Saturday, January 24, 2015

Added 50 PNNT at $8.2/Bought Back TRMK at $22.25-Regional Bank Basket Strategy/Sold 100 NBD at $22.22-Taxable Account

Stable Vix Pattern (Bullish):
Links to SeekingAlpha Instablog, Articles and Comments:

South Gent's Instablog | Seeking Alpha

South Gent's Articles | Seeking Alpha

South Gent's Comments | Seeking Alpha


Recent Developments: 

The ECB finally launched a large scale QE program. BloombergReuters I view the devaluation of the Euro as more important to a potential economic recovery in Europe. The ECB's QE program did accelerate the slide in the Euro:

EURUSD Interactive Chart

The index for leading economic indicators rose .5% in December. Conference Board

Swiss Helvetia Fund

I received last Friday the shares purchased with this fund's 2014 year end distribution.

172.472 Shares at $11.47 per Share

SWZ closed at $11.41 last Friday, down $.11.

The net asset value per share was $13.14, creating a discount to net asset value of -13.17%.


1. Added 50 PNNT at $8.2 (see Disclaimer): PNNT is being trashed due to its exposure to E & P loans.  

Snapshot of Trade:

Closing Price Day of Trade 1/20/15: PNNT: $8.52 -0.20 (-2.29%)

The shares traded in a broad range between $8.16 and $8.7. Volume was 2.376+M compared to an average of 540,040 over the prior three months.

PNNT Historical Prices

Security DescriptionPennantPark Investment (PNNT) is an externally managed BDC.

Within a few minutes after my purchase, PNNT issued a press release that apparently gave some investors comfort for about a day. PennantPark Investment Corporation Announces Preliminary Financial Estimates for December 31, 2014

The company estimated that its net asset value per share would be in the $10.4 to $10.5 range as of 12/31/14, down from $11.03 as of 9/30/14. The estimated quarterly net investment income was in the $.25 to $.27 range, slightly below the then consensus estimate of $.28. Those two items were the bad news.

The somewhat positive news was that PNTT was "comfortable" with its energy investments given their "seniority", reserves and "substantial hedges". I assume that the reference to substantial hedges refers to the hedges that the E & P companies have in place.  I am not comfortable with PNNT's exposure as noted below.

The company also assured investors that it would not be selling stock at below net asset value per share, and that it "currently" intends to maintain the quarterly dividend at the $.28 per share rate. "Currently" is one of those meaningless words when used in that context.

Lastly, the company noted that one of its portfolio companies had an IPO in the 4th quarter that will increase PNNT's net asset value by $.08 per share and result in a $.13 per share realized gain. That was real positive news.

I believe that the portfolio company that had a 4th quarter IPO was Patriot National (PC).

Guts of PNNT Press Release
PNNT sold shares last September at a public offering price of $11.63 per share. The underwriter's paid $11.2811 per share. PennantPark Investment Corporation Prices Public OfferingProspectus

PNNT SEC Filings

Since early in 2010, this stock has traded mostly in a narrow channel between $10 to $12 after crashing in 2008 and early 2009. PNNT Interactive Stock Chart The share price crashed below that range late last year due primarily, in my opinion, to its large exposure to energy companies.

Between 4/19/2007 and 1/20/15, the annualized total return with dividends reinvested was +4.38%Calculator  That anemic total return, which includes reinvestment of dividends, clearly illustrates why this stock is not a worthwhile long term investment and needs to be traded to secure an adequate total return. The return also highlights that the reinvestment of dividends can result in the destruction of their original cash value.  

If I start that total return calculation on 1/2/2010, the PNNT annualized return increases to 8.86%. Starting the calculation on March 9, 2009 after the price had cratered to the low single digits, the annualized total return increases to 34.23%.

A buy on 5/13/13 would have generated a -5.53% total return.

In short, the total return numbers will also depend on when you buy and sell. A buyer on 3/9/2009 would have been better off selling on 5/13/13 rather than holding long term. The annualized return for that holding period was +55.03%.

PNNT Net Asset Value Per Share History: 
Sourced 10-K and  10-Qs
9/30/14:     $11.03
6/30/12:     $10.16
6/30/11:     $11.08
6/30/10:     $10.94
6/30/09:     $11.72
9/30/08:     $10.
6/30/07:     $12.83
3/31/07:     $12.08
April 2007: IPO at $15  Prospectus (underwriters paid $14.025)

The external managers are paid 2% of gross assets plus a generous incentive fee.

A list of investments can be found starting at page 61 of the recently filed Annual Report: 10-K

Current Position Taxable Account (150 Shares):

Item # 3 Bought 100 PNNT at $10.47 (12/5/14 Post)

Other Prior Trades: The prior trades are summarized in Item # 2: Bought 100 PNNT at $10.66-Regular IRA This last purchase brings me up to 300 shares.

I last sold PNNT when the market price was at a premium to NAV per share, viewed as substantial for an externally managed BDC in my opinion. Item # 5 Sold 50 PNNT at $11.92 (12/17/13 Post)(profit $71.68)- Item # 6 Bought 50 PNNT at $10.2-ROTH IRA (11/21/12 Post) When I sold that 50 share lot, the last reported net asset value per share was $10.49 as of 9/30/13, so an $11.92 market price was a 13.63% premium to that NAV number.

Dividend: PNNT is currently paying a $.28 per share quarterly dividend.

Assuming no change in that rate, which is certainly a questionable assumption, the dividend yield at a total cost per share of $8.2 is about 13.66%.  

Chart: The chart looks like a falling knife that was dropped in late August 2014: PNNT Interactive Stock Chart

Last Earnings Report: For its 4th fiscal quarter which ended on 9/30/14, PNNT reported core net investment income of $.34 per share. The net asset value per share was reported at $11.03. The weighted average yield on debt investments was 12.5% as of 9/30/14.

As of 9/30/14, this BDC had a significant exposure to subordinated debt, preferred stock and common equity:

SEC Filed Press Release

Q4 2014 Results - Earnings Call Transcript | Seeking Alpha

Rationale:  As with all BDCs, my goal is to harvest a 10% annualized total return and will generally consider doing so when and if I achieve that objective. I could achieve that annualized return by collecting 4 dividends and selling the shares at a loss.

However, I am not likely to sell the PNNT shares for a loss unless I become spooked about this BDC's performance. The overriding goal is to harvest a total return in excess of the dividend yield.

The current quarterly dividend is $.28 per share. At a total cost of $8.2 per share, and assuming a continuation of that rate which is not an assumption that I would make, the dividend yield would be about 13.66%.

The general idea is to harvest that yield and to escape without losing money on the shares. Easier said than done is my motto for externally managed BDCs.

As noted above, the company disclosed within an hour or so after my purchase that book value was likely to be in a range of $10.4 to $10.45 per share as of 12/31/14. I do not know the reason for the decline, but suspect that it involves some loan write-downs. If I take the low end of that guidance, then the $8.2 purchase was at a 21.15%% discount to a $10.4 per share net asset value.

By buying at below the last reported net asset value per share, I simply improve my chances of getting out with a share loss.

The December 2014 purchase was made at below net asset value too, but that did not help me any. My last purchase was at $10.47 about a month ago and the price had declined 21.68% when I purchased this 50 share lot at $8.2.

PNNT is not a serial issuer of common stock like PSEC which unfortunately also has a history of selling shares before net asset value per share.

Risks: As with all BDCs, PNNT has considerable risks summarized in a very long discussion found in its F/Y 2014 Annual Report staring at page 18, 10-K

BDCs invest in risky companies and do not retain much of a capital after paying dividends to their common shareholders. The shares will perform badly during a recession.

PNNT has an usually large allocation to riskier subordinated debt and a large second lien debt weighting (see preceding snapshot)

Loans made by BDCs are generally not rated by Moody's or S & P. If the loans were rated, most of them would be at CCC+ or lower. An average portfolio yield of 12.5% adequately describes the risk when the ten year treasury is hovering around 1.8.%.

PNNT had about a 9% exposure to the "oil and gas" sector as of 9/30/14. A 8% weighting is in "energy/utilities". Page 74 10-K

The largest exposure appears to be a Ram Energy L.L.C. that PNNT classifies under "energy/utilities" rather than "oil and gas", even though this private company appears to be an E & P only. There is little public information available on this private company.

The CEO noted in the last earnings call that PNNT  purchased a $100 million RAM first lien loan and $1M in stock. The CEO described RAM as "an exploration and production company focused on operation in the Ark-La-Tex and Permian regions". Page 3  Earnings Call Transcript | Seeking Alpha

Why is that company not classified under oil and gas that would bring the total exposure up to 17% from the 9% shown for the "oil and gas" category. The CEO was asked about that position in the Q & A and noted that PNNT "agonized" over it. He further noted the first lien status and that $27M of the exposure was in a 1 year maturity. Page 4 Earnings Call Transcript | Seeking Alpha My question after reading that exchange was how exactly is RAM going to raise funds now to pay off that one year loan.  

MLV & Co. Announces $105.75mm Debt and Equity Financing for RAM Energy L.L.C. (August 2014 press release)

Chaparral Energy Sells Central Basin Holdings to Ram Energy for $48.1M in Cash (May 2014)

I would be curious to hear PNNT's explanation for the "energy/utilities" tag which fooled me for awhile. There is a company called Ram Energy, Inc. that is involved apparently in two foreign geothermal projects, but I see no factual reason to connect the two companies.

Another large investment is the debt issued by New Gulf Resources, L.L.C.,  a company that closed on a $500M loan last May to buy some assets from Halcon Resources Corporation, which was formerly known as Ram Energy Resources, Inc.

That investment is shown as second lien debt with an 11.75% coupon with a value of $45.675M and a cost of $44.615+M as of 9/30/14 (page 61, 10-K) There is shown some subordinated debt at page 62, with a cost of 13.030+M and a value of $10.665M that looks like a 12% PIK note (which I call pretend interest payments, though the correct name is payment-in-kind) PNNT also owns some warrants (cost $495,000, valued at 2.97M as of 9/30/14, page 63) Second lien status for an E & P loan is worrisome. I would assume that the warrants have been written down in value.

Another smaller E & P investment is in a company called Energy & Exploration Partners which filed for an IPO in September 2014. S-1S-1/A The share symbol was shown as ENXP in the prospectus. I believe that this company is still private. The last few months have not been an opportune time to bring an E & P public. There is an amended S-1/A that was filed in December that provides useful information about this company (derivative contracts summarized at page 52 as of 12/4/14).

It is difficult for me to see the shares gaining much upside traction until investors have more clarity on the potential E & P loan losses. Even if those investments went to a zero value today, however, the current market price would still be below the $10.4 to $10.5 estimate as of 12/31/14.

Any investor buying shares now is catching a falling knife.

Future Buys and Sells: I had previously asserted that I would not buy another share after bringing my position up to 300 shares. The spurt down to $8.2 caused me to move slightly off that dime. I do not intend to buy more shares at above $8.2, though I will consider buying another 50 share lot when and if the price slides to $7.5.

I had hoped that most of the BDC weakness late this year was related to tax loss selling, but the selling pressure has continued unabated in 2015 particularly for those BDCs with greater than a 5% exposure to E & P companies.

I hope to sell 100 shares either this year or next, when and if the market price per share returns to a premium to net asset value per share, provided I can sell at break-even or higher.

2. Bought Back 50 TRMK at $22.25 (REGIONAL BANK BASKET STRATEGY)(see Disclaimer):

Snapshot of Trade:

The share price closed at $22.28. Regional banks performed well on the next trading after my purchase, with TRMK closing at $23.36, up $1.08 or 4.85%. The regional bank ETF KRE rose 4.5% that day in a robust rally. With interest rates falling last Friday, the regional banks were back into retreat mode.

Company Description: Trustmark (TRMK) is a bank holding company that operates 207 branches through its wholly owned subsidiary Trustmark National Bank.

TRMK is based in Jackson, MS.

TRMK has been active on the acquisition front, expanding its geographic footprint over the past several years. Two of the recent acquisitions are described at pages 93-94 of the 2013 Annual Report: (1) the 2011 FDIC assisted acquisition of the Heritage Banking Group, Carthage, Mississippi and (2) the 2012 purchase of Panama City's Bay Bank & Trust Co.

Trustmark acquired in 2013 BancTrust Financial Group, headquartered in Mobile, with 32 branches in the southern two-thirds of Alabama, including Mobile, Montgomery and Selma, and 9 branch offices in Florida's Panhandle. SEC Filed Press Release

Trustmark Profile Page at Reuters

Trustmark Key Developments Page at Reuters

Trustmark did participate in TARP. The government's preferred stock was redeemed in 2009 after TRMK sold 6.2+M shares at $18.5. Page 24-10K

SEC Filings for Trustmark

2013 Annual Report SEC Form 10-K

Prior Trades: I have been in a trading mode for this stock, never buying more than 100 shares. My normal buy is just a 50 share lot.

2014 TRMK 100 Shares +$119.1
Sold 100 TRMK at $24.45 (10/28/14 Post)-Item # Bought 100 TRMK at $23.12 (8/9/14 Post)

2014 TRMK 50 Shares +$81.39
Sold 50+ TRMK at $24.63 (7/19/14 Post)-Item # 6 Bought:  50 TRMK at $22.73 (5/10/14 Post)

2013 TRMK 50 Shares +$233.07
Item # 1 Sold 50 Trustmark at $26.52 (7/20/13 Post)-Item # A Bought 50 TRMK at $21.54 (11/16/11 Post)

2012 TRMK 50 Shares +$240.57
Item # 3 Sold 50 TRMK at $24.7 (1/6/12 Post)-Item # 3 Bought 50 TRMK at 19.57 (8/21/10 Post)

Total Realized Trading Gains To Date: $674.13

Dividend: The bank is currently paying a quarterly dividend of $.23 per share. Assuming a continuation of that rate and a total cost per share of $22.25 per share, the dividend yield would be about 4.09%.  

While TRMK did not cut the dividend during the Near Depression period or its aftermath, the dividend has not been raised either since it was increased from $.22 per share in the 2007 4th quarter. TRMK  Dividend  History

Prior to the Near Depression, Trustmark was raising its dividend rate annually. The quarterly rate was raised from $.085 per share in 1998 to $.23 per share in 2007 or 170.59% using an online percentage increase calculator.

Last Earnings Report: For the 2014 third quarter, TRMK reported net income of $33.6M or $.50 per share.

The following table shows quarterly financial information starting with the Q/E 9/30/13 at the far right and moving to the Q/E 9/30/14 numbers on the far left:

In the last quarter, the return on average assets was 1.1% which compares favorably with the national average of 1.02%.  Return on Average Assets for all U.S. Banks-St. Louis Fed

The net interest margin has been trending at over 4%, well above the current national average of 3.09%. That favorable is trend is mostly temporary and due to "accretion" of acquired loan discounts. When a bank acquires loans from another bank, the discount on acquired loans are marked to market value and the difference is accreted to net interest income and hence to net interest margin over the loan's life. TRMK is still receiving benefits to net interest income derived from its prior acquisitions.

"Excluding acquired loans, the net interest margin in the third quarter totaled 3.47%, down eight basis points from the prior quarter, reflecting declining yields on loans held for investment and loans held for sale". SEC Filed Press Release

The following chart shows that net interest margin initially received a boost in 2009-2010 as deposit interest rates (savings accounts and CDs) were repriced down due primarily to the FED's zero federal fund's rate policy. Once that positive cost benefit was largely realized by 2010, net interest margin compressed from around 3.83 in the 2013 third quarter to 3.02% in the 2014 third quarter:

The capital ratios are good:

The new capital rules went in effect on 1/1/15, and TRMK's capital ratios are well in excess of the minimum levels shown the following snapshot:

FDIC Final Rule.pdf

Net-Charge offs for the quarter to total loans was -.03%, indicating a net recovery. The 2014 third quarter average charge-off ratio for U.S. commercial banks was .45%.

Charge-Off Rate On All Loans, All Commercial Banks-St. Louis Fed

The allowance for loan losses to non-performing loans (coverage ratio) was at 79.41% as of 9/30/14.

The non-performing loans to total loans (NPL ratio) was at 1.37%.

Sourced from: SEC Filed Earnings Press Release and 10-Q for the Q/E 9/30/14

Rationale: Trustmark is within a fair value range at my $22.25 purchase price and has good dividend support at that price. The capital ratios are good and net-charge offs have historically been below the average for commercial banks.

The bank remained profitable during the recent Near Depression and its aftershocks:

Historical Data 2007-2011

Page 24 2011 Annual Report SEC Form 10-K

Given that financial institutions were at the epicenter of the Near Depression, I view it as a positive when a bank, such as TRMK, was at least capable of maintaining it dividend and to cover that payout with net income.

I do not like to see Masters of Disaster and Gunslingers running banks for their own personal aggrandizement. The foregoing data from 2007-2011 at least provides me with a yardstick to measure potential downside risk during a major recession, assuming the bank remains prudently managed in the future as during the last major economic downturn.

Risks: One of the key risks for all banks now is net interest margin compression. That risk can become more acute when and if the Federal Reserve starts to raise the federal funds rate, which will increase deposit costs, and there is no offsetting improvement in loan yields and/or yields on investments.

Bank stocks will likely go down more in a recession than the S & P 500 or any other broad index. Even if net interest margin improves, the profit benefit can be overwhelmed by an increase in loan losses.

In general, an investor wants to see an increase in loans and low cost deposits, lower loan losses due to an improving economy and an expansion of the net interest margin due to higher lower and investment yields.

TRMK describes risks incident to its operations starting at page 16 of its 2013 Annual Report.

Another negative is that the consensus E.P.S. forecast for 2015 is $1.72, down from $1.85 in 2014. That decline may be largely due to lower net interest income through loan accretion, which I discussed above.

Management received several analyst questions on the sustainability of accretion income during the last earnings call. Page 4  Earnings Call Transcript | Seeking Alpha

Future Buys and Sells: Until I see improvement in earnings growth and a dividend raise, I will be in a trading mode for this stock. I do not require much of a profit before selling out and then simply waiting for a downdraft to buy back.

I sold my first lot in January 2012 at $24.7 and just bought back 50 shares in January 2015 at $22.25. The trading strategy seems appropriate looking at the stock history over the past five years and will likely remain in force until I see a reason to hold long term.

TRMK Interactive Stock Chart

I have not seen that reason materialize yet.

3. Sold 100 NBD at $22.22 Taxable Account (see Disclaimer)

Snapshot of Trade:

Snapshot of Profit:

2015 NBD 100 Shares +$71.07

Item # 1 Bought Back 100 NBD at $21.35 (11/3/2014)

I held the shares long enough to receive 3 monthly dividends ($.114 per share), with the last one scheduled for payment on 2/2/15.

Total Dividends: $34.2
Share Profit: $71.07
Total Return: $105.27 or 4.91% (2+ months)

Security Description: The Nuveen Build America Bond Opportunity Fund (NBD) is a leveraged closed end bond fund that invests in taxable municipal bonds issued under the Build America Bond program.

This bond CEF is scheduled to terminate on or around 12/31/2020, "distributing the fund's assets to shareholders at that time".

The net asset value on the date of purchase was $23.89 and the discount based on the $21.36 closing price that day (11/3/14) was $21.36, creating a discount to net asset value at that time of -10.59%.

Data on Date of Trade 1/22/15:
Closing Net Asset Value Per Share: $24.16
Market Price: $22.24
Discount:  -7.95%

The discount had shrunk by 2.64% since my purchase with the net asset value per share increasing 1.13% unadjusted for the three monthly ex dividends.

Sourced from CEFConnect Page for NBD

Sponsor's Website: NBD - Nuveen Build America Bond Opportunity Fund

As of 12/31/14, the fund owned 62 securities. The leveraged adjusted duration was then 11.94 years.

Bond Fund Duration-Vanguard

NBB Page at the SEC

Last SEC Filed Shareholder Report for the Period Ending 9/30/14

Prior Trades: Item # 3 Sold 100 NBD at $21.86-Roth IRA (5/29/13 Post)-Item # 2 Bought 100 of the Bond CEF NBD at $21.29-Roth IRA (6/21/12 Post)Item # 7 Sold 100 NBD at $22 (2/27/13 Post)-Item # 2 Bought 100 NBD at $21.8 (9/11/12 Post)

Related Trades: I currently own the functionally equivalent NBB in a Roth IRA where the distributions become tax free. Item # 1 Roth IRA: Added 100 NBB at $20.1

NBB Realized Gains To Date: $307.12

Rational: I clipped three dividends and made a decent percentage return on the shares. I am holding the functionally equivalent NBB in the ROTH, at least for a few more weeks.

While the bond ghouls are not concerned about interest rate risk, I seen almost nothing but that kind of risk in these long duration bonds and bond funds. The risk is so strong that it is blinding to even gaze upon it.

TLT for example has a duration of 17.9 years and a distribution yield of 2.48% as of 1/21/15. iShares 20+ Year Treasury Bond ETF | TLT A 2% rise in interest rates for treasuries with similar maturities would result in about a 36% loss in TLT's value or roughly 14.4 years of dividend payments at a 2.48% yield.

The duration is long, as noted above, so interest rate risk is high. A 1% rise in interest rates for similar duration bonds could result in almost a 12% decline in net asset value per share. I am consequently moving in and out of these long duration leveraged bond CEFs. Eventually, I may have no choice but to sell at a loss after buying back shares one too many times.

Intermediate and long term rates fell last Friday.