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Update For Bond And Equity Preferred Stock Basket Strategy As Of 7/31/15

|Includes: The Goldman Sachs Group, Inc. (GS), GST, HTGC, JPM, MS, ROAN

The size of this basket has fallen by almost 100K due primarily to issuer redemptions. I have engaged in some profit taking.

My last update for this basket strategy was published last January: Stocks, Bonds & Politics: Exchange Traded Bond and Preferred Stock Table as of 1/27/15

This table shows my current holdings in exchange traded bonds and equity preferred stocks only:

This portfolio's value has been over $150K and is now struggling to hit $40,000. The three culprits for that decline are redemptions, a lack of viable risk/reward options to deploy redemption proceeds, and profit taking.

I have expanded this update's format to include $1,000 par value bonds.

I will buy both exchange traded bonds and $1,000 par bonds available only in the bond market.

Most exchange traded bonds have $25 par values and come in various legal structures. "Exchange traded" simply means that these securities are bought and sold in the stock market, just like a common stock.

I have categorized the exchange traded bonds into the following categories listed below in bold type and in this post: Exchange Traded Bonds: New Gateway Post

The most easily comprehensible category is simply known as a baby bond due to its par value being lower than the $1,000 par value bonds traded in the bond market. Most baby bonds have $25 par values.

The best site for researching exchange traded preferred stocks and bonds is It is a free site with a registration requirement. I will also use the Preferred Stock Channel website primarily to calculate total returns for my preferred stock investments. I can also use the Dividend Channel's calculator to determine total returns for exchange traded bonds. I also rely heavily on financial reports filed with the SEC and bond information provided by FINRA.

Exchange Traded Bonds:

1. Baby Bonds: They are called baby bonds due to their low par values.


First Mortgage Bonds Entergy Mississippi Inc. 6.20% Series First Mortgage Bonds 2040 (EFM:NYSE) and Entergy Louisiana LLC First Mortgage Bonds 6.00% Series 2040 (ELB:NYSE)(both owned in a Roth IRA account)

EFM Discussed Here: Item # 3 Pared Interest Rate Risk by Selling in a Taxable Account: 200 PDT at $14.26, 50 AMHPRA at $25.4 and 100 EFM at $25.95 (2/11/15 Post)-Bought 100 EFM at $24.88 (2/17/14 Post) and Item # 2 Paired Trade: Sold 50 EMQ at $26.49 and Bought 50 EFM at $24.9

Senior Unsecured Bonds Kennedy-Wilson Holdings Inc. 7.75% Senior Notes due 2042 (KWN:NYSE); Banc of California Inc. Senior Notes (BOCA); Hercules Technology Growth Capital Inc. 7% Senior Notes due 2019 (HTGZ:NYSE)(all owned both in a Roth IRA and a Taxable Account)

KWN Discussed Here: Bought Roth IRA: 50 KWN at $24.85 (12/19/12 Post); Item # 5 Added 50 KWN at $23.79 -Roth IRA (1/16/14 Post)

2. Trust Preferred (in effect junior bonds):

Generally, these securities have liberal rights reserved to the issuer to defer interest payments, five years is a frequent maximum deferral period, but the deferred interest is cumulative and bears interest at the coupon rate for the security. Each Trust Preferred needs to be checked on these type of issues. In this form of ownership, as an example, a bank will form another entity, a Delaware trust, and cause that new entity to issue preferred stock in the trust to the public, with the proceeds used to buy a junior bond from the bank. The preferred stock represents a beneficial interest in the junior bonds contained in the trust. So, it is a preferred stock issued by a trust but that "preferred stock" represents an beneficial interest in a bond owned by the trust.

The trust preferred security occupies a place one step higher than equity preferred stocks that are below all bonds in the capital structure. Regular Preferred and Trust Preferred (1/1/2009 Post)

Trust Preferred Securities: Links in One Post

3. Trust Certificates (mostly gone due to call warrant owner redemptions)

A trust certificate represents an undivided beneficial interest in bonds owned by a Grantor Trust. Those bonds are referred to as the underlying security. The trust is administered by an independent trustee who is charged with collecting the bond interest payments and then distributing those funds to the owners of the TCs. Most TCs have a par value of $25 which makes them easier to purchase for most individual investors, compared to bonds traded in the bond market that have a $1,000 par value.

The Grantor Trust is formed by a brokerage company who buys the bonds in the bond market.

The trust then buys the bonds from the brokerage company with the proceeds realized from the sell of TCs in a public offering. Since the bonds are being purchased in the secondary market, their price may be at a discount or premium to the then existing par value. That fact can result in the TC having a lower or higher coupon than the underlying bond.

When the Grantor Trust is formed, the agreement will generally grant the brokerage company the right to call the TC at par value plus accrued interest.

This right will frequently serve to cap the price movement of the TC. A few TCs do not have call warrants attached to them. Most TCs have been called by their respective call warrant owners. The call warrant's existence allows the brokerage company that formed the trust to capture a bond's appreciation without assuming the bond's credit risk or downside interest rate risk.

Generally, the bonds selected for inclusion in this type of security have long dated maturities and Make Whole Provisions that make it unlikely that the issuer will redeem the bond early.

With interest rates falling, the bonds will rise in value permitting the brokerage company to harvest a risk free profit, sometimes a substantial one, given the decline in rates, by simply exercising the call warrant that it placed in the Grantor Trust agreement, pay the trust certificate owners par value, take possession of the bonds and then sell them in the bond market. What do you expect from them? This institutions exist to enrich themselves and the people who work for them.

Trust Certificates: New Gateway Post (trading snapshots=+$28,971.16)

I am down to just one that has no call warrant attached to it: Structured Products Corp. 8.205% Credit-Enhanced CorTS (KTN:NYSE)(underlying bonds owned by the trust are junior securities issued by AON traded in the bond market-Bond Detail at FINRA-no call warrant attached) I will be discussing this trust certificate below, since I liquidated 1/2 of my position.

4. Synthetic Floaters (currently own in 50 share lots GJT, GYB and GYC, all in a Roth IRA account)

Synthetic Floaters

I have bought and sold the synthetic floaters more times than I possibly could remember, though my memory is not what it used to be now either.

I linked prior discussion of GYB when I last bought the 50 share lot back in February 2015:

Item # 3 Tiptoed Back into the Exchange Traded Synthetic Floater GYB

Quote: Corporate Asset Backed Corporation, CABCO Series 2004-101 Trust- Goldman Sachs Capital I Floating Rate Certificates (GYB:NYSE)

Now, say that back real quick.

Most investors need to avoid this type of exchange traded bond due in part to their complexity. The exchange traded synthetic floaters that pay the greater of a minimum coupon or a float over the 3 month Libor rate are similar in that respect to floating rate equity preferred stocks.

Historical Chart 3 Month LIBOR

GYB for examples pays the greater of 3.25% or .85% over the three month Libor rate on a $25 par value, with a maximum coupon of 8.25%. The similarity with equity preferred stock floaters pretty much ends there.

The synthetic floaters have issues and/or problems that the equity preferred stocks do not have. I am not going to discuss those here since that is a very complicated topic. For those with masochistic tendencies, a flavor of one issue is discussed here: Stocks, Bonds & Politics: Sold 100 GYC at 22.22: Ongoing Reassessment of Synthetic Floaters (7/29/12 Post). I did buy 50 GYC back recently: Stocks, Bonds & Politics: Bought Back 50 of the Synthetic Floater GYC at $21.67 (3/22/15 Post).

One difference in favor of the synthetic floaters is that they mature no later than the "underlying bonds" owned by a grantor trust. In the case of GYB, that underlying security is a Goldman Sachs trust preferred maturing on 2/15/2034. The equity preferred floaters have no maturity dates. Instead, the issuer has an optional redemption right at par plus accrued dividends which will be exercised only when it is in the issuer's interest to do so (e.g. a spike in the Libor rate making a fixed coupon security cheaper for the issuer, which is when the owner would particularly like to keep the security or what I call asymmetric interest rate risk between the issuer and the owner)

5. "Principal Protected" Senior Notes-Coupons Linked to an Index or Commodity (all of mine have matured)

Item # 1 Principal Protected Notes

E.G.: Received MOU Redemption Proceeds This Afternoon-28.4% Annual Coupon Confirmed; MOU-Received 27.93% coupon (3/3/11 Post); MOU-Received 10.48% coupon (3/15/13 Post).

6. European Hybrids (in effect junior bonds that pay qualified dividends under current U.S. law-all of my positions have been sold)

ING HYBRIDS: Links in one Post

Aegon Hybrids: Gateway Post

The ING and Aegon hybrids fell into the low single digits during the Near Depression, providing those capable of mustering some fortitude over 30% current yields. They are now trading near or above their $25 par values or have been redeemed at their $25 par values.

For Aegon hybrids, my lowest purchase prices include the 6.375% AEH at $4.63 and the floater AEB at 4.8.

For ING hybrids, the lowest purchase prices were the 6.375% ISF at $4.6 and the 7.2% INZ at $6.52 and $7.82.

I no longer own any ING or Aegon hybrid.

Equity Preferred Stocks:

Most of my earlier equity preferred stock discussions relate preferred stock floaters that pay the greater of a fixed rate coupon or a spread over the 3 month Libor rate or REIT preferred stocks. I will dabble in other categories.

Gateway Post: Equity REIT Common and Preferred Stock Basket

Gateway Post: Advantages and Disadvantages of Equity Preferred Floating Rate Securities

Gateway Post: REIT CUMULATIVE PREFERRED LINKS IN ONE POST/Advantages & Disadvantages

Equity preferred stocks generally have $25 par values and are bought just like a common stock. This type of security is senior only to common stock and is junior to all bonds.

Equity preferred stocks issued by REITs are cumulative, while most bank preferred stocks are non-cumulative.

A cumulative dividend can not be eliminated short of a bankruptcy, but only deferred provided the issuer first eliminates cash dividends paid to the more junior common stock owners.

A non-cumulative dividend can be eliminated just like a common stock dividend, but the common stock dividend has to eliminated first.

In a bankruptcy, an equity preferred stock is likely to become worthless.

A. $1,000 Par Value Bonds-Traded in the Bond Market:

I will periodically delve into the bond market to buy $1,000 par value bonds. Most of those will be junk rated since that is the only place to pick up yield due to the long standing Jihad Against the Saving Class inaugurated in December 2008 with the Federal Reserve's adoption of ZIRP and extended with massive QE programs designed to lower long term interest rates.

$1,000 Par Value Bonds Available in the Bond Market

LINN Senior Unsecured Bonds:

First, I would strongly emphasize that my minor purchases described below are viewed as nothing more or less than a gamble.

In my opinion, the Bond Ghouls are saying that Linn Energy is in jeopardy of bankrupting before paying off its first to mature senior unsecured bond which closed last Friday near 61 with a yield to maturity of over 20% per year.

Yield to maturity assumes the payment of all interest payments and the $1000 par value per bond at maturity. The Linn May 2019 senior unsecured bond is the first to mature.

Second, when yields-to-maturity and current yields start to flatten irrespective of the maturity date, then the Bond Ghouls are in my opinion forecasting a distinct possibility of a bankruptcy before any of them mature. In a bankruptcy, all of the senior unsecured debt owners will be in the same boat and have the same legal rights to a recovery.

There may not be a meaningful recovery depending on circumstances then existing, including the amount of senior secured debt. It is common for a firm moving toward a bankruptcy to take on increasing amounts of senior secured debt hoping to survive whatever misfortune has befallen it. That was the case with Quicksilver Resources who only managed only to destroy the value of its senior unsecured bonds before filing for bankruptcy: Quicksilver Resources 2019: at 100 in December 2013 and now at 10

Third, there comes a point in the slide to bankruptcy when bond investors are trying to guess the potential recovery in a BK when pricing the bonds. IMO, the Linn bonds are not there yet but are moving in that direction. A number of other E & P companies are having their debt priced based on estimated recovery values coming out of a BK.

The Linn bonds popped some last Thursday when Linn announced that it was going to eliminate the common unit distribution and had bought back bonds at steep discounts. Most of that buying occurred in July when the Linn bonds collapsed in price. The price spurt quickly went into reverse as sellers emerged en masse.

One problem for those owning bonds issued by MLPs is that money is flying out the door to the common unit owners. The distribution elimination solved that issue for the time being.

As noted below, I bought back the 8.625% senior unsecured at 61 or $610 per $1,000 par value bond. If Linn survives to pay that bond off in less than five years, I will make $780 just from 2 bonds plus the interest payments. That kind of return is a pulsating warning bell that Linn has only started to heed.

The collective judgment of the Bond Ghouls, expressed in their bond pricings, needs to receive more respect from management. Their opinion is that Linn is in jeopardy of failing even before the first maturity date in May 2019.

Survival may depend simply on making it through 2019, and that necessitates surviving 2019 first. Delaying the refinancing crunch for as long as possible is key.

At some indeterminate future time, the supply/demand equation for energy will move into balance. The mother of all price spikes would then be a possibility due to the mega projects being postponed and those projects generally take years to complete.

And, the shale producers are exhausting their most fertile production areas now in an effort to stay afloat and many will end up in bankruptcy before 2017 arrives.

Without hinting directly or indirectly which firms will file, I generally pay attention to the message being sent by both the common and bond prices to identify those most at risk.

Swift Energy's 2017 bond, for example, now trades near 35, with the common at less than a buck per share. That firm announced last week that it had hired Lazard to Advise as to Strategic Alternatives Related to Its Capital Structure. Those are buzz words.

That 35 handle is about the same for the 10.75% Midstates Petroleum bond that also matures in 2017 with the common shares, MPO, now trading near $.50.

The 8.75% Sandridge 2020 closed at $32.5 last Friday with the stock closing at $.5170. I sold that bond last February at 74.69 after buying it at 65 (12/17/14 Post). I am not inclined to buy again given the current circumstances.

I could go on and on with illustrations. Lawyers with a certain specialty and exorbitant fees will have no shortage of future clients. I am not inclined to gamble with those bonds. Both the bond and common stock prices are sending the same signal: a BK is more likely than not with a limited recovery potential for senior unsecured debt owners.

I found it inexplicable that Linn bought a boatload of its bonds maturing in 2021 Page 48 LINE Q/E 6.30.2015 10-Q

The two 2019 maturities had a combined prinicipal amount of $3B as of 6/30/15. The purchases made in July 2015, disclosed in the second quarter earnings release, brought that total down by $356.9M. Those July purchases reduced the total outstanding to 2.643+B. At current prices, the remainder could be retired with a 1.61+B expenditure. That would leave the 6.75% Berry maturing in December 2020 as the next senior unsecured bond in need of refinancing.

There is no material interest payment savings derived from buying the 6.5% bonds maturing in 2021. The Bond Ghouls are telling management that the odds of paying off the 2019 bonds at maturity are not high, and that is an understatement.

A list of the bonds purchased in July and prior to the 31st are listed in Linn's earnings press release.

SEC Filed Press Release

While it is just my opinion, I view the use of $94.5M to buy the 6.5% 2021 bond and only $27.1M to buy the 6.5% bonds maturing in May 2019 as inexplicable under the circumstances. Linn could save more in interest payments by buying the 8.625% 2020 that is selling at a similar discount to the 2019 bonds. There is no shortage of institutional investors willing to sell these bonds.

Linn was coy in its earning release whether it would continue buying bonds. A comment by the CEO at page 4 of the transcript suggests that cash flow will be devoted to further bond purchases provided the discounts are attractive enough.

Q2 2015 Earnings Call Transcript | Seeking Alpha

The last filed 10-Q for the Q/E 6/30/15 provides relevant information about the bond buying during the first six months:

Excerpted From Page 48: LINE 6.30.2015 10Q

Both the credit facility and term loan are secured debt, see page 99, and consequently has priority over senior unsecured debt.

I bought the 8.625% 2020 before Linn divulged its July buying spree. I then bought the 6.5% bond maturing in May 2019 after that announcement. My total out-of-pocket exposure is $2,578+ for $4,000 in principal amount.

Andrew Bary published another negative LINN article in this week's Barron's.

1. Bought 2 Linn 8.625% Senior Unsecured Bonds Maturing 4/15/2020 at 61

As noted in the preceding snapshot, I had to pay $47.44 in accrued interest to the seller. The yield to maturity is shown at 22.302%. That is per year and assumes that all interest payments are made and Linn survives to pay off the bond at maturity.

Assuming a total cost at $61, the current yield is calculated as follows:

$8.625 รท $61=14.14%

Finra Information on the 2020: Bonds Detail

2015 Linn 2020 Trading Profit= $308.92

I am just pleased that I have not lost money-YET!

I have been discussing this trading history and my thought process in the comment section to this Instablog that discusses the January purchase. Bought Back The Linn Energy 8.625% Senior Unsecured Bond Maturing In 2020 - South Gent | Seeking Alpha (Originally Published on 1/29/15)

The FINRA website now has links to the bond prospectuses.

2. Bought 2 Linn 6.5% Senior Unsecured Bonds Maturing on 5/15/2019 at 64.464 w/commission 64.864

FINRA Information on the 2019: Bonds Detail

This bond closed at 61.17 last Friday so I already have an unrealized loss on the bond.

Even at my higher price, the YTM is shown at 20.22% with a current yield of 10.02%. To capture the YTM, however, Linn will have to survive to pay off this bond on 5/15/2019. That is 20.22% per annual period which tells the investor a lot about the risk which could only be labeled a reasonable likelihood of a significant total return loss. The common unit owners have got that message loud and clear.

LINE Interactive Stock Chart (a falling knife)

Last Friday's Closing Price: LINE: $4.04 -0.72 (-15.13%)

I would add that Linn sold common units to investors at $11.79 last May: Prospectus

Line Energy Filings with the SEC

I have not owned the common units since I sold 100 back in 2010:Sold 100 LINE at 25.90 (6/26/2010 Post)(profit snapshot=$971.97)

That profit and the LINN bond trading profits causes an unfortunate thought to enter the Old Geezer's mind. The total profit trading Linn's securities is now at $1,280.89, enough to pay for one of these two bond lots. The thought is expressed with the phrase "playing with the house's money". When that phrase pops into my mind uncontrollably, I am more inclined to gamble with that money. Anyone playing in the Linn bond sandbox needs to be willing to light a match to the money used to buy these bonds IMO.

The Linn bonds are still rated B1 by Moody's, but that rating originates from December 2013 according to FINRA. The S & P rating of B was made in September 2014.

The Linn bonds are not trading anywhere close in yield terms to other bonds rated B1 by Moody's or B by S & P.

Based on Closing Prices as of 7/31/15:

Beazer Homes 5.75% Maturing 6/25/19=YTM 5.824%

ADS Waste Holdings 8.25% Maturing 10/1/2020: YTM 6.403%

CPI International 8% Maturing 2/15/18: YTM 7.539%

Ally Financial 3.6% Maturing 3/15/2020: YTM 3.803%

Linn discusses the risks relating to its operations starting at page 19 of the 2014 Annual Report. LINN Form 10-K 12-31-2014 The discussion ends at page 37.

My trade snapshot for the 2019 bond shows that I paid $28.53 in accrued interest to the seller. As in the past, I will receive the entire next interest payment, and my broker will include that $28,53 as taxable interest paid to me. I will then make an adjustment in Schedule B to deduct that amount as "Accrued Interest Paid to Seller". Accrued Interest and Bond Premiums

On a final note I would add that the Berry senior unsecured debt has much lower yields than the debt originally issued by Linn. I attribute that pricing differential to motivated sellers in the bonds originally sold by Linn. The Berry bonds are senior unsecured debt and were assumed by Linn after Berry's acquisition.

Berry November 2020 Bonds Detail

Berry September 2022 Bonds Detail

3. Boyd 9.125% Senior Unsecured Bond Maturing in 2019 Redeemed by the Issuer:

This bond was redeemed at a premium to par value, a common occurrence for junk bonds as issuers found it beneficial to pay the premium and to refinance at lower rates while also extending the maturity. This bond was bought in October 2011 and redeemed in June 2015. I view it as a victory to receive a 9.12% coupon and to escape with a profit on the bond.

B. Senior Unsecured Exchange Traded Bonds:

Exchange traded bonds trade flat, which simply means the buyer does not have to pay accrued interest to the seller and the owner on the ex interest date will receive the entire interest payment.

The ex interest date for an exchange traded bond has the same meaning as the ex-dividend date for a stock.

RAIT Financial: I bought 50 share lots in two RAIT Financial (RAS) bonds. RAIT is a REIT.

The first one mentioned below matures on 8/17/2019. The 4 year maturity mitigates my interest rate risk.

The other one (RFT) matures on 4/15/2024 and has a higher current yield. I have more credit risk on that one due to more things can go wrong over a longer period (see generally, Now the Long Run Looks Riskier, Too, for Investors - NYT or just conceptualize owning Polaroid or Eastern Kodak bonds long term) The interest rate risk is also higher than for the bond maturing in August 2019.

The bonds are unrated, but I would rate them at no higher than CCC just as a matter of common sense given RAIT's operating history and debt load. A Caa1 rated 7.625% bond maturing in 2020 closed last week with a 6.4% YTM.

I am more comfortable owning the 2019 bond simply due to it maturing about 5 years earlier. RAIT crashed and burned during the recent Near Depression. I do not believe that anyone would characterize that statement as an exaggeration looking a long term chart: RAS Interactive Stock Chart

RAIT's common stock had a bad day last Friday:

RAS: 5.24 -0.58 (-9.97%)

The company used the recently released positive earnings report as an excuse to sell stock. The underwritten offering was priced at $5.5 per share.

Earnings Release for Q/E 6/30/15: SEC Filing

RAIT is the external manager for the apartment REIT Independence Realty which I own and discussed in my update for the REIT Basket and comments to that post: Update For Equity REIT Basket Strategy As Of 7/24/15 - South Gent | Seeking Alpha RAIT also owns 23% of IRT's stock as of 6/30/15. IRT's pending acquisition of Trade Street Residential will increase the fees paid to RAIT by the combined entity as noted by RAIT in that earnings press release.

I would note that these exchange traded bonds are currently trading with far lower yields than the Linn bonds which are trading more like Ca credit risks IMO.

RAIT also has three publicly traded cumulative equity preferred stocks that would sit above common stock only in the capital structure.

RAIT Financial Trust 7.75% Cumulative Preferred Series A Price Today (RAS.PA:NYSE)

RAIT Financial Trust 8.375% Cumulative Preferred Series B (RAS.PB:NYSE)

RAIT Financial Trust 8.875% Cumulative Preferred Series C (RAS.PC:NYSE)

Risks incident to RAIT's business are discussed starting at page 9 of the 2014 Annual Report.10-K That discussion ends at page 36. The pages are dense single spaced type. If I am going to assume the risk of default, I would prefer to accept less yield and go with the senior bond rather than the preferred stock whose dividend can be deferred and whose potential recovery in a BK setting is not comforting.

1. Bought 50 RFTA at $24.25: RAIT Financial Trust 7.125% Sr. Notes Maturing in 2019 (RFTA:NYSE)(5/15/15)

The next ex interest date is 8/14/15

Prospectus Supplement

RAIT has the option to redeem this bond at the $25 par value plus accrued interest on or after 8/30/17.

Interest payments are made quarterly at the fixed coupon rate of 7.125% per annum on a $25 par value.

The prospectus contains the usual language identifying this debt's place in the capital structure:

If RAIT defaults and does a BK, both RFT and RFTA would be in the same lifeboat taking on water. Bond Ghouls call that parity relationship pari passu. I am told that is a Latin phrase meaning "on an equal step" or something like that.

Assuming a total cost of $24.25 per share, the current yield would be about 7.35%. The YTM would be slightly higher at around 9% given the discount to par and the short maturity date. Morningstar Bond Calculator: Yield to Maturity

This purchase is an average down: Item # 3 Bought 50 RFTA at $25

2. Bought 50 RFT at $23.05 RAIT Financial Trust 7.625% Notes Maturing in 2024 (RFT:NYSE)(last ex interest date 6/29/15)

Prospectus (par value $25; quarterly interest payments)

The current yield at a total cost of $23.05 is about 8.37% with a YTM near 9.34%. Note that the current yield is slightly more than 1% higher for RFT comparted to RFTA. The YTM for these bonds are only .34% apart due to the longer maturity date for RFT that reduces the YTM on an annualized basis even though it starts out with a higher coupon and a greater discount.

RAIT may redeem at par plus accrued interest on or after 4/15/2017. If RAIT exercises that redemption option prior to maturity, I am fine with that result since I would have a profit on the bond. Interest payments are made quarterly.

The prospectus has standard language identifying the notes as senior unsecured obligations:

3. Transferred 50 shares of KTN from the Regular IRA to the ROTH IRA and Later Sold the Shares at $32.15 ($25 par value):

KTN is an exchange traded bond in the Trust Certificate legal form. A Trust Certificate represents an undivided beneficial interest in bonds owned by a trust. The trust in this case owns AON junior bonds maturing on 1/1/2027. The TC's maturity date will be the same as the underlying bond.

Quote: Structured Products Corp. 8.205% Credit-Enhanced CorTS (KTN:NYSE)

KTN Prospectus

AON Bond Prospectus

FINRA Information on the AON Underlying Bond Owned by the Trust: Bonds Detail

I briefly discussed buying this trust certificate back in 2008:

I previously sold 50 of 150 owned certificates: Item # 1 Sold 50 of 150 KTN at 28.17 (9/17/2010 Post)(profit snapshot in Trust Certificates: New Gateway Post-Regular IRA +$692.52)

I still own 50 shares with a cost basis of $13.26. Hopefully, I am done with my profit taking and will the remaining shares alone.

The total average annualized return for that bond is currently 21.79% with reinvestment and 19.11% without. Returns Calculator

There are two profit snapshots for these latest transactions.

The first snapshot records the profit representing the difference between my original cost basis and KTN's market value at the time of the Roth conversion:


Per Share Total Cost=$14.16

The second snapshot captures the profit realized after the Roth IRA conversion.


Total Profit on 50 Shares=$891.53

4 1/2 Years of Interest Payments: $9.231 per share x 50 Shares=$461.53

Total Return: $1,353.06

Original Cost Basis=$708

4. Sold 50 PJS at $27.11 (6/8/15):

Profit= $81.49

I explain this security in this post.

Bought PJS In Roth IRA: An Exchange Traded Bond With A 7.55% Coupon On A $25 Par Value - South Gent | Seeking Alpha (prior PJS trading gains=$2,210.03)

I also own two $1,000 par value CoreLogic 7.55% senior bonds that pay 8.32% based on my total cost of $1,815.25. That is the underlying bond in the PJS trust. When bought in the bond market, the bond was a better value than the trust certificate.

Item # 3 Bought 1 7.55% CoreLogic Senior Bond Maturing 4/1/2028 at 94.975 (4/29/11 Post); Bought 1 CoreLogic 7.55% Senior Bond Maturing 4/1/2028 at 84.95 (2/22/12 Post)

5. Synthetic Floater Buys: GJT, GYB and GYC

I will not be discussing these purchases here and have instead linked my earlier blog discussions along with links to the prospectuses and a bare bones outline of the coupon terms. These purchases were made since my last update.

Item # 3 Tiptoed Back into the Exchange Traded Synthetic Floater GYB (2/21/15 Post)(prior trade snapshots=$1,382.72)

GYB: Quarterly Interest Payments at the greater of 3.25% or .85% above the 3 month Libor rate based on a $25 par value, with a maximum coupon of 8.25%.


Item # 3 Bought 50 GJT at $17.97-Roth IRA (3/28/15)(prior trade snapshots=+$575.95)

GJT: No minimum. Makes monthly interest payments at a .8% spread to the 3 month Libor with a 8% maximum.

Item # 1 Bought Back 50 of the Synthetic Floater GYC at $21.67-Roth IRA (3/22/15 Post)(prior profits=+$587.54)

Prospectus for GJT

GYC: Quarterly Interest Payments at the greater of 3.25% or .65% above the 3 month Libor based on a $25 par value, with a maximum coupon set at 8%

Item # 1 Bought Back 50 of the Synthetic Floater GYC at $21.67 (3/22/15 Post)

Prospectus for GYC

GJT's coupon will likely increase in tandem with increases in the federal funds rate, whereas the other two will not have a coupon increase until the 3 month Libor rate plus the float exceeds the minimum coupon during the applicable computation period. For GYC, that would require a 3 month Libor rate in excess of 2.6%.

I am close to playing with the house's money on these three securities, so I keep coming back now with small lot purchases hoping to catch a wave. I probably need to wash that thought about playing with the house's money out of my brain. I can not help thinking in those terms however.

6. Hercules Technology Growth Capital Inc. 7% Senior Notes due 2019 (HTGZ:NYSE):

I lost 50 shares to an issuer redemption and may lose the remaining shares since Hercules has already indicated an intention to redeem more. HTGZ: Partial Cal (3/28/15 Post)

Consequently, the price will hug par value as investors do not want to pay much more than par value plus accrued interest. The bond just went ex interest (7/13) for its quarterly distribution.

There is nothing for me to do other than to watch it happen. I bought two 100 share lots below par value to replace a common stock HTGC position originally bought at $9.7.

Item # 3 Bought 100 HTGZ at $24.6-ROTH IRA (5/25/12 Post)

Item # 4 Bought 100 HTGZ at $24.63 (5/4/12 Post)

C. Equity Preferred Stocks:

1. Bought 50 JPMPRG at $24.76:

Quote: JPMorgan Chase & Co. Non-Cumulative Preferred Series AA (JPM.PG:NYSE)

Prospectus: SEC Link

JPMPRG is an equity preferred stock that pays qualified and non-cumulative dividends at the fixed coupon rate of 6.1% on a $25 par value.

I bought this security on the ex dividend date.

As with other equity preferred stocks, there is a dividend stopper clause that enforces the preferred stock's superior claim to common stock. (i.e. the company is stopped from paying a cash common share dividend and then eliminating or deferring a preferred share dividend).

The limited exceptions that involve the purchase of JPM's stock, rather than the payment of a cash common stock dividend, are discussed at page S-13.

JPM can eliminate the preferred stock dividend only by first eliminating a cash dividend payable to the common shareholders.

JPM has the option to redeem this preferred stock on or after 9/1/2020. The redemption amount is the $25 par value plus any accrued and unpaid dividends.

Once a non-cumulative dividend is lawfully eliminated, it is just gone until the company decides to pay it or otherwise activate the stopper clause that requires a future payment.

In that way, a non-cumulative preferred dividend is like a common share dividend since both could be eliminated by the Board of Directors at the same time. The cumulative dividend can not be eliminated short of a bankruptcy but may be deferred once the cash common share dividend is eliminated and there are no other impediments contained in the stopper clause preventing deferral (e.g. use of cash to purchase common stock).

Risk factors are discussed starting at page S-6 of the prospectus.

In the 2008 meltdown, $25 equity and trust preferred stocks issued by financial firms fell into the single digits due entirely to credit risk concerns.

During the last stock market correction, equity preferred stocks and exchange traded junior bonds collapsed in prices and experienced periods of extreme volatility with a strong downside bias as I noted here: Item # 1 Fear and Enhanced Volatility in Certain Classes of Income Securities (8/9/2011 Post)

2. Sold 41 SCEDN at $100.91: Southern California Edison Co. Preferred Series A (SCEDN:OTC)

Profit: $678.7

SCEDN is an equity preferred stock that is currently paying qualified dividends and non-cumulative dividends at a 1.45% spread to the 30 year treasury rate based on a $100 par value.

According to Quantumonline, this preferred stock is rated Baa1 by Moody's and Baa1 by S & P. It is probably the highest rated equity preferred stock that I have owned to date.

Prospectus Supplement

Item # 4 BOUGHT 50 SCEDN AT $84

I received last Friday my last quarterly variable rate dividend.

For a long time now, this security has been priced at a slight premium to its par value and will quickly regain its value on its ex-dividend date. It will not rise much above par since the issuer may redeem at par now.

Southern California Edison has already partially redeemed my position at the $100 par value back in 2012. I then lost 9 of my 50 shares: Item # 1 Partial Redemption SCEDN (profit snapshot for 9 shares=$142.56). Assuming a 30 year yield at 2.92% on the quarterly computation date, which was the closing yield for 7/31/15, then 1.45% spread would result in a 4.37% coupon. If the 30 year treasury yield goes up too much for Edison, then the security will be redeemed at the $100 par value. This preferred stock has no more upside juice left.

Many investors may find that kind of yield appealing now from a quality preferred stock. Personally, I find it boring but I was spoiled with a 15% yield on insured bank deposits back in the 1981 time frame. I would prefer owning the 6.1% JPRMPRG, purchased below par value. The five year call protection is worth something compared to the current callability of SCEDN.

3. Sold 50 MSPRA at $21.2: Morgan Stanley Non-Cum. Preferred Series A (MS.PA:NYSE)

MSPRA is an equity preferred stock that pays qualified and non-cumulative dividends at the greater of 4% or .7% above the 3 month Libor rate on a $25 par value.

I call this type of security an equity preferred floating rate stock and will trade them.

I discussed this security earlier this year when I bought a 50 share lot which I still own: Equity Preferred Floating Rate Stocks: Added To MSPRA At $19.87 - South Gent | Seeking Alpha


4. Sold 50 GSPRC at $20.82: Goldman Sachs Group Inc. Preferred Series C (GS.PC:NYSE)-Eliminated

Profit= $43.58

GSPRC is an equity preferred stock issued by Goldman Sachs that pays non-cumulative and qualified dividends at the greater of 4% or .75% above the 3 month Libor rate on a $25 par value.

I discussed this security earlier this year: Equity Preferred Floating Rate Stocks: Added 50 GSPRC At $19.63 - South Gent | Seeking Alpha

5. Sold 50 GSTPRB at $24.25: Gastar Exploration Ltd. 10.75% Cumulative Preferred Series B (GST.PB:NYSE)

Profit: $85.76

GSTPRB is an equity preferred stock that pays cumulative dividends at the fixed coupon rate of 10.75% applied to a $25 par value. I was concerned about a price crash in this security which did occur shortly after I sold shares: GST.PB Stock Chart

Preferred shares issued by small E & P companies are extremely dangerous now IMO. This security was my only equity preferred stock issued by an energy producer.

6. Sold 80 SANPRB: Santander Finance Preferred S.A. Unipersonal Floating Rate Preferred Series 6 (NYSE:SAN.PB)

SANPRB is an equity preferred stock that pays qualified and non-cumulative dividends at the greater of 4% or .52% above the three month LIBOR rate on a $25 par value Prospectus

Stocks, Bonds & Politics: Sold 80 SANPRB at $21.81 (72.57% total return)(profit snapshot=+$561.77)

Item # 2 Bought: STDPRB at $13 (8/10/11 Post); Item # 1 Added 50 STDPRB at $15.44 (11/1/11 Post)(symbol later changed to SANPRB from STDPRB)

Total Realized Trading Gains=$1,462.03

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. 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.