed 24 million (census.gov/pdf.; e.g. the OG's home), there is certainly a lot of firepower for a consumer led recovery in the U.S., particularly when the Fed ends its Jihad Against the Saving Class late in 2014 and starts to raise the Federal Funds rate at a hoped for fast rate. The Real Cost of The Federal Reserve's Jihad against the Saver Class And, consumer debt is falling among other folks due to mortgage defaults and bankruptcies. Those households and individuals will have all or most of their slate wiped clean.  

I would view this chart as positive for future economic activity in the U.S. 

Household Debt Service Payments as a Percent of Disposable Personal Income - St. Louis Fed

The Lottery Ticket Power-One reported better than expected earnings of 30 cents per share on $322M in revenues. As of 7/1/12, the company had $259M in cash and cash equivalents, up from $205 million as of 1/1/12. The report is discussed in this  Seeking Alpha article.

FBR Capital Markets downgraded Annaly Capital Management to underperform, arguing that the company is more exposed to prepayment risk than other Mortgage REITs and will likely cut its dividend in the second half.  That report is summarized at Barrons.com. The prepayment risk for Mortgage REITs is well known and understood. I own 50 shares in the ROTH IRA. Annaly Capital Management (NLY) fell 45 cents in trading yesterday to close at $16.8. Annaly reported second quarter results last week. Adjusted net income per share was reported at 55 cents, down from 71 cents in the 2011 second quarter.

I was asked whether I have any short positions. I have none. In fact, I have never shorted a stock. Occasionally, I have used double short ETFs as a hedge. I do not have a single margin account and have never borrowed money to buy a security. None of my family members have margin accounts either. We are a conservative tribe.   

1. Bought 200 of FUND at $6.34 Last Tuesday (see Disclaimer): While I have not yet sold any RMT or RVT shares, two other closed end funds managed by the Royce fund group, I will flip their other CEF, the  Royce Focus Trust (FUND). My prior trade in this CEF is shown in this snapshot:

2010 FUND 300 Shares +$281.66
RB Bought 300 of the CEF FUND at 6.22 (Sept. 2010 Post) Sold: 300 FUND @ 7.2 (November 2010) I did not hold it for very long.

This CEF, like RVT and RMT, has a managed dividend distribution policy. The last quarterly dividend was for 10 cents per share. The managed distribution policy is explained in this excerpt from a Royce press release:

Royce Focus Fund Distribution Policy
2Q Distributions Declared for Royce Closed-End Funds This policy is subject to change. During the Near Depression period all three Royce CEFs quit paying dividends. 

As of 8/3/12, the closing market price was $6.39, and the net asset value then $7.28 per share.  That spread created a discount to net asset value of 12.22%.

The top ten positions as of 6/30/12 are as follows:

Morningstar Page: FUND

Closed-End Fund Association Page for FUND

‎SEC Form N-Q Listing Holdings as of 3/31/12

‎Last SEC Filed Shareholder Report

Sponsor's website: Royce Focus Trust (FUND) As shown at that site, the weighted average P/B ratio for Fund's asset  is 1.7 and the weighted P/E is 12. So the strategy would fit with a value orientation.

Royce Focus Trust (FUND) rose 5 cents in trading yesterday to close at $6.44. The net asset value per share rose to $7.35 from Friday's closing number of $7.28.

2. Officemax (own 2 senior unsecured bonds: Junk Bond Ladder Basket Strategy): The two bonds that I own are hard to buy. They were issued when OMX was known as Boise Cascade Bought 2 OfficeMax Senior Bonds Maturing 2/1/16 at 97.494 (January 2011)

OfficeMax reported adjusted second quarter income of $23.1 million or 12 cents per share, up from 4 cents in the 2011 second quarter. Revenues fell 2.7% to $1.6024B.  

As of 6/30/12, OMX had total debt of $237.4M which excludes, as previously explained, $1.47B of non-recourse debt related to a timber securitization. The company had $444.504M in cash and cash equivalents.

3. Sold 154+ FBSS at $13.05 Last Friday (Regional Bank Basket Strategy)(see Disclaimer): After reviewing the earnings report, I gave up on FBSS last Friday. 

First, I was already perturbed when the Board slashed the dividend after I made a purchase, without making any adjustments in management pay. The efficiency ratio was high, which shows the need for belt tightening. When the bank released its last earnings report, it disclosed two problem loans that hammered results, claiming that they were isolated cases. Maybe they are, or maybe they are cockroaches.  I recall another bank President make a similar assertion, the one from Porter (PBIB), that proved the cockroache theory, where one or two pop up, you may just have an infestation. I sold PBIB for the biggest loss in my regional bank basket to date. I have had it with FBSS.

I am not going to discuss this earnings report at all, but will simply provide a link to it. SEC Filed Press Release 

I was reinvesting the FBSS dividends. I netted a loss on the shares of $20.08 and had a slight positive return with the dividends. I do not take snapshots of gains and losses when the total is less than $30.  Those transactions will be few in number and will offset one another.

4. Bought 100 APF at $13.59 Last Friday (Asia Strategy)(see Disclaimer): Whenever I want to increase my allocation to companies located in the Asia-Pacific region, excluding Australia, I will generally just buy a fund. I own a few funds already that concentrate in that region of the world including  Matthews Asian Growth & Income (MACSX) and Matthews Pacific Tiger (MAPTX). The Matthews Pacific Tiger was one of the mutual funds that I pared in 2007 down to a 100 or 150 share position, and thereafter started to add back shares after the Near Depression period. Most stock ETFs and stock mutual funds were eliminated altogether and only the Permanent Portfolio position was left in tack.

In the MAPTX case, I sold the shares down to 150 which eliminated everything bought prior to 1/1/05:

188+ Shares MAPTX Unrealized Gain as of 8/6/12=$1,262.15
Snapshots of Pre-Near Depression Pares of 82.129 shares:

50 Shares +$313.68
32.129 Shares +$338.62
For MACSX, I started the position in September 2009. The total return would include the sum of all reinvested dividends plus the unrealized profit on the shares:

MACSX 473+ SHARES Prices as of 8/3/12
As documented in this blog starting in late February 2009, I was able to make substantial purchases of both common stocks and stock funds because I had increased my cash allocation by selling those type of positions in 2007. Part of that cash allocation was used to buy short term investment grade bonds which I started to sell off in 2/2009, redeploying the proceeds into stocks.

A voice was heard to say, who poured the money back into stocks in March 2009, Lame Brain or the Real Stock Stud RB? Long time readers remember who engineered the coup d'etat at HQ's trading desk, to dethrone Mama Boys as Head Trader.  "Lame Brain was hiding under the sheets crying for its Mama," as RB recalls, "and it was the Real Man, RB, who put it all to together and rode to Headknocker's rescue". RB's Coup D'Etat on 3/3/2009 RB will now refer back to the historical record of HQ's trading operation:

So, in a normal roundabout way, I am ready to discuss the purchase of the closed end fund Morgan Stanley Asia-Pacific Fund (APF) Well, the title of the security gives away its focus.

I have previously bought and sold it a few days later : Item # 2 SOLD: 100 APF @ 17.47 (July 2011)- Bought Back 100 APF at 16.84 (July 2017)

That position was sold with others in an ongoing reduction in my stock allocation which was then occurring.

Previous transactions netted more of a profit:

2011 APF 300 Shares +$340.16

The fund closed 8/3/12 at a $15.28 per share net asset value. 

There was a large capital gain distribution of $1.121 on 12/21/11. That distribution would account, in part, for last Friday's lower purchase price, compared to the earlier buys. 

Morningstar Page: APF On that page, the adjusted expense ratio is shown at 1.24% in 2011. The dividend has not been supported with a return of capital. 

SEC Form N-Q for the Period ending 3/31/12

Last SEC Filed shareholder report for the period ending 12/31/12

Morgan Stanley Asia-Pacific Fund (APF) rose 9 cents in trading yesterday to close at $13.68. The net asset value per share at yesterday's close was $15.33. I also own shares in the Morgan Stanley Emerging Markets Fund (MSF)

5. Edison Mission Statement on Bankruptcy: In a recent SEC Form 10-Q, Edison Mission stated that it does not have sufficient liquidity to repay the $500M debt obligation due in June 2013 and may have to declare bankruptcy, absent a restructuring of its obligations:

EME Bankruptcy Option/Going Concern Exception
EME 2012 Q2 at page 5 The company also reported a loss for the second quarter.

This is not surprising. I have already sold four out of five EME unsecured senior bonds for a small loss and currently own just 1 senior unsecured bond maturing in 2016.

I discussed EME's bleak prospects in a recent post, noting that professional investors had already started to price bonds for a bankruptcy reorganization. Irrespective of maturity and coupon, the EME unsecured bonds have flatlined in price at close to 1/2 of par value which is consistent with an anticipated bankruptcy filing. Item # 1 Risk Rating Raised on Edison Mission Bond to 10- from 9-; and see Sold 2 Edison Mission 7.75% Senior Bonds Maturing in 2016 at 73.25.  Fitch had stated last April that bankruptcy was a distinct possibility when it lowered the rating to CC. In response, I said that there was no reason to disagree with that assessment.

Currently, the market is anticipating some recovery for those bonds and that is being factored into my current risk assessment of 10-. Since a default is probably likely, a risk rating of 10+ is probably deserved for this bond. Personal Risk Ratings For Junk Bonds

FINRA Prices:





Bankruptcy appears to be the best option for EME at this point. While I am just guessing, it is possible that private equity would infuse equity capital into the company after EIX's equity interest is wiped out in the bankruptcy reorganization.  The unsecured bond owners could agree to extend their maturities by several years (3 years would seem desirable), while keeping their principal amounts and coupons. The coupons of those debt instruments are fine, mostly in the 7% neighborhood. If the 2013 maturity would be extended to say 2016, this would take some pressure off the company. Possibly, a minority equity position could be given to the unsecured bond owners to acquire their consent, (25% might be tops).  The Homer station appears to be non-viable so whatever obligations, if any, exist in relation to that project could hopefully be wiped out entirely. Another possibility is a Greece styled reorganization, where the bond holders get clipped on their coupons and principal amounts while extending maturities. All of the foregoing are more musings than anything having substance.

(added: as expected, the WSJ reported on 12/15/12 that EME is preparing to file for bankruptcy in a few days.  WSJ.com For reasons discussed in that article, EME may be in bankruptcy for some time. I previously noted that EME failed to make the interest payments due to unsecured debt owners on 11/15/12. ‎EME 8-K SEC Filing)

(added: as expected, EME filed for bankruptcy on 12/18/12, ‎www.sec.gov

No comments:

Post a Comment