Thursday, August 9, 2012

SD, ASH, CWH/Sold 100 BDN at $12.38-ROTH IRA/Bought 100 of the Stock CEF PEO at $24.98/Colt Defense

It would be nice to find client of Wells Fargo Advisors who had been put into GJN by their broker and left holding the security on the redemption. Ideally, a lawyer representing a class would want a number of those folks as named plaintiffs.

If someone had asked the LB in say December 2010, "when could J P Morgan reasonably determine that it would have to phase out the use of Trust Preferred securities as Tier 1 equity",  a Capital Treatment Event, the LB would have said that was an easy question to answer. It could be determined right now by anyone, anyone who cared to read the Dodd-Frank bill, section 171 ( .pdf), signed by the President into law already, that JPM would have to phase out the use of TPs as Tier 1 equity capital starting on 1/1/13.  And, as of mid-July 2012, has more than 90 ninety days expired since that time? And the LB would say next question.

It is easy to craft a JPM argument based on the Capital Treatment Event language contained in the prospectus for the 2035 trust preferred. After all, JPM drafted that language. Too my knowledge, no court has accepted their interpretation that would give them multiple opportunities to start the 90 day period running, which would continually disrupt the pricing in the security over long periods of time, when everything that needed to be known was already known as of July 21, 2010. J P Morgan-Make Whole Payment-Redemption of Its 2035 Trust Preferred GJN-JPM-Make Whole Payment When Does a Capital Treatment Event Occur? This one is certainly worth the effort in my opinion given the likely negligible cost to litigate the issue (briefing, oral argument, legal research, appeal) and the enormous possible return on that investment.

It goes without saying that the few apologists for WFC will not even see this argument regarding JPM as having even a remote chance of success, which makes the RB wonder some whether they are as disinterested as claimed by them in their Anonymous comments. I am not questioning their honesty, but simply pointing out that I can not verify claims of disinterest by Anonymous people. The OG has no direct or indirect financial interest in anything that happened to those GJN owners, and that is not subject to any dispute.

A recent visitor to my site claims, with some substantiation, that he understood the risk of a swap termination fee before the redemption, but did not own the security at the time. He could not short the security because he did not have a margin account. He did not open a margin account to take advantage of one of those rare opportunities for a large, quick and guaranteed return. He did find the JPM press releases, which I did not find after doing a google search, after he noticed the price jump on heavy volume. As previously noted, I was monitoring GJN only as to price, and I also saw that jump. Unlike this reader, however, I did not discover the reason for it after making a cursory effort as noted in my 6/13/12 blog. If the prospectus disclosure had been legally adequate, the price should have exploded down rather than up, a point that is lost on the WFC apologists.

Needless to say, I am not focusing on one security or a few dozen where I can concentrate all of my effort. It would be easier if I could focus on say exchange traded bonds and nothing else. Instead, between myself, a trust, and family members, I have to keep tabs on maybe 1500 securities (worldwide and throughout the capital structure), plus another 1000 or so that are being monitored to various decrees. And, like other individual investors, I have other things to do, including writing this blog whose access is free and will remain so without advertisement.

I was not focused on GJN at all between 6/11/12 until 7/18/12, when I was informed late that night of the redemption amount. Item # 3 GJN Redeemed-Payment to Swap Counterparty From Proceeds? I stayed up to around 3:00 A.M. trying to figure out how that could happen by reading the prospectus and looking for information about a JPM redemption which I found in a google search that returned an article at TheStreet, which I reference in that post. I did not own GJN during that period, nor did I own any JPM TP or any other JPM security, directly or indirectly, and had no reason to monitor what that bank was doing, nor was I even interested in buying the stock.

I have seen a lot of squirrelly action in TCs. So, if I had owned GJN on that big up day last June 13th on very heavy volume, which could not have happened with a legally adequate risk warning prominently featured in the prospectus,  I would have sold it without a moment's hesitation.  One of the most bizarre moves in a TC was a rise in XFL to over 33 one day, which I sold in an instant after seeing it. I could not hit the sell button quick enough:

2008 XFL 100 Shares Sold at $33.31/+$821.98

The TC soon fell back to its $25 par value. That security was later redeemed by the owner of the call warrant at $25 plus accrued interest.  Call Warrants and Trust Certificate: XFL CALLED (March 2010 Post)


SandRidge Energy commenced a private offering of senior bonds: $500M in notes due in 2023 and $250M in notes due in 2021. The funds are being used in part to finance the redemption of up to $350M in senior floating rate notes due in 2014. S & P assigned a "B" rating to the new notes. TEXT-S&P

Ashland price $500 million of 4.75% senior notes due in 2022. The proceeds were used to make a tender for a 9.12% senior note maturing in 2017. Of the $650M in principal amount outstanding, 88% of the notes were tendered in response to the Ashland's offer. I own 1 junior bond.  Bought 1 Hercules 6.5% Junior Bond Maturing on 6/30/29 at 86 (June 2011); FINRA (currently rated Ba2 by Moody's). For the quarter ending 6/30/12, Ashland reported an E.P.S. from continuing operations of $2, up from $.94 in the year ago quarter. ASH-2012.6.30-10Q The 2029 junior bond, originally issued by Hercules, is referenced in the forgoing linked 10-Q at page 19.

I have bought several senior second lien bonds. While a secured bond will be better than an unsecured one from the same issuer, it is entirely possible that the second lien attaches to nothing in reality. The amount of the first lien debt may exceed the fair market value of the secured assets. I made a comment over a year ago that one second lien bond was attached to nothing more substantial than the air surrounding the firm's headquarters. I turned out to be right.

Provident New York Bancorp (own) sold institutional investors 6,258,505 shares at $7.35 per share raising net proceeds of $46M.

Alerian MLP ETF (AMLP) declared a third quarter dividend of $.252 per share which went ex dividend on 8/7/12. I recently bought 100 shares. Bought 100 AMLP at $16.19

1. CWH (own):  CommonWealth REIT is a large real estate investment trust that owns office and industrial properties.

I thought that the market's significant adverse reaction to an in line earnings report was difficult to justify given the pounding already taken by the shares. CommonWealth REIT Announces 2012 Second Quarter Result Then, I realized something else had to be causing the downdraft.

The Old Geezer thought that the reaction might be justified, at least temporarily, with a warning about a future dividend cut. While no such warning was contained in the earnings release, I have been informed that the topic was mentioned during the earnings call. I have not yet verified that assertion, but it would be consistent with yesterday's price action.

When I find out something more definite on the dividend, either by reading a published earnings call transcript or a news story, I will made an add here: ADDED: The CEO stated in the conference call that "it may become necessary for the Board of Trustees to adjust the dividend rate during the next couple of quarters in order to retain more cash flow . . ." CommonWealth REIT Management Discusses Q2 2012 Results - Earnings Call Transcript - Seeking Alpha)

I do know that the CEO said that CWH could afford the dividend in his 1st quarter earnings conference call and was perplexed about all of the talk about a dividend cut. (near the end of SeekingAlpha transcript:  CEO Discusses Q1 2012 Results) So maybe he has changed his mind for some reason.

The shares were trading consistently over $25 per share between August 2009 and July 2011, when there was a decline to the current trading channel, mostly in the $17 to $20 range. CWH Interactive This slide started with the public offering of 10 million new shares in July 2011. ‎

With yesterday's plunge, investors need to reassess the wisdom of keeping the management team in place. I intend to vote against them.

There are two basic criticisms about this REIT. As noted previously, CWH has created new REITs by seeding them with some of its best properties over the years. The most recent examples were the creation of Select Income REIT (Hawaii holdings) and Government Properties Income Trust. (own both as of today) This process started in 1995 with the creation of Hospitality Properties Trust.

This spin out process leaves CWH with less desirable properties. While that is a negative, it is not as bad as it looks for several reasons, including CWH's significant ownership stake in those new companies. Some value creation is possible when the market places a higher premium on the standalone REIT than when those properties were included in the much larger and diverse CWH portfolio. (I bought the Select Income REIT which is now trading over $3 above its IPO price.)

The other criticism is that CWH is not a self-administered REIT but is managed by a separate company that also provides management services for SIR, GOV and a prior spin out SNH (see pages 15-16 at Form 10-Q) Some investors believe that this creates issues where the interests of shareholders and management are not aligned. Those issues are summarized in this recent Seeking Alpha article.

Another concern is a possible dividend cut. Washington REIT (WRE) recently slashed its dividend for the first time in fifty years. Washington Real Estate Investment Trust Announces New Quarterly Dividend Rate It was paying slightly more than its FFO which is not sustainable in my opinion, particularly when leasing office space is soft. CWH's fifty cent quarterly dividend is substantially below its quarterly FFO. The last quarter was at .83 cents.

CWH has a large number of office buildings in areas where there is no moat. Any fool with a bank loan can buy land fairly cheaply and build a eight story office building. Those REITS like Boston Properties and S L Green, who own desirable properties in major U.S. cities like Boston and NYC, do not  face that kind of competition for tenants.

CWH is not having any difficulty raising capital. Recently the REIT sold $175M of 5.75% senior notes maturing in 2042.

If the dividend is cut, I will vote against the Board and any resolution requesting approval of management's compensation or the management agreement with the third party firm.

Sometimes, the Board will cut a dividend because they can get away with it, particularly now when interest rates are low and a dividend of 5% would look good to investors. If the money saved by the dividend cut is put to productive use, then the shareholders might be better off way down the road.

The reduction in cash payments now is more certain than a possibility of enhanced shareholder value down the road. And, there is always the possibility that the savings find non-productive uses, including salary and benefit increases for management.  

I have discussed this issue, sort of a philosophical one, many times. If I had not seen management destroy capital countless times for the past forty years, sometimes in ways that could only be described as stupid, I might just say, keep that money, invest it wisely and prudently, and I will be richer for it. But it is hard to forget all the money incinerated by management which was not paid out in dividends.

Back in the old days, even before the OG became an investor in the 1960s, investors wanted that dividend in hand, rather than lost on some foolish project or taken by management. Maybe they were wiser than us.

I would note that there are investors who prefer to invest in real estate companies that are not REITs since they do not have to pay out any dividends and can retain that capital to expand. This worked for Forest City for many years. {I own a senior 2015 bond and have bought the common as a LT again for the second time. Bought  30 FCE/A at 11.58}

Yes, it would like a charm for Forest shareholders for many years. The stock moved from around $8 in 1999 and hit 70 by May 2007. Wow, that was awesome. Then, just looking at the chart, something bad must have happened. FCE-A Interactive Chart I understand what happened, a typical problem among real estate wheeler dealers. The company had the peddle to the medal well into the Near Depression period, and all of that value went poof, with  the stock closing at $3.41 on 3/30.09, FCE-A Historical Prices. My first entry into the common as a LT was in May 2009 at $6.3, later sold at $13.23. I mention the foregoing as a lesson to keep in mind.

Stock Quote: CommonWealth REIT (CWH)

The OG is not happy about this one but will stay with it.

2. Sold 100 BDN at $12.3833 Roth IRA Last Monday (see Disclaimer): This was another flip of an individual stock holding in the Roth IRA. The shares were bought about a month ago at $11.24, and I received one quarterly dividend. I will constantly flip for small gains, plus one or more dividends,  individual stock positions purchased in the ROTH RIA.

2012 ROTH IRA 100 Shares BDN +$100.5
I still own 100 shares of BDN in a taxable account.

Stock Quote: Brandywine Realty Trust (BDN)

3. Bought 100 PEO at $24.98 Last Monday (see Disclaimer): Petroleum & Resources (PEO) is a closed end fund that owns natural resource stocks.

Sponsor's website: Petroleum & Resources Corp. | Investments in Global Energy and Natural Resources

On Friday 8/3/12, PEO had a closing market price of $24.85 and a net asset value per share of $28.81, creating a discount to NAV at that time of -13.75%.

The NAV per share on my purchase date was $28.91 and the discount was -13.66 based on a closing price of $24.96.

PEO page at the CEFA

PEO page at Morningstar (currently rated at 2 stars). Other information shown at that page includes the following.  The expense ratio is shown at .56%. The dividend has not been supported by a return of capital. There was a dividend distribution of $1.67 per share in November 2011, consisting mostly of a long term capital gain distribution of $1.51 per share.

Semi-Annual Report: JUNE 30, 2012

This is a snapshot of the 10 largest holdings as of 6/30/12:

I have previously bought and sold this CEF:  SOLD: 100 EXC @ 44.67, 100 APF @ 17.47, 50 DLN @ 49.38, 100 PEO @ 30.62, 100 MSFT @ 27.9

Stock Quote: Petroleum & Resources (PEO) This was the add mentioned in yesterday's post that was included in the CEF Table.

4. Colt Defense (own 1 senior unsecured 2017 bond):  It is hard to find anything of a positive nature to say about Colt Defense. Fortunately, I own just one bond. Colt is a private company.

Colt Defense reported a loss of $6.665 million for the Q/E 7/3/12. Cash had decreased to $31.109M from $38.236M as of 12/31/11. SEC Form 10-Q This brings the net loss for six months to $13.275M. Inventories stood at $38.412M. There were no borrowings under a bank credit agreement, which means the senior unsecured note does not yet have higher priority debt. Any borrowings under that bank credit facility would be subject to a first lien in substantially all of Colt's assets.

If the firm eventually goes bankrupt, I would expect a drawdown of that credit facility before any such future filing which would likely be disadvantageous for the unsecured bond owners, who fall second in line in a situation where capital is being destroyed in order to stay afloat. Before Eastman Kodak filed for bankruptcy, it drew on its bank credit facility.

On the slightly positive side, backlog increased to $184.5M (page 21)

I raised my risk rating on the 2017 bond to 9+ last May: Colt Defense-Raising Risk Rating to 9+

Bought 1 Colt Defense 8.75% Senior Bond Maturing on 11/15/2017 at 85.24 (May 2011). I am sitting on close to a $200 unrealized loss on that 1 bond, but the company is current on its interest payments.

For anyone interested in what happened to Colt's GAO protest on the award to Remington for the M-4 carbine, see U.S. GAO - Bid Protest Docket - Colt Defense, LLC (B-406696.1)


  1. a) thanks for the rides, specifically that WIN trip. It was good. Time for a repeat?

    b) man you are one pretty prickly fella, I'm the "dud" guy, when your recent purchases tank (1/3 or so) it's only natural to inquire whether it's still a good idea, you know new info come up all the time, who's better to ask than the existing presumably conscientious owner, proud or not. My post, for the record was:

    Here's a list of some recent "duds" of yours (no criticism implied obviously) and where they are now re your original purchase price. Any of those you consider a buy at this point?

    GGAL -35%
    NOK -34%
    MTOR -31%
    SD -20%
    LSI -20%

    After fuming about it extensively you finally answered substantively, which I appreciated very much.

    c) looks like that with an almost total dearth of sensible places to put money in these days, you have opted for MPLs and such, vide recent AMLP, MLPA, EMLP, YMLP purchases. Care to add a word or two to your existing rationales?

    d) is this the retirement, Tennessee or just ego that drives your exceptionally prolific output, much appreciated as it is.

    sincerely, one of those 25.


    Good luck with GJN business, perseverance and being aggressively vocal is essential, I know, I went through similar exercise some time ago with some indian casino, it worked in the end.

  2. Now, the OG is not prickly at all. Sometimes the LB has been known as being a real hard ass. I gather you are my Oregon reader.

    Now, I mentioned in my comment to your last post on my mostly LT Duds that I would buy LSI at $5.89 if I had not already allocated almost the entire $300 allowable capital to my purchase at $7.28. Did you buy it then?

    Now, I was talking about you in a recent post, now that LSI is up to $7.65, which by my calculation puts me in profit territory finally. This is what I noted about it: "Goldman Sachs upgraded the LSI to buy yesterday and reiterated its $9 price target. LSI rose 3.87% to close at $7.52. I was asked about this "dud" by a reader in the comment section of my July 12, 2012 post. LSI was then selling at around $5.89. I bought 40 shares as a Lottery Ticket at $7.28-LT Category. If I had not already exhausted the maximum $300 limit for a LT, I would have bought at $5.89. I am not being critical of the reader or myself. It is important to remember that investors are not entitled to immediate gratification after buying a stock, and no one can hit the absolute bottom or highs except by luck." 8/8/12 Post

    I had a conversation with a reader from California on MLPs. I do not want the headache of the K-1s and I am not interested in taking on the credit risk of a ETN in addition to all of the issues normally associated with MLPs particularly those in energy production.

    Some of what I am doing is a shift from an under allocation in energy to more of an equal weight, and that would include energy infrastructure assets. I have noted that natural gas prices have spiked up since June after hitting a ten year low.

    Now, I have done all that I can really do for those poor souls who owned GJN. I spent an hour on the phone with Norris and laid out the legal theories for the lazy class action lawyers. I am just about done. LB is not going to be too understanding about individuals who go out of their way to support what WFC did to those people. I am going to make a statement about them tomorrow.

    As to Windstream, I see the downdraft which is one reason for moving in and out in a retirement account, less likely to get caught in an eddy when moving around so much.

    I have not read the earnings report. I will look at it tonight. I did glance at a news summary and it did not look comforting.

  3. While one of OG's many inadequacies involves a near total lack of knowledge about technical analysis, I did glance at the Winstream chart and reached a guess that support around $9 may be breached, so I may be looking for a re-entry somewhere below $9 later this month and then I would buy 50 in the Roth IRA rather than 100.

  4. Mr. Oregon: Now you have not told the OG what, if anything, you did in response to that long dissertation that I gave you.