I am going out of order by updating now my exchange traded bond and preferred stock basket.
My next update will be the regional bank basket and I will then skip the bond/preferred stock update.
Generally, I am aware that more readers are interested in this basket more than the others, though the REIT and CEF baskets do generate some interest.
For this basket only, as more fully discussed below, I am going to include recently inherited positions from my father's testamentary trust and will include later exchange traded bonds and preferred stocks inherited from my mother. Since I managed both my father's trust and my mother's assets, there will be a lot of overlap with my pre-existing positions discussed in my two blogs.
This basket was last update here: Update For Exchange Traded Bond And Preferred Stock Basket As Of 12/31/15 - South Gent | Seeking Alpha
The following table includes only exchange traded securities. I do not have a table showing my existing $1,000 par value bonds bought in the bond market.
I discuss the asymmetric interest rate risk of exchange traded fixed coupon securities here: Update For Bond And Preferred Stock Basket Strategy As Of 9/10/15 - South Gent | Seeking Alpha (Scroll to Appendix: 1. Exchange Traded Bonds and Preferred Stocks: Asymmetric Interest Rate Risks)
I recently inherited several exchange traded bonds and preferred stocks, as well as a few bonds. Since there is some interest in this basket, I have added those positions to this basket and will discuss their disposition when and if they are sold. I will not be adding positions in other sectors to my other baskets, other than REITs, since the effort is too time consuming. I would note that my REIT holdings have gone way up.
I have included snapshots of those inherited positions in the Appendix, with the prices as of 12/5/15.
Basket as of 1/5/16:
This basket is now being managed for income with a hope that I will not lose money on the shares. The opportunities for capital appreciation occurred in the Near Depression period, and its aftermath, when these types of securities were slaughtered in price.
Examples of Exchange Traded Bond and Equity Preferred Stock Categories:
Senior Unsecured Baby Bonds:
Junior Baby Bonds:
First Mortgage Bonds:
Trust Certificate-Junior Bond
Trust Certificate-Synthetic Floaters with Minimum Guarantees
Fixed Coupon Equity Preferred Stock: Non-Cumulative
Fixed Coupon Equity Preferred Stock: Cumulative
Floating Rate Equity Preferred Stock with Minimum Guarantees: Non-Cumulative
Fixed to Floating Rate Equity Preferred Stock: Non-Cumulative
I have discussed the foregoing categories in several vintage posts.
A breakeven-even inflation rate for the ten year TIP is viewed by many investors as the market's prediction of the average annual CPI over the next ten years.
That number can easily be calculated as follows simply by subtracting the real yield from the nominal yield:
Daily Treasury Yield Curve Rates (non-inflation protected nominal yields)
TIPs are available for 5, 10, 20 and 30 years.
Chart of Ten Year TIP Break-Even:
The break-even inflation rate for the thirty year TIP was 1.74% as of 1/5/16. ( 3.01 % nominal minus 1.27% TIP current yield=1.75%).
The buyer of a thirty year TIP last Friday would need an average annual inflation rate of 1.74% to break-even with the buyer of the 30 year non-inflation protected treasury. That rate has gone up a tad since I last did the calculation. 30-year Breakeven Inflation Rate -St. Louis Fed
The average annual U.S. inflation rate between 1914 and 2014 was 3.31%: United States Inflation Rate | 1914-2015
I am not going to buy a 30 year treasury bond anytime soon. If had to buy a 30 year treasury, I would go with the TIP, which is a bet that the average annual inflation rate will exceed 1.74% over the next thirty years.
There is a meaningful risk in bond land now that the market has substantially underestimated inflation pressures building in the economy, the pace of a Fed's tightening cycle, and the likely real rate of returns over the next 5 to 10 years based on current bond yields.
Investors may bid up high quality and longer term bonds in response to a FED tightening cycle however, based on a forecast that increases in short term rates will slow down the economy and/or nip inflationary pressures in the bud.
One response to a possible material miscalculation by the Bond Bookies is the purchase of securities that will likely rise in value when short term rates increase in a sustained upward cycle. Another risk mitigation technique is to construct an individual bond ladder.
I discuss the various categories of exchange traded bonds in this old post: Stocks, Bonds & Politics: Exchange Traded Bonds (5/30/12 Post)
I lump equity preferred stocks with exchange traded bonds since their bond characteristics are more dominant than their equity features which are generally unfavorable.
An equity preferred stock does not represent an ownership interest in the business and most pay a fixed rate coupon. Both of those features are bond characteristics. Unlike bonds, however, equity preferred stocks generally do not have maturity dates and can become perpetual. I am about to discuss an exception. The issuer generally reserves the right to redeem this type of security at par value, usually exercisable on or after a specific date. The call protection for the owner generally runs five years after the IPO settlement date. The equity preferred stock is senior only to common stocks and junior to all bonds.
While many equity preferred stocks pay qualified dividends, those issued by pass through entities including REITs pay entirely, or close to it, non-qualified dividends.
In a recent post, I noted that longer term treasuries went down in yield after the FED started a tightening cycle back in June 2004.
1. Bought 2 RRD 6.625% Senior Unsecured Bonds Maturing in 2029 at 81.535:
The $8 brokerage commission is built into the price which raises the total purchase price to 81.635.
Excerpt from Confirmation:
The accrued interest is paid to the seller. When RRD makes its next interest payment, I will receive the entire six months in interest, and the broker will report that entire amount on my 1099. My accountant will then deduct in 2016 the accrued interest paid to the seller in my schedule B.
Current Yield: 8.115%
Yield-to-Maturity: 9.023% (assumes that all interest payments are made and RRD pays the principal amount at maturity)
Recent Earnings Release: "The third-quarter net earnings attributable to common shareholders included pre-tax charges of $69.4 million and $22.6 million in 2015 and 2014, respectively, all of which are excluded from the presentation of non-GAAP net earnings attributable to common shareholders."
RRD Consensus Earnings Estimates:
Rationale/Risks: Interest rate risk is significant, but I view credit risk as more important. The interest rate risk is mitigated some IMO by the current yield, the discount to par value and the remaining 14+ year term.
The company discusses the risks incident to its operations starting at page 9 of its 2014 Annual Report: 10-k ITEM 1A RISK FACTORS (e.g. "The substitution of electronic delivery for printed materials may continue to adversely affect the Company's businesses"; "The highly competitive market for the Company's products and industry consolidation may continue to create adverse price pressures" emphasis supplied)
Another risk is that RRD plans to separate into three publicly traded companies in October 2016. The debt division will be important. The company made this announcement on 8/4/15. SEC Filed Press Release It is anticipated that all of RRD's debt will remain with a company called CMCo with that company receiving cash proceeds from the other two companies upon the recapitalization: Page 12 Investor Presentation
Split: CMCo is the largest one of the three.
Debt as of 9/30/15:
Page 24 10-Q
The 2029 is the next to last one to mature.
The RRD 2029 bond started to roll over in April when it briefly traded over 102. I can not directly tie the current price to the bond ghouls reaction to this split plan. The decline seems to me to be more associated with the stock market rout in August/September and the overall problems in the junk bond market.
I currently own 1 RRD 6.125% senior unsecured bond maturing on 1/15/17: Item # 1 Bought 1 R.R. Donnelley 6.125% Senior Bond Maturing 1/15/2017 at 89 (8/17/11 Post) At the time of purchase, the 2017 had a YTM of 8.515% and a current yield of 6.82%. RRD's senior unsecured debt was then rated Ba1 by Moody's and BB+ by S & P.
I will hold the 1/15/17 bond to maturity.
I have bought and sold several times a Trust Certificate that has the RRD 2029 bond as its underlying security. Merrill Lynch Depositor Inc. PPLUS 6.3% TRUCs Series RRD-1 for R.R. Donnelley & Sons Co (PYS:NYSE)
I last sold PYS in May 2014: Item # 1 Roth IRA: 50 PYS at $23.3 (6/7/14 Post)(profit snapshot=$163.52)- Bought 50 PYS at $19.75-Roth IRA (February 25, 2014 Post)
Most of my other PYS trading profits originated from two fifty lots sold in 2010 for a $222.68 profit. Bought 50 PYS at 20.01 March 2010; Added 50 PYS at $19.59 June 2010; Sold 50 PYS at $20.76 July 2010; Sold 50 PYS at $24 November 2010
PYS has a lower coupon than the underlying bond in this case.
On 2/29/15, the day that I purchased the 2029 bond, PYS closed at $24.55, producing at that market price a current yield of about 6.41% compared to the underlying bond's 8.12% current yield and much higher YTM.
The underlying bond was clearly a better option than PYS which is being mispriced in the market compared to the 2029 bond. For several years starting in 2008, TCs were being mispriced significantly compared to their underlying bonds but those days a long gone.
I have traded other RRD bonds in the past as well: Item # 2 Sold 1 RRD 8.875% Bond Maturing in 2021 at 101.355 (11/9/2012 Post)-Item # 2 Bought Back R.R. Donnelley 8.875% Senior Bond Maturing in 2021 at $96.95 (5/23/12 Post); Item # 2 Sold 1 RRD Senior 8.875% Bond Maturing 2021 at 100 (4/11/12 Post)-Item # 1 Bought 1 R.R. Donnelley 8.875% Senior Bond Maturing 5/14/2021 at 92.69 (2/12/12 Post)
FINRA Bonds Detail for 2021 RRD Bond (YTM closed at 7.565% as of 12/29/15)
2. Bought 50 TCRZ at $24.75:
Snapshot of Trade ($1 Commission):
Closing Price Day of Trade:TCRZ: $24.86 -0.09 (-0.36%) (ranged $24.5 to $24.93)
The yield at a total cost of $24.75 is about 6.82%.
Security Description: This security is a senior unsecured note issued by the BDC THL Credit that makes quarterly interest payments at the fixed coupon rate of 6.75% per annum on a $25 par value.
"The Notes will be our direct unsecured obligations and rank pari passu, or equally in right of payment, with all outstanding and future unsecured unsubordinated indebtedness issued by THL Credit, Inc."
However, the notes are "effectively subordinated to all our existing and future secured indebtedness (including indebtedness that is initially unsecured to which we subsequently grant security), to the extent of the value of the assets securing such indebtedness, including without limitation, borrowings under our revolving credit agreement, or Revolving Facility, and the term loan agreement, or Term Loan Facility"
There are some default protection provisions:
The notes mature on 12/30/22 which mitigates interest rate risk. THL has the option to redeem at par plus accrured interest on or after 12/30/18.
Functionally Equivalent Note: THL Credit Inc. 6.75% Notes Due 11/15/21 (TCRX:NYSE)-Prospectus for 2021 Senior Unsecured Note
Related Trades: I currently own 100 of the common shares: Nibbling At BDCs During The Current Downdraft: Bought 100 TCRD At $12.83 - South Gent | Seeking Alpha I bought those shares on 12/3/2014. The total return without dividend reinvestment through 12/31/15 was -3.73% (-4.06% with dividend reinvestment).
I sold the 50 TCRD shares held in an IRA.
Risks: BDCs invest in risky companies: "Substantially all of the debt securities in which we invest are below investment grade debt securities and are often referred to as "high yield" or "junk" securities." Income is flying out the door to the common shareholders. Those are two profound risks when considering a purchase of a BDC issued senior unsecured bond. The same consideration applies to the one discussed below.
The company discusses risks incident to its operations starting at page 34 of its last filed annual report: Form 10-K That discussion ends at page 60. The company discusses risks relating to the notes starting at page 17 of the prospectus.
The notes are junior in priority to THL's Revolving Facility and Term Loan Facility: Page 69 Form 10-Q
Last Earnings Report: Uninspiring
3. Bought 50 PBB at $23.3
Snapshot of Trade:
Closing Price Day of Trade: PBB: $23.30 -0.20 (-0.85%)(range $22.13 to $22.85)
The yield at a total cost of $23.3 is about 6.71%.
Security Description: PBB is a senior unsecured note issued by the much and deservedly malingend BDC Prospect Capital (NASDAQ:PSEC). I have difficulty containing my disdain and need to limit my discussion of this company before my blood starts to boil.
This note was only recently sold to the public at $25. According to quantumonline, the note has a BBB- rating from S & P.
"The Notes will be our direct unsecured obligations and rank pari passu with all outstanding and future unsecured unsubordinated indebtedness issued by Prospect Capital Corporation."
The same risks discussed above in reference to the THL note are applicable here, except PSEC may have those risks on sterioids in spite of the current BBB- rating.
PSEC discusses risks incident to its operations starting at page 26 of its last filed Annual Report: 10-K
Last SEC Filed 10-Q.
4. Bought 100 TCBIL at $25
This is a very low expectation buy. The general idea is to harvest several quarterly interest payments and to hopefully sell this junior bond at whatever profit is available-no matter how small.
Prior Trade: My prior trade was another example of small ball, where admittedly I would have been better off keeping the shares.
Item # 3 Sold Roth IRA: 50 TCBIL at $22.45 (1/20/14 Post)(snapshot of profit=$43.48 + one interest payment of $20.31)-Item # 3 Bought 50 TCBIL at $21.3 (10/19/13 Post)
Security Description: The Texas Capital Bancshares Inc. 6.5% Subordinated Notes due 2042 (TCBIL:NASDAQ) is an Exchange Traded junior bond issued by the bank holding company Texas Capital Bancshares Inc. (NASDAQ:TCBI) that makes quarterly interest payments at the fixed coupon rate of 6.5% per annum on a $25 par value.
Ranking in Capital Structure:
TCBI has the option to redeem at par value plus accrued interest on or after 9/21/2017. If not redeemed early, the bond is scheduled to mature in 2042.
Risk factors relating to the notes are discussed starting at page S-6 of the Prospectus.
The prospectus has the following unfavorable provision: "A default in the payment of principal of or interest on the Notes or in our non-performance of any other obligation under the Notes or the Indenture will not constitute an event of default under the Indenture and will not give rise to any right of acceleration" and
Events of default are narrowly defined to mean bankruptcy, insolvency or receivership relating to TCBI or a "principal subsidiary" (e.g. the operating bank).
I do not like those terms, but I believe they are required in order for the security to qualify as Tier 2 capital.
In addition, TCBI is "not restricted under the terms of the Notes from incurring additional debt, including debt that ranks senior to the Notes, or repurchasing our securities. In addition, the limited covenants applicable to the Notes do not require us to achieve or maintain any minimum financial results relating to our financial position or results of operations."
This bond is currently rated Baa3 by Moody's and BB+ by S & P.
Related Security: TCBI has issued a 6.5% non-cumulative equity preferred stock that is rated Ba2 and BB-. Prospectus (stopper clause at page S-16).
Risks: Junior securities issued by a bank holding company are most likely IMO to become worthless when and if the FDIC seizes the operating subsidiary bank.
TCBI has significant oil patch exposure.
The company summarizes risks incident to its operation starting at page 12 of the 2014 Annual Report. 12.31.2014-10K
Interest rate risk is illustrated by this securities price decline doing the interest rate spike in 2013: Texas Capital Bancshares Inc. 6.5% Sub. Notes due 2042 Interactive Stock Chart The shares plummeted quickly from around $26 to $21.
Last Earnings Report:
Sourced: SEC Filed Press Release
Consensus E.P.S. Estimate for 2016= $3.44, up from $2.94 in 2015.
Appendix: The following snapshots of $1,000 par value bonds, exchange traded bonds and equity preferred stock positions were recently acquired through an inheritance. Familiar names will dot this landscape.
I sold all of my shares:; Item # 2 Sold 50 BPFHP at $24.84 (7/19/14 Post)(profit snapshot $104.47); SItem # 6 Sold ROTH IRA: 50 BPFHP at $24.7 (6/28/14 Post)-Bought Roth IRA: 50 BPFHP at $23.35 (5/10/14 Post)
My last lot was sold in May 2015:
2. 100 Shares of DLRPRI Digital Realty Trust Inc. 6.35% Preferred Series I (DLR.PI:NYSE)
I bought 50 shares and discussed that purchase here: Update For Bond And Preferred Stock Basket Strategy As Of 9/10/15 - South Gent | Seeking Alpha (Scroll to 1. Bought 50 DLRPRI at $24.59-ROTH IRA)
3. 200 Shares of GSPRD:
I added to my position recently: Update For Exchange Traded Bond And Preferred Stock Basket As Of 12/31/15 - South Gent | Seeking Alpha (Scroll to 3. Paired Trade: Sold 50 GSPRJ at $25.67 and Added 50 GSPRD at $19.95) These new shares brings my total to 400 shares.
4. 76 Shares of HTGZ and 100 Shares of IBKCP:
I discussed buying 50 IBKCP shares in my IB account here:Update For Bond And Preferred Stock Basket Strategy As Of 9/10/15 - South Gent | Seeking Alpha (scroll to 3. Bought 50 IBKCP at $24.86)
I discussed my HTGZ purchases here: 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)
Hercules partially called this bond last year.
5. 100 Shares of EFM:
I last discussed this First Mortgage bond here: Item # 4 Bought 100 EFM at $24.88 (2/27/14 Post)
6. 100 Shares of MSPRA; 100 Shares of NGHCZ and 2 $1,000 Par Value Albertson Bonds:
I discussed buying two fifty share NGHCZ lots here:Update For Bond And Preferred Stock Basket Strategy As Of 9/10/15 - South Gent | Seeking Alpha (Scroll to 2. Paired Trade: Bought 50 NGHCZ at $23.75 (a Roth IRA account) and Another 50 at $23.2 (a new Taxable Account)-and Sold 50 NGHCP at $25 (a Roth IRA account)
I last discussed equity preferred floater MSPRA here: Update For Exchange Traded Bond And Equity Preferred Stock Basket Strategy As Of 10/7/15 - South Gent | Seeking Alpha (2. ADDED 50 MSPRA AT $19.48)
7. 50 Shares of the Synthetic Floaters GYB, GYC, GJS, GJR and GJT:
Most investors IMO need to avoid synthetic floaters.
8. 100 Shares of GBLIZ
I recently discussed adding to my GBLIZ position here: Update For Exchange Traded Bond And Preferred Stock Basket As Of 12/18/15 - South Gent | Seeking Alpha (Scroll to 4. Averaged Down: Bought 50 GBLIZ at $23)
9. 50 Shares of EVERPRA:
I sold out of my position earlier: Item # 3 Sold: 50 EVERPRA at $24.9 (6/28/14 Post)-Item # 5 Bought: 50 EVERPRA at $22.05 (10/31/13 Post)
10. 50 Shares of NLYPRD:
I last discussed this one here: Update For Exchange Traded Bond And Preferred Stock Basket Strategy As Of 10/30/15 - South Gent | Seeking Alpha (scroll to 2. Bought Back 50 NLYPRD at $24.39)
11. 50 shares of TANP and 2 $1,000 Par Value Telefonica Bonds:
I have owned several Telefonica bonds. (e.g. Bought 1 Telefonica Emisions 5.877% Senior Note Maturing 7/16/19 at $91.0677 (6/26/12 Post), Bought 1 Telefonica Emisiones 6.421% Senior Bond Maturing in 2016 at 95.178; Bought 1 Telefonica Emisiones 4.949% Senior Bond Maturing on 1/15/2015 at 96.075) I now own 2 more due to the inheritance.
I discussed buying TANP and the functionally equivalent TANO is two recent posts here.
12. ETFs: 50 shares of BSCJ and 264+ of VRP (includes 100 just bought):
Quotes: Guggenheim BulletShares 2019 Corporate Bond ETF (NYSEARCA:BSCJ)(investment grade bonds maturing in 2019/commission free at Schwab)
I recently discussed adding VRP here: Update For Exchange Traded Bond And Preferred Stock Basket As Of 12/31/15 - South Gent | Seeking Alpha (Scroll to 2. Added 100 VRP at $24.21 (Commission free in Schwab account)
13. 50 JPMPRG and 100 KWN:
I discussed buying 50 JPMPRG here: Update For Bond And Equity Preferred Stock Basket Strategy As Of 7/31/15 - South Gent | Seeking Alpha (scroll to 1. Bought 50 JPMPRG at $24.76)
I discussed my KWN purchases here: Item # 4 Bought Roth IRA: 50 KWN at $24.85 (12/19/12 Post); Item # 5 Added 50 KWN at $23.79 -Roth IRA (1/6/14 Post)(near the end of the 2013 interest rate spike period); Item # 8 Bought: 50 KWN at $24.78 (3/3/14 Post)
14. 2 Senior Secured Sears Bonds:
I will inherit more of these securities when my mother's estate is settled and will add them to the basket at that time.
I still own one Sears 2018 after selling 3: SItem # 1 SOLD 3 Sears 6.625% Senior Secured Bonds Maturing in 2018 at 95.002 (9/21/12 Post)- ADDED 2 Sears Holding Senior Secured 6.625% Bonds Maturing 10/15/2018 at $89.75; Bought 1 Sears Holding 6.625% Senior Secured Bond Maturing 10/15/2018 at 83.25
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.