Economy:
US job openings jump to record high of 7.3 million
Small-business sentiment in January slumps to worst reading since Trump election - MarketWatch; Small Business Optimism Returning to Normal Levels as Owners Express Uncertainty about the Future
US job openings jump to record high of 7.3 million
Small-business sentiment in January slumps to worst reading since Trump election - MarketWatch; Small Business Optimism Returning to Normal Levels as Owners Express Uncertainty about the Future
++++++
Markets and Market Commentary:
SPX did manage to close a slither above its 200 day SMA line yesterday using a one year chart. S&P 500 Chart The close was at 2,744.73 with the 200 day SMA line at 2,743.37. SPX is now above its 50, 100 and 200 day SMA lines using a one year chart.
SPX did manage to close a slither above its 200 day SMA line yesterday using a one year chart. S&P 500 Chart The close was at 2,744.73 with the 200 day SMA line at 2,743.37. SPX is now above its 50, 100 and 200 day SMA lines using a one year chart.
This cocktail of macro risks could cause downturn that ‘rivals’ global financial crisis: Deutsche Bank - MarketWatch IMO, the Stock Jocks are pricing these potential risks at a near zero probability now.
Time for stock-market investors to shake off the 3rd ‘recession scare’ of the cycle, analyst says - MarketWatch
U.S. fund managers brace for consumer slowdown | Reuters
Cramer: Earnings revealed 'brutal truths' about US-China trade
Chicago financial adviser stole ‘at least $65 million’ in 10-year crime spree, feds allege - MarketWatch (avoiding that result is one of many reasons why I have managed my own money over the past 50 years)
U.S. fund managers brace for consumer slowdown | Reuters
Cramer: Earnings revealed 'brutal truths' about US-China trade
Chicago financial adviser stole ‘at least $65 million’ in 10-year crime spree, feds allege - MarketWatch (avoiding that result is one of many reasons why I have managed my own money over the past 50 years)
++++++
Trump:
Don the Con deserves an A+ on the hypocrite grading scale: ‘My whole town practically lived there’: From Costa Rica to New Jersey, a pipeline of illegal workers for Trump goes back years - The Washington Post
Made in America: A look at Trump company products made at home and abroad - ABC News; Trump event touted 'made in America' goods. A lot of his merchandise couldn't be featured.
“I Am Disgusted”: Behind the Scenes of Trump’s Increasingly Scrutinized $107 Million Inauguration | Vanity Fair
+++++
Second Lien BDC Loans:
BDCs generally speaking lend money to highly leveraged private companies that could not secured the required financing from banks. So the starting point is high risk investments.
The private company would generally have both first and second lien loans attaching to all or substantially all of its assets.
The first lien loan would have to be satisfied first in a bankruptcy which often leads to the second lien loan owners holding worthless paper that attaches to nothing since the assets are inadequate to pay off the first lien owners who are likely to lose part and sometimes all of their investments.
When there is a workout of a second lien loan, the owners may be able to secure something depending on what is left after taking care of the first lien owners. That something may be equity or preferred stock or a new second lien loan with a much lower principal amount and a longer maturity. The more common result would be nothing in a bankruptcy.
As I have discussed previously, there is not much information available to individual shareholders to identify which loans will go bad before the BDC marks it down.
There is almost invariably a question in retrospect whether the BDC properly valued the loan before it went sour.
Most of the time, the valuation remains high, though lower than the original loan amount, just before there is a major write-down.
To illustrate this problem, I am going to discuss one second lien loan made by CM Finance (CMFN) to Trident USA Health Services.
The original principal amount was $21.443+M.
I will ignore in the following discussion another loan in the amount of 2.673+M made to Trident that also went to zero. This loan was apparently made within the past year or so, and was not listed until the 2017 4th quarter (page 7) That turned out to be a poor decision, apparently made to salvage the larger loan that was already in deep trouble.
Valuation of $21.443+M loan as of 12/31/18: Zero
CM FINANCE 10-Q for the Q/E 12/31/18 at page 8
Valuation as of 9/30/18: $8.712+M
CM FINANCE 10-Q for the Q/E 9/30/18 at page 8
Valuation as of 12/30/17: $10.243+M
Valuation as of 9/30/17: $17M
10-Q. at page 7 (the smaller loan is not listed)
Valuation as of Q/E 12/31/16: $19.252+M (identified as 11.59% of net assets)
Page 7
At least the BDC was marking down the loan but there are still questions whether the marks were appropriate given the operating circumstances.
When looking into this loan, I came across a Moody's report which is highly unusual for a BDC loan.
The first report was dated in July 2013 and noted there was then $415M in first lien debt, an important consideration for second lien debt owners. The first lien debt was rated deep into junk territory at Ba3 with the second lien rated even deeper at Caa1. So that is a read flag already.
The second report was dated in November 2017, possibly at or near the time CM Finance increased its loan amount. Moody's downgrades New Trident's CFR to Caa3, outlook negative
In that report, Moody's downgraded the first lien debt to Caa2 and the second lien debt to Ca.
I would not value the second lien loan at that time as having any value. The Ca rating means that a default is imminent with "little prospect for recovery".
Moody's referred to Trident's "severe liquidity situation". The company had drawn down fully its first lien revolver loan to fund its cash drain. That normally happens before a bankruptcy. The increase in the first lien amount also makes the second lien position even less credit worthy when it was already uncreditworthy.
The next report was dated in August 2018 and discussed a restructuring of the debt in April 2018 that included a first lien capital raise of $216M. At that time, I would not have paid anything for the second lien debt, viewing it as worthless. The second lien debt rating was affirmed at Ca by Moody's.
Possibly an argument could be made that the refinancing and other actions could have supported a valuation no greater than 20 cents on the dollar.
To classify that argument as one made in good faith, I would need to see the facts that legitimately called into question the Ca rating. I have not seen anything that would undermine Moody's opinion that a default was imminent with little chance of a recovery.
I have seen first lien debt go down to 30 cents on the dollar and then get paid off at maturity, but that is an exception. Generally, and I am not familiar with an exception, when the cash drain is being financed by more first lien debt, the wipe out of the second lien owners is only being delayed temporarily after a debt restructuring forced on the lenders as a an attempted salvage operation in deep water.
CM Finance assigned a valuation close to 50 cents on the dollar as of 12/31/17 (see above link to the 10-Q for the Q/E 12/31/17) And that illustrates one problem with BDCs. Looking at the facts as of 12/31/17, how could that loan be valued at $10.243+M?
More importantly, the total loss associated with a loan of this size, exacerbated by the decision to loan even more money in late 2017, calls into question the competence of the external managers. The size of the loan as a percentage of total assets is the key point.
At a minimum, their compensation is outrageous for the results being delivered to their shareholders.
There is at least one other BDC that owned Trident's second lien bonds. I am referred to Ares Capital (ARCC). I would not that ARCC's exposure, as a percentage of total loans, is far smaller than CMFN.
Earnings for the 4th quarter were reported yesterday. (see my comment published yesterday). ARCC has not yet filed its 10-Q for the 4th quarter.
The company did not mention the Trident loan in its conference call and no analyst asked about it either. Ares Capital Corporation (ARCC) CEO Kipp DeVeer on Q4 2018 Results - Earnings Call Transcript | Seeking Alpha No question was asked by an analyst during the third quarter's conference call or during any conference call last year. Ares Capital Corp (ARCC) CEO Kipp DeVeer on Q3 2018 Results- Earnings Call Transcript | Seeking Alpha Apparently, it is bad form to ask a question about a large loss.
In the 3rd quarter 10-Q, ARCC had written the original two second lien Trident loans down to $28.6M from an amortized cost number of $96.3M:
Page 9 10-Q for the Q/E 9/30/18 So most of the hit was taken prior to the last quarter.
The assigned value was at $60.2M as of 12/31/17: Page F-9 Annual Report Note that the smaller of the two large loans was a first lien loan as of 12/31/17 value at $16M with an amortized cost of $15.9.
I surmise that ARES traded that first lien loan for a second lien in the 2018 recapitalization plan. The larger loan was then a second lien loan with an amortized cost of $79.3 with a $44.2M assigned "fair value".
So CMFN's marks were not out of line with the ones made by ARCC. None of those marks were anywhere near fair market value based on the Moody's assigned grade, Trident's own cash crunch and need to borrow in order to pay expenses, the apparent urgent need for the recapitalization, and the end result which could have been reasonably anticipated no later IMO than 12/31/17.
++++
Alexandria Real Estate's senior unsecured debt was upgraded to BBB+ by S & P:
I recently discussed buying 2 more bonds maturing on 1/15/20: Item # 2.A. 2/6/19 Post)
I did not recall buying 2 Alexandria REIT 3.95% SU bond maturing on 1/15/2027, but found two yesterday hiding in a Roth IRA account that were bought on 4/16/18.
++++
1. Bought 200 AEG at $5.16:
Quotes:
USD Price ADR: Aegon N.V. ADR (AEG)
1 ADR = 1 Ordinary Share
Euro Priced Ordinary Share: Aegon N.V. (Netherlands: Euronext Amsterdam)
Closing Price Yesterday: AEG $5.18 +$0.09 +1.67%
I discussed selling the Aegon hybrid AEB in my last post.
Prior to this purchase, Citigroup had downgraded Aegon to a sell. The report is apparently dated 1/17/19. I do not have a copy.
For the reasons noted below, a sell rating needed to be applied to this stock five years ago. The question now is whether or not it is an avoid or a weak buy based on valuation and the dividend yield.
5 Year Chart (snapshot at time of purchase): Ugly
Aegon has been struggling for years. Currently, the main positive attributes of the stock are the current valuation and dividend yield at the current price.
Morningstar Rating: 4 stars with a fair value estimate at $7.75 (as of 2/4/19)
A $7.75 price within one year would be a home run for this stock. It is a low expectation buy.
The Morningstar report is available to Schwab customers.
My purchase was largely based on the Morningstar's report where the analyst concluded that AEG was too cheap to ignore.
AEG Analyst E.P.S. Estimates
Euro Decline Against the Dollar: EUR / USD Currency Chart
The decline in the Euro against the USD has contributed to the poor performance of the USD priced ADR. Five years ago, 1 Euro would buy around $1.4, while the current exchange rate is close to 1.15
5 Year Comparison Chart USD ADR vs. Euro Ordinary Share:
Blue Line: Euro Priced Shares
The chart merely compares the same shares priced in Euros and USDs over a five year period. The currency conversion rates have only added to the slide already shown in the Euro priced shares.
Dividends: Semi-Annually
In the past, the ex dividend dates were in May and August. Aegon NV (AEG) Dividend Date & History - Nasdaq
The dividend is paid in Euros and converted into USDs after a 15% withholding tax imposed by the Netherlands. The amount of that tax is for U.S. citizens whose broker asserts tax treaty rights for their customers.
As shown in a preceding snapshot, I received the last semi-annual dividend paid by AEG before selling the position. The foreign tax was at 15% of the total.
The value of the dividend will depend on the amount declared by AEG in Euros and the conversion rate into USDs.
In 2018, the total dividend paid to the USD priced AEG was $.33.
Using that amount, the dividend yield at a $5.16 total cost would be about 6.4%.
Last Round Trip:
Item # 4 Sold 100 AEG at $6.74-Used Schwab Commission Free Trade (10/14/18 Post)(profit snapshot =$74.21)- Item # 1 Bought 100 AEG at $6 (9/2/18 Post)
Snapshots of Prior Round Trip Trades at Item # 2.A. Sold 200 AEG at $5.69 (3/22/17 Post)(total profits prior trades = +$370.28)
Trading Plan:
There is nothing in AEG's price history that would rationally support a long term hold.
This purchase is consequently a trade, where the goal is to clip the next semi-annual dividend and realize a $100+ gain on the shares.
If that goal is achieved, the total return would be close to 10%. The trade will be viewed as successful if that annualized return is harvested within six months and satisfactory if achieved within 12 to 18 months.
I also view the risk/reward balance to be tilted toward reward at the current price.
Recent Earnings Report: Aegon reports strong first half 2018 results | Business Wire
Note the €294M charge to reflect the loss generating by selling Aegon Ireland and restructuring costs which Aegon expects "to generate substantial expense savings".
Recent News:
Aegon’s US capital position to benefit significantly from merger of legal entities (9/25/18 Post)
Aegon: Transamerica settles universal life litigation (10/4/18)(settlement for $195M
US subsidiaries Aegon reach settlement with SEC (AEG had previously booked a $100M provision for this settlement in the 2017 4th quarter)
Aegon to divest last block of US life reinsurance business "The transaction is expected to result in a pre-tax IFRS loss of approximately USD 105 million (EUR 90 million) and will be reported in Other charges in the second half 2018 results." There will be an approximate one time $50M benefit to Transamerica's capital position.)
The last three news releases highlight problems, which are hopefully over for the time being. The business dispositions simplify the company and improve its capital position.
2. Pares:
A. Sold 111+ PFLT at $12.99-A Roth IRA Account:
Don the Con deserves an A+ on the hypocrite grading scale: ‘My whole town practically lived there’: From Costa Rica to New Jersey, a pipeline of illegal workers for Trump goes back years - The Washington Post
Made in America: A look at Trump company products made at home and abroad - ABC News; Trump event touted 'made in America' goods. A lot of his merchandise couldn't be featured.
“I Am Disgusted”: Behind the Scenes of Trump’s Increasingly Scrutinized $107 Million Inauguration | Vanity Fair
+++++
Second Lien BDC Loans:
BDCs generally speaking lend money to highly leveraged private companies that could not secured the required financing from banks. So the starting point is high risk investments.
The private company would generally have both first and second lien loans attaching to all or substantially all of its assets.
The first lien loan would have to be satisfied first in a bankruptcy which often leads to the second lien loan owners holding worthless paper that attaches to nothing since the assets are inadequate to pay off the first lien owners who are likely to lose part and sometimes all of their investments.
When there is a workout of a second lien loan, the owners may be able to secure something depending on what is left after taking care of the first lien owners. That something may be equity or preferred stock or a new second lien loan with a much lower principal amount and a longer maturity. The more common result would be nothing in a bankruptcy.
As I have discussed previously, there is not much information available to individual shareholders to identify which loans will go bad before the BDC marks it down.
There is almost invariably a question in retrospect whether the BDC properly valued the loan before it went sour.
Most of the time, the valuation remains high, though lower than the original loan amount, just before there is a major write-down.
To illustrate this problem, I am going to discuss one second lien loan made by CM Finance (CMFN) to Trident USA Health Services.
The original principal amount was $21.443+M.
I will ignore in the following discussion another loan in the amount of 2.673+M made to Trident that also went to zero. This loan was apparently made within the past year or so, and was not listed until the 2017 4th quarter (page 7) That turned out to be a poor decision, apparently made to salvage the larger loan that was already in deep trouble.
Valuation of $21.443+M loan as of 12/31/18: Zero
CM FINANCE 10-Q for the Q/E 12/31/18 at page 8
Valuation as of 9/30/18: $8.712+M
CM FINANCE 10-Q for the Q/E 9/30/18 at page 8
Valuation as of 12/30/17: $10.243+M
Valuation as of 9/30/17: $17M
10-Q. at page 7 (the smaller loan is not listed)
Valuation as of Q/E 12/31/16: $19.252+M (identified as 11.59% of net assets)
Page 7
At least the BDC was marking down the loan but there are still questions whether the marks were appropriate given the operating circumstances.
When looking into this loan, I came across a Moody's report which is highly unusual for a BDC loan.
The first report was dated in July 2013 and noted there was then $415M in first lien debt, an important consideration for second lien debt owners. The first lien debt was rated deep into junk territory at Ba3 with the second lien rated even deeper at Caa1. So that is a read flag already.
The second report was dated in November 2017, possibly at or near the time CM Finance increased its loan amount. Moody's downgrades New Trident's CFR to Caa3, outlook negative
In that report, Moody's downgraded the first lien debt to Caa2 and the second lien debt to Ca.
I would not value the second lien loan at that time as having any value. The Ca rating means that a default is imminent with "little prospect for recovery".
Moody's referred to Trident's "severe liquidity situation". The company had drawn down fully its first lien revolver loan to fund its cash drain. That normally happens before a bankruptcy. The increase in the first lien amount also makes the second lien position even less credit worthy when it was already uncreditworthy.
The next report was dated in August 2018 and discussed a restructuring of the debt in April 2018 that included a first lien capital raise of $216M. At that time, I would not have paid anything for the second lien debt, viewing it as worthless. The second lien debt rating was affirmed at Ca by Moody's.
Possibly an argument could be made that the refinancing and other actions could have supported a valuation no greater than 20 cents on the dollar.
To classify that argument as one made in good faith, I would need to see the facts that legitimately called into question the Ca rating. I have not seen anything that would undermine Moody's opinion that a default was imminent with little chance of a recovery.
I have seen first lien debt go down to 30 cents on the dollar and then get paid off at maturity, but that is an exception. Generally, and I am not familiar with an exception, when the cash drain is being financed by more first lien debt, the wipe out of the second lien owners is only being delayed temporarily after a debt restructuring forced on the lenders as a an attempted salvage operation in deep water.
CM Finance assigned a valuation close to 50 cents on the dollar as of 12/31/17 (see above link to the 10-Q for the Q/E 12/31/17) And that illustrates one problem with BDCs. Looking at the facts as of 12/31/17, how could that loan be valued at $10.243+M?
More importantly, the total loss associated with a loan of this size, exacerbated by the decision to loan even more money in late 2017, calls into question the competence of the external managers. The size of the loan as a percentage of total assets is the key point.
At a minimum, their compensation is outrageous for the results being delivered to their shareholders.
There is at least one other BDC that owned Trident's second lien bonds. I am referred to Ares Capital (ARCC). I would not that ARCC's exposure, as a percentage of total loans, is far smaller than CMFN.
Earnings for the 4th quarter were reported yesterday. (see my comment published yesterday). ARCC has not yet filed its 10-Q for the 4th quarter.
The company did not mention the Trident loan in its conference call and no analyst asked about it either. Ares Capital Corporation (ARCC) CEO Kipp DeVeer on Q4 2018 Results - Earnings Call Transcript | Seeking Alpha No question was asked by an analyst during the third quarter's conference call or during any conference call last year. Ares Capital Corp (ARCC) CEO Kipp DeVeer on Q3 2018 Results- Earnings Call Transcript | Seeking Alpha Apparently, it is bad form to ask a question about a large loss.
In the 3rd quarter 10-Q, ARCC had written the original two second lien Trident loans down to $28.6M from an amortized cost number of $96.3M:
The assigned value was at $60.2M as of 12/31/17: Page F-9 Annual Report Note that the smaller of the two large loans was a first lien loan as of 12/31/17 value at $16M with an amortized cost of $15.9.
I surmise that ARES traded that first lien loan for a second lien in the 2018 recapitalization plan. The larger loan was then a second lien loan with an amortized cost of $79.3 with a $44.2M assigned "fair value".
So CMFN's marks were not out of line with the ones made by ARCC. None of those marks were anywhere near fair market value based on the Moody's assigned grade, Trident's own cash crunch and need to borrow in order to pay expenses, the apparent urgent need for the recapitalization, and the end result which could have been reasonably anticipated no later IMO than 12/31/17.
++++
Alexandria Real Estate's senior unsecured debt was upgraded to BBB+ by S & P:
I did not recall buying 2 Alexandria REIT 3.95% SU bond maturing on 1/15/2027, but found two yesterday hiding in a Roth IRA account that were bought on 4/16/18.
++++
1. Bought 200 AEG at $5.16:
 |
| Schwab 2 Year History |
USD Price ADR: Aegon N.V. ADR (AEG)
1 ADR = 1 Ordinary Share
Euro Priced Ordinary Share: Aegon N.V. (Netherlands: Euronext Amsterdam)
Closing Price Yesterday: AEG $5.18 +$0.09 +1.67%
I discussed selling the Aegon hybrid AEB in my last post.
Prior to this purchase, Citigroup had downgraded Aegon to a sell. The report is apparently dated 1/17/19. I do not have a copy.
For the reasons noted below, a sell rating needed to be applied to this stock five years ago. The question now is whether or not it is an avoid or a weak buy based on valuation and the dividend yield.
5 Year Chart (snapshot at time of purchase): Ugly
Aegon has been struggling for years. Currently, the main positive attributes of the stock are the current valuation and dividend yield at the current price.
Morningstar Rating: 4 stars with a fair value estimate at $7.75 (as of 2/4/19)
A $7.75 price within one year would be a home run for this stock. It is a low expectation buy.
The Morningstar report is available to Schwab customers.
My purchase was largely based on the Morningstar's report where the analyst concluded that AEG was too cheap to ignore.
AEG Analyst E.P.S. Estimates
Euro Decline Against the Dollar: EUR / USD Currency Chart
The decline in the Euro against the USD has contributed to the poor performance of the USD priced ADR. Five years ago, 1 Euro would buy around $1.4, while the current exchange rate is close to 1.15
5 Year Comparison Chart USD ADR vs. Euro Ordinary Share:
Blue Line: Euro Priced Shares
The chart merely compares the same shares priced in Euros and USDs over a five year period. The currency conversion rates have only added to the slide already shown in the Euro priced shares.
Dividends: Semi-Annually
In the past, the ex dividend dates were in May and August. Aegon NV (AEG) Dividend Date & History - Nasdaq
The dividend is paid in Euros and converted into USDs after a 15% withholding tax imposed by the Netherlands. The amount of that tax is for U.S. citizens whose broker asserts tax treaty rights for their customers.
As shown in a preceding snapshot, I received the last semi-annual dividend paid by AEG before selling the position. The foreign tax was at 15% of the total.
The value of the dividend will depend on the amount declared by AEG in Euros and the conversion rate into USDs.
In 2018, the total dividend paid to the USD priced AEG was $.33.
 |
| Sourced from Charles Schwab |
Last Round Trip:
Item # 4 Sold 100 AEG at $6.74-Used Schwab Commission Free Trade (10/14/18 Post)(profit snapshot =$74.21)- Item # 1 Bought 100 AEG at $6 (9/2/18 Post)
Snapshots of Prior Round Trip Trades at Item # 2.A. Sold 200 AEG at $5.69 (3/22/17 Post)(total profits prior trades = +$370.28)
Trading Plan:
There is nothing in AEG's price history that would rationally support a long term hold.
This purchase is consequently a trade, where the goal is to clip the next semi-annual dividend and realize a $100+ gain on the shares.
If that goal is achieved, the total return would be close to 10%. The trade will be viewed as successful if that annualized return is harvested within six months and satisfactory if achieved within 12 to 18 months.
I also view the risk/reward balance to be tilted toward reward at the current price.
Recent Earnings Report: Aegon reports strong first half 2018 results | Business Wire
Note the €294M charge to reflect the loss generating by selling Aegon Ireland and restructuring costs which Aegon expects "to generate substantial expense savings".
Recent News:
Aegon’s US capital position to benefit significantly from merger of legal entities (9/25/18 Post)
Aegon: Transamerica settles universal life litigation (10/4/18)(settlement for $195M
US subsidiaries Aegon reach settlement with SEC (AEG had previously booked a $100M provision for this settlement in the 2017 4th quarter)
Aegon to divest last block of US life reinsurance business "The transaction is expected to result in a pre-tax IFRS loss of approximately USD 105 million (EUR 90 million) and will be reported in Other charges in the second half 2018 results." There will be an approximate one time $50M benefit to Transamerica's capital position.)
The last three news releases highlight problems, which are hopefully over for the time being. The business dispositions simplify the company and improve its capital position.
2. Pares:
A. Sold 111+ PFLT at $12.99-A Roth IRA Account:
This was a recent buy. I still own shares in three taxable accounts.
Quote: PennantPark Floating Rate Capital Ltd. (PFLT)
Closing Price Yesterday: PFLT $13.19 +$0.05 +0.38%
Profit Snapshot: $52.24
Last Substantive Discussion: Item # 3 Bought 30 PFLT at $11.99-Used Fidelity Commission Free Trade (1/9/19 Post)
I have nothing to add to that post.
I am always in a trading mode for BDCs.
Dividends: Monthly at $.095 per share ($1.14 annually)
Remaining Position in All Accounts: 162+ shares
Of my remaining lots, the highest cost ones are in my Schwab account: Item # 3.A Bought 50 PFLT at $13.16 and 50 at $12.78-Used Commission Free Trades in Schwab Taxable Account (10/17/18 Post) I will consider selling the lot bought at $13.16 somewhere in the $13.4 to $13.6 range.
I have not traded this one much.
Earnings Report: Q/E 12/31/18
PennantPark Floating Rate Capital Ltd. Announces Financial Results for the Quarter Ended December 31, 2018
Subsequent to this pare, PFLT released its 4th quarter earnings report that was in line with expectations.
Core net investment income was reported at $.3 per share.
Net asset value per share was $13.66 as of 12/31/18, down from $13.82 as of 9/30/18.
"As of September 30, 2018, our portfolio totaled $1,000.6 million and consisted of $913.3 million of first lien secured debt (including $101.1 million in PSSL), $21.2 million of second lien secured debt and $66.1 million of preferred and common equity (including $44.8 million in PSSL). Our debt portfolio consisted of 100% variable-rate investments." (emphasis added)
B. Sold 30 Shares of EMP-Highest Cost-at $24.44:
Quote: Entergy Mississippi LLC 4.9% First Mortgage Bond
Closing Price Yesterday: EMP $24.44 +0.08 +0.35%
This bond is secured by a first lien on substantially all of Entergy Mississippi's assets.
Entergy Mississippi is a wholly owned subsidiary of Entergy Corp (ETR).
Entergy Mississippi earnings are included in ETR's earnings reports.
ETR 10-Q for the Q/E 9/30/18 (see pages 147- 153 for Entergy Mississippi information)
Profit Snapshot: +$7.04
Item # 4.A. Bought 30 EMP at $24.04-Used Commission Free Trade (5/28/18 Post) I sold that lot and kept the lost bought at $21.76. This is standard small ball trading.
Average Cost Remaining 70 share Lot = $21.83
Yield at $21.83 = 5.61%
Last Substantive Discussion: Item 1.B. Bought 70 EMP at $21.76 (1/2/2019 Post)
Interest Payments: Quarterly
Last Ex Interest Date: 12/28/18
Par Value: $25
Optional Issuer Call Date: at anytime on or after 10/1/21
Category: Exchange Traded Baby Bonds
Rationale: This pare lowers my average cost, reduces my interest rate risk, and increases my yield. I would consider buying back 30 to 50 shares at below $20.
I am not currently concerned about credit risk, and have no reasonable expectation of a becoming concerned.
Quote: PennantPark Floating Rate Capital Ltd. (PFLT)
Closing Price Yesterday: PFLT $13.19 +$0.05 +0.38%
Profit Snapshot: $52.24
SEC Filings
Annual Report for the F/Y Ending 9/30/18 (risk factor summary starts at page 14 and ends at page 30)
Net Asset Value Per Share History: Relatively Stable for a BDC
12/31/18 $13.66
9/30/18: $13.82
6/30/18: $13.82
9/30/17: $14.10
9/30/16: $14.06
9/30/15: $13.95
9/30/14: $14.40
9/30/13: $14.10
9/30/12: $13.98
IPO at $15 in April 2011 (net after underwriters discount = $13.95)
Annual Report for the F/Y Ending 9/30/18 (risk factor summary starts at page 14 and ends at page 30)
Net Asset Value Per Share History: Relatively Stable for a BDC
12/31/18 $13.66
9/30/18: $13.82
6/30/18: $13.82
9/30/17: $14.10
9/30/16: $14.06
9/30/15: $13.95
9/30/14: $14.40
9/30/13: $14.10
9/30/12: $13.98
IPO at $15 in April 2011 (net after underwriters discount = $13.95)
Last Substantive Discussion: Item # 3 Bought 30 PFLT at $11.99-Used Fidelity Commission Free Trade (1/9/19 Post)
I have nothing to add to that post.
I am always in a trading mode for BDCs.
Dividends: Monthly at $.095 per share ($1.14 annually)
Remaining Position in All Accounts: 162+ shares
Of my remaining lots, the highest cost ones are in my Schwab account: Item # 3.A Bought 50 PFLT at $13.16 and 50 at $12.78-Used Commission Free Trades in Schwab Taxable Account (10/17/18 Post) I will consider selling the lot bought at $13.16 somewhere in the $13.4 to $13.6 range.
Earnings Report: Q/E 12/31/18
PennantPark Floating Rate Capital Ltd. Announces Financial Results for the Quarter Ended December 31, 2018
Subsequent to this pare, PFLT released its 4th quarter earnings report that was in line with expectations.
Core net investment income was reported at $.3 per share.
Net asset value per share was $13.66 as of 12/31/18, down from $13.82 as of 9/30/18.
"As of September 30, 2018, our portfolio totaled $1,000.6 million and consisted of $913.3 million of first lien secured debt (including $101.1 million in PSSL), $21.2 million of second lien secured debt and $66.1 million of preferred and common equity (including $44.8 million in PSSL). Our debt portfolio consisted of 100% variable-rate investments." (emphasis added)
B. Sold 30 Shares of EMP-Highest Cost-at $24.44:
Quote: Entergy Mississippi LLC 4.9% First Mortgage Bond
Closing Price Yesterday: EMP $24.44 +0.08 +0.35%
This bond is secured by a first lien on substantially all of Entergy Mississippi's assets.
Entergy Mississippi is a wholly owned subsidiary of Entergy Corp (ETR).
Entergy Mississippi earnings are included in ETR's earnings reports.
ETR 10-Q for the Q/E 9/30/18 (see pages 147- 153 for Entergy Mississippi information)
Profit Snapshot: +$7.04
Item # 4.A. Bought 30 EMP at $24.04-Used Commission Free Trade (5/28/18 Post) I sold that lot and kept the lost bought at $21.76. This is standard small ball trading.
Average Cost Remaining 70 share Lot = $21.83
Yield at $21.83 = 5.61%
Last Substantive Discussion: Item 1.B. Bought 70 EMP at $21.76 (1/2/2019 Post)
Interest Payments: Quarterly
Last Ex Interest Date: 12/28/18
Par Value: $25
Optional Issuer Call Date: at anytime on or after 10/1/21
Category: Exchange Traded Baby Bonds
I am not currently concerned about credit risk, and have no reasonable expectation of a becoming concerned.
Prior EMP Round Trip: Item # 2.A. Sold 50 EMP at $24.47 (7/22/17 Post)(profit snapshot=$66.98)
I also own 6 Entergy Mississippi 3.1% First Mortgage bonds maturing on 7/1/23 ($1K par value bonds traded in the bond market); FINRA Page. I discuss the purchase of three more in Item # 2 below.
I have a long history of trading first mortgage bonds issued by Entergy subsidiaries and currently own first lien bonds issued by Entergy Arkansas, Entergy Louisiana and Entergy Mississippi. Most of those bonds have $1K par values, trade in the bond market, have much shorter maturities than the exchange traded versions, and have make whole provisions which are never present in the baby bonds sold to investors. I do pick up more yield with the baby bonds.
3. Intermediate Term Bond Basket Strategy:
A. Bought 3 Entergy Mississippi 3.15% First Mortgage Bonds Maturing on 7/1/23:
I now own 6 bonds.
Bond Information:
FINRA Page: Bond Detail (prospectus linked)
Issuer: Wholly Owned Subsidiary of Entergy who does not guarantee the bonds
The parent's company debt has lower ratings. (Bond Detail)
Security: First Lien on substantially all of Entergy Mississippi's assets
The lien does not attach to cash or securities and receivables.
Limit on Amount of Lien Bonds:
Make Whole Provision:
A make whole provision becomes important when interest rates are declining.
Over the past decade, exchange trade bonds, which lack this type of provision, have been redeemed at par value when it was advantageous for issuers to do so.
That right is optional, which right generally comes into existence five years after the IPO. The issuer then refinances at a lower rate and frequently extends the term as well.
A huge number of higher yielding exchange traded bonds and equity preferred stocks have been redeemed at par value over the past ten years.
The owner of the exchange traded bond receives the proceeds when the equivalent securities provide less yield and income.
The make whole provision found in $1K par value bonds, sold primarily to institutional investors, allow the issuer to exercise an optional redemption right.
However, the issuer has to pay the present value of all remaining interest payments and the principal amount to exercise that option. The discounting mechanism is generally a comparable maturity treasury.
When rates are low as now, the sum of those payments is discounted at a slow rate which results in a premium redemption price that turns the optional redemption into no option at all, except when the bond is close to maturity and the coupon is somewhat similar to the treasury rate used in the discounting mechanism (e.g a bond maturing in 6 months with a 2.3% coupon can likely be redeemed at par value notwithstanding the make whole provision)
And, if interest rates are higher, so that the discounting mechanism is greater, the issuer may not want to redeem since it can not replace the bond with a lower coupon one.
The result is that bonds with make whole provisions can sell a significant premiums to par value when interest rates are declining since the make whole prevents as a practical matter an optional redemption.
During peak low periods in the 20 year bond, it was not unusual to see a 5% to 6% AA rated corporate maturing in 20 selling at a 30%+ premium to its par value.
If there was a similar exchange traded bond, which could be redeemed at par, the price would hug par value and the bond would be redeemed at par and then refinanced with a lower coupon bond maturing at a later time. That is the story of the past ten years in a nutshell.
Bought at a Total Cost of 99.111
YTM at TC Then at 3.318%
Current Yield at TC = 3.1783%
I also own 6 Entergy Mississippi 3.1% First Mortgage bonds maturing on 7/1/23 ($1K par value bonds traded in the bond market); FINRA Page. I discuss the purchase of three more in Item # 2 below.
I have a long history of trading first mortgage bonds issued by Entergy subsidiaries and currently own first lien bonds issued by Entergy Arkansas, Entergy Louisiana and Entergy Mississippi. Most of those bonds have $1K par values, trade in the bond market, have much shorter maturities than the exchange traded versions, and have make whole provisions which are never present in the baby bonds sold to investors. I do pick up more yield with the baby bonds.
3. Intermediate Term Bond Basket Strategy:
A. Bought 3 Entergy Mississippi 3.15% First Mortgage Bonds Maturing on 7/1/23:
Bond Information:
Issuer: Wholly Owned Subsidiary of Entergy who does not guarantee the bonds
The parent's company debt has lower ratings. (Bond Detail)
Security: First Lien on substantially all of Entergy Mississippi's assets
Limit on Amount of Lien Bonds:
A make whole provision becomes important when interest rates are declining.
Over the past decade, exchange trade bonds, which lack this type of provision, have been redeemed at par value when it was advantageous for issuers to do so.
That right is optional, which right generally comes into existence five years after the IPO. The issuer then refinances at a lower rate and frequently extends the term as well.
A huge number of higher yielding exchange traded bonds and equity preferred stocks have been redeemed at par value over the past ten years.
The owner of the exchange traded bond receives the proceeds when the equivalent securities provide less yield and income.
The make whole provision found in $1K par value bonds, sold primarily to institutional investors, allow the issuer to exercise an optional redemption right.
However, the issuer has to pay the present value of all remaining interest payments and the principal amount to exercise that option. The discounting mechanism is generally a comparable maturity treasury.
When rates are low as now, the sum of those payments is discounted at a slow rate which results in a premium redemption price that turns the optional redemption into no option at all, except when the bond is close to maturity and the coupon is somewhat similar to the treasury rate used in the discounting mechanism (e.g a bond maturing in 6 months with a 2.3% coupon can likely be redeemed at par value notwithstanding the make whole provision)
And, if interest rates are higher, so that the discounting mechanism is greater, the issuer may not want to redeem since it can not replace the bond with a lower coupon one.
The result is that bonds with make whole provisions can sell a significant premiums to par value when interest rates are declining since the make whole prevents as a practical matter an optional redemption.
During peak low periods in the 20 year bond, it was not unusual to see a 5% to 6% AA rated corporate maturing in 20 selling at a 30%+ premium to its par value.
If there was a similar exchange traded bond, which could be redeemed at par, the price would hug par value and the bond would be redeemed at par and then refinanced with a lower coupon bond maturing at a later time. That is the story of the past ten years in a nutshell.
Bought at a Total Cost of 99.111
YTM at TC Then at 3.318%
Current Yield at TC = 3.1783%
4. Short Term Bond/CD Ladder Basket Strategy:
A. Bought Three 56 Day Treasury Bills at Auction Maturing on 4/8/2019:
IR = 2.427%
Auction Results:
IR = 2.427%
Auction Results:
Disclaimer: I am not a financial advisor but simply an individual investor who has been managing my own money since I was a teenager. In this post, I am acting solely as a financial journalist focusing on my own investments. The information contained in this post is not intended to be a complete description or summary of all available data relevant to making an investment decision. Instead, I am merely expressing some of the reasons underlying the purchase or sell of securities. Nothing in this post is intended to constitute investment or legal advice or a recommendation to buy or to sell. All investors need to perform their own due diligence before making any financial decision which requires at a minimum reading original source material available at the SEC and elsewhere. A failure to perform due diligence only increases what I call "error creep". Stocks, Bonds & Politics: ERROR CREEP and the INVESTING PROCESS Each investor needs to assess a potential investment taking into account their personal risk tolerances, goals and situational risks. I can only make that kind of assessment for myself and family members.
I have traded Dream Industrial REIT several times, content with harvesting a profit after collecting several monthly dividend payments.
ReplyDeleteI recently discussed restarting a position with a 100 unit purchase:
Item # 4.A. Bought 100 CA:DIR.UN at C$9.75 (C$1 IB commission):
https://tennesseeindependent.blogspot.com/2018/12/observations-and-sample-of-recent_12.html
I view it as important to see how a stock reacts to a share offering, focusing on what happens to the share price after the announcement.
Last June, this REIT sold $144+M at C10.35.
https://globenewswire.com/news-release/2018/06/29/1531726/0/en/Dream-Industrial-REIT-Completes-144-Million-Equity-Offering.html
Dream just completed another stock offering raising $144M at C$10.45 per share.
https://globenewswire.com/news-release/2019/02/13/1724627/0/en/Dream-Industrial-REIT-Completes-144-Million-Equity-Offering.html
"The Trust intends to use the net proceeds from the Offering to partially fund the purchase price of a portfolio of 21 buildings located in five cities across the Midwest United States and for general Trust purposes."
Dream has been expanding into the U.S. as previously discussed. I view it as a potential takeover target for a larger U.S. industrial REIT.
The stock offering was announced on 2/4/19 after the market closed:
Dream Industrial REIT Announces Acquisition of CAD$235 Million (US$179 Million) Logistics Portfolio in Five Cities Across the Midwest U.S. and $125 Million Equity Offering
https://globenewswire.com/news-release/2019/02/04/1710207/0/en/Dream-Industrial-REIT-Announces-Acquisition-of-CAD-235-Million-US-179-Million-Logistics-Portfolio-in-Five-Cities-Across-the-Midwest-U-S-and-125-Million-Equity-Offering.html
I would first note that the offering price was significantly higher than my recent purchase price.
The closing price before the announcement was at C$10.77. I would characterize the offering at C$10.45 as well absorbed by the market.
Dream Industrial Real Estate Investment Trust
https://www.marketwatch.com/investing/stock/dir.un/charts?countrycode=ca
The ordinary shares do trade in USDs on the dark Grey Market.
YF has the book value per share at C$10.12.
https://ca.finance.yahoo.com/quote/DIR-UN.TO/key-statistics/
Today was notable for SPX putting a little more space above its 200 day SMA line.
ReplyDeleteWhile the ten year treasury has drifted up to 2.7% from its recent 2.63% low, that rise indicates the bond ghouls have not changed their forecasts even after the Stock Jocks did a 180.
The apex of the stock decline occurred on 12/24. The ten year treasury closed that day at a 2.74% yield:
https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldYear&year=2018
So the 10 year yield is down slightly from the nadir of the stock collapse.
Were the Stock Jocks being rational in quickly taking SPX down 20% and then quickly retracing most of the decline?
That does not sound like rational behavior to me.
One or the other future forecast made by the Stock Jocks over the past three months or so has to be wrong, but which one?
The market is forecasting no major problems for the foreseeable future and that may end up being the case, as current concerns are resolved, mainly by Donald folding.
He has just folded on the wall, apparently willing to accept less than what he was offered before he shut down the government. Anyone who views Donald as a master negotiator needs to examine his history and cleanse their brain of a multi-decade brainwash.
Trump is a master of the big con and at convincing the easily manipulated that he was extremely successful in his own right after six bankruptcies and inheriting a fortune from his dad. HIs success was based on creating the brand Trump and then licensing his name.
He has proven to be a master of self-promotion, endless braggadocio, and screwing people who have worked for him or lent him money. And, he has proven that the U.S. government is more likely to catch a tax cheat and brow beating a family at subsistence level into submission rather than tax cheats who go big and complicated.
I was thinking today about what would be the most likely unexpected event this year. By unexpected, I mean something that is currently being assigned a zero or near zero chance by both the Stock Jocks and the Bond Ghouls.
My candidate is two .25% FF rate hikes by the Fed, with the first occurring in September and the next one in December 2019.
That would be in response to an economy that improves rather than slows down, with inflation catching its sea legs and moving back up, and the 10 year making another stab at breaking its recent high yield near 3.25% or thereabouts.
SnP is now above the 200 SMA by about 40 points. So it's managing some distance. With the 2800ish overhead resistance, that may be the downturn retrace point instead of the 200?
DeleteOn the VIX model, after a drop, there's generally been a recovery & re-test of critical MAs.
The indicator that it will be a continued bull market is the panic as measured by VIX during the downturn wasn't deep for long enough. So that in the past that's matched a market pattern of going back to bull.
Another indicator is that during the recovery, if there is going to be a continued bull, the VIX stays under 20 for a period, rather than continuing to be somewhat elevated (in the 20-26 range) that it did for example in 1999 (when the market went up but the VIX continued to show investor concern.)
So currently the low under 20 VIX coupled is yet another indication that investors (at least) aren't fitting an end to the bull?
Land: The current VIX reading is at 15.21 which indicates that the panic selling phase is over and more upside is likely.
DeleteI am basically in a trading mode where I buy into the volatility event, increasing the purchase amounts as the VIX moves farther away from 20 toward 30+ and then lightening up as the VIX falls back 20. So some trading is timed off the volatility movement.
I am now engaged in some light selling where I focus primarily on selling highest cost lots and eliminating some recently bought positions that are nearing the top of their two year channel range. An example of the later would be the ETF VNQ. An example of the later was the recent paring of ENB which I view as a bond substitute that went ex dividend yesterday.
The small lot trading is made possible by commission free trades. Vanguard now has over 1800 ETFs that can be bought commission free including their own. I can secure 500 commission free trades by moving some money around. Then I have IB where I can buy 100 or less shares for $1. This technique is primarily one designed to preserve capital while taking measured and otherwise insignificant risks. I further reduce my tax bill by selling the highest cost lots and increase my dividend yield for the remaining shares. Using this small ball trading system, I will only buy when the price falls below the lowest price in the chain and then hopefully rinse and repeat. That required me to buy in many cases when SPX fell 20% and then sell highest cost lots in the rebound phase.
I had a related mechanical trading system during the recent Near Depression that resulted in a cataclysmic stock market event. I had to invest my cash flow from bonds and stocks to buy stocks (including several preferred stocks that had been crushed), no matter what I thought about the market or where it was headed. So the worst day in October 2008 was a buying day for me.
"...he has proven that the U.S. government is more likely to catch a tax cheat and brow beating a family at subsistence level into submission rather than tax cheats who go big and complicated."
DeleteIn other words:
"Steal a little and they throw you in jail
Steal a lot and they make you king."
Sweetheart Like You, 1983, Bob Dylan
Cathie: Michael Cohen is another example of someone who commits bank and tax fraud that would have gone unnoticed by the IRS, even though he could have been discovered fairly easily. If Cohen had disassociated himself from Donald two years before the election, he would be a free man today and still doing his thing.
DeleteThe clearest example of tax fraud by the Trumps involves their evasion of gift taxes that was documented in a recent NYT article. There is a reason Donald never released his returns and it has nothing to do with him being audited. He knows that those returns could not withstand independent scrutiny by experts. And they would be scrutinized by the best. Sure, the IRS is underfunded and understaffed but it is also a place where people, who were passed over by accounting and legal firms that prepare the returns, go to work.
Isn’t Europe entering recession and China has slowing growth and the Fed is watching this?
ReplyDeleteAlso isn’t the Fed continuing to shrink the balance sheet?
Sam: Europe and Japan have not contributed much to global growth over the past decade. The U.S. and China have done the heavy lifting.
DeleteI am estimating -.5% to +1% real GDP growth in the EU19 this year. China's growth is slowing but still robust IMO given the current size of its economy. The big question mark is the U.S.
The FED is paying attention to potential impediments to U.S. growth, such as the ongoing tariff war with China. It remains to be seen whether a new trade agreement can be finalized that will materially benefit the U.S. economy or whether Trump will fold and accept what China was offering before the tariff war began. Whatever the outcome, it is important for the U.S. economy that no further tariffs be imposed and the existing ones be removed relatively soon.
I do not view the drawdown of the FED's bloated balance sheet as material to the real economy. What will be material is the parabolic growth in U.S. government debt. The Stock Jocks are not inclined to factor into prices potential adverse events until they occur, a perspective that has served them well over the years.
When I was born, the S & P 500 was at 20.
When the 1982 to 2000 long term secular bull market started in August 1982, the S & P 500 was near 100.
Aegon laid another egg in its earnings report released today. It did increase the May semi-annual dividend to €.15 from €.14.
ReplyDeletehttps://www.businesswire.com/news/home/20190213005938/en/Aegon-reports-2018-results
Aegon N.V. (AEG)
$4.90 -$0.27 (-5.22%)
As of 11:22AM EST.
AEG has a boatload of problems as shown in its earnings release. The dividend will provide some support for the share price as the company works through those problems.
I do not believe that a .27% decline adequately reflects the negative news today. The retail sales report for December was ugly. KO had a bad day after reducing guidance for the current year. Expect more of that to come as the year progresses:
ReplyDeleteCoca-Cola Co.
$45.59 -4.20 -8.44%
https://www.marketwatch.com/investing/stock/ko
The Stock Jocks are back to predicting that nothing will interfere, except temporarily, on their near and intermediate term earnings forecasts. That optimism, which has served them well, may be to sanguine IMO now.
The Bond Ghouls think so.
iShares 7-10 Year Treasury Bond ETF
$104.54 +0.49 +0.47%
https://www.marketwatch.com/investing/fund/ief
U.S. 10 Year Treasury Note
2.655% -0.048%
Last Updated: Feb 14, 2019 4:57 p.m. EST
https://www.marketwatch.com/investing/bond/tmubmusd10y?countrycode=bx
I am continue to be a net stock seller into the current strength. The bond portfolio has been giving me enough upside since the ten year treasury peaked at 3.24% last November.
https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldYear&year=2018
By peak, I am simply referring to the last attempt at interest rate normalization that started with a 2.15% yield on 9/17/17.
Haven't the bond ghouls thought the stock jocks too sanguine for a lot of this bull? This sentiment from them isn't new?
DeleteLand: That is why I call them Bond Ghouls. Pessimism is the mirror image of the Stock Jocks boundless optimism. Eventually, the Bond Bookies will be proven right. Trying to guess when is a futile exercise.
DeleteI discussed the Trident loans made by CM Finance (CMFN) and Ares in this post. The focus was on the loss taken by CMFN.
ReplyDeleteARES has filed a 10-K which includes information through 12/31/18.
Information regarding the write-down taken by ARES can be found at page F- 9 under the heading "New Trident".
https://www.sec.gov/Archives/edgar/data/1287750/000128775019000004/arccq4-1810k.htm
The 19.4M loan that was originally a first lien loan that got taken down to a second in a restructuring was valued at $5M. The 2020 second lien loan for $67.8 was cut to zero as was the $8.8M "senior subordinated loan" which is probably junior to the first and second lien loans.
What I find interesting about this is that the analysts did not question management about it.
There will be losses in the risky loans made by BDCs. The trick over the long term is to offset those inevitable loan losses with gains (mostly from equity kickers and fees) so that net asset value per share remains relatively stable after payment of the dividends. Another important point is that this Trident loan should never have been 10% of CMFN's loan book.
I have published a new post:
ReplyDeletehttps://tennesseeindependent.blogspot.com/2019/02/observations-and-sample-of-recent_17.html