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Update For Exchange Traded Bonds And Preferred Stock Basket Strategy As Of 1/22/16

|Includes: Argo Group International Holdings, Ltd. (ARGO), EVER-OLD, NGHC, PFXF, THG

This basket was last update here: Update For Exchange Traded Bonds And Preferred Stocks As Of 1/12/16 - South Gent | Seeking Alpha

I have been expanding this basket in part due to an oversized cash position earning zilch. I am taking small and measured risks simply to generate income from funds that would otherwise be invested in a brokerage money market account.

While net capital gains are important with these securities, I still view their income generation as the primary reason for owning them. Given their current values, and the issuers optional call right, capital appreciation is expected to be minimal at best. The price risk is to the downside rather than missing an opportunity for capital appreciation. This basket is now being managed for income with a hope that I will not lose money on the shares.

Exchange traded bonds and preferred stocks generally have what I call asymmetric interest risk between the owner and the issuer that clearly favors the issuer. 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)

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.

In the Appendix section, I list several categories of exchange traded bonds and provide examples for each category.

Basket as of 1/21/16:

1. Added 50 EVERPRA at $24.65 and Another 50 at $24.29:

Trade Snapshot ($1 Commission)

Prior Trade: Item # 3 Sold 50 EVERPRA at $24.9 (6/28/14 Post)(profit snapshot=$128.47/total return=$170.65 or 15.38%)-Item # 5 Bought: 50 EVERPRA at $22.05 (10/31/13 Post)

Security Description: The EverBank Financial 6.75% Non-Cumulative Preferred Stock (EVER.PA:NYSE) is an equity preferred stock issued by EverBank Financial Corp (NASDAQ:EVER) that pays non-cumulative and qualified dividends at the fixed coupon rate of 6.75% on a $25 par value.

Final Prospectus

SEC Filings for EverBank

At an all-in price of $24.65, the current yield is about 6.85%.

This is my first bank holding company preferred stock to decline below par value. After my purchase at $24.65, selling pressure did not abate and this security closed at $23.72 on 1/15/15.

The volume number on 1/15 was reported at 677,091 shares which is extraordinary for this lightly traded preferred stock:

The common shares hit a new 52 week low that day: EVER: $13.34 -0.40 (-2.91%): EverBank Financial Corp. Common (intraday low at $13.15/52 week range $13.15 to $21.18). Investors have been dumping those common shares in an accelerated fashion after a disappointing third quarter earnings report.

The EVER chart is worrisome: EVER Interactive Stock Chart The extremely negative market reaction to the last report is clearly shown in that one year chart.

Risk factors are discussed starting at page 29 of the prospectus.

Stopper Clause: The prospectus contains a typical stopper clause:

This clause "stops" EVER from paying a cash dividend to the common shareholders while eliminating the preferred share dividend. In order to eliminate the non-cumulative preferred share dividend, EVER would have to first eliminate the common share cash dividend. The clause also enforces the preferred share's superior claim to cash compared to the commons shares by prohibiting the use of cash to buyback common shares.

Everbank is currently paying a common share dividend. Dividend Date & History I would note that eliminating that dividend would probably not cause heartburn to the Board.

Last Earnings Report: There is nothing much to like about the last earnings report IMO. On the positive side, the bank reported a profit.

GAAP E.P.S. was $.21 vs. $.33 in the 2014 third quarter.

For an internet bank, the efficiency ratio is way too high. The NIM is also low at 2.9%.

"Adjusted non-performing assets to total assets1 were 0.55% at September 30, 2015. Annualized net charge-offs to average total loans and leases held for investment were 0.11% for the quarter." Those numbers are good.

"Total deposits were $17.6 billion at September 30, 2015, an increase of $1.1 billion, or 7% compared to the prior quarter and an increase of $3.1 billion, or 21%, year over year. Commercial deposits were $4.0 billion, an increase of $648 million, or 19%, compared to the prior quarter and $1.7 billion, or 70%, year over year."

Capital ratios are okay:


I also bought 50 EVERPRA in my Schwab taxable account which brings my total to 100 shares in that account:

I intend to sell the higher cost shares when I can do so profitably in that account. The cost for the first 50 share lot in that account was $25.06.

2. Added 50 PFXF at $18.95 and 5 Shares of PFF-Commission Free in a Fidelity Account:

Quote: Market Vectors Preferred Securities ex Financials ETF (NYSEARCA:PFXF)

Trade Snapshot ($1 Commission)

This purchase was an average down: Update For Exchange Traded Bond And Preferred Stock Basket Strategy As Of 10/15/15 - South Gent | Seeking Alpha (scroll to 1. Bought 50 of the ETF PFXF at $19.67)

I have nothing to add to that prior discussion other than to note that my dividend yield went up for the second odd lot purchase compared to the first.

I also added 5 shares of PFF at $37.93, one of the ETFs that can be bought commission free in my Fidelity accounts.

I last discussed that ETF here: Update On Bond And Equity Preferred Stock Basket Strategy As Of 8/14/15 - South Gent | Seeking Alpha {scroll to 1. Added to iShares U.S. Preferred Stock ETF Fund (PFF)} A more detailed discussion can be found here: Increasing Cash Flow In A World Without Risk Free Yield-Bought The ETF PFF - South Gent | Seeking Alpha

3. Swapped Again NGHCP for More NGHCZ-Sold 50 NGHCP at $25.07 and Bought 50 NGHCZ at $23.19

Trade Snapshot:

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)}

Profit Snapshot: Any profit on an exchange traded bond or preferred stock purchased near par value is viewed as a victory now.

Interest Payments = $117.2 (5 payments at $23.44)

Total Return: $139.77 or 11.43%-holding period about 15 months

I am moving more funds to my IB account where I can make these small lot purchases more cost effectively. My profit was reduced by $18 by Fidelity's high commission rate. The return would have been about 12.74% using my IB account. I am moving money gradually away from Fidelity and into the IB account.

Rationale: The account placement of this security depends on an individual's tax bracket. For me, I am retired with no earned income or private pension. I may struggle this year to hit a 15% marginal tax rate given the over-sized cash allocation still earnings zilch and what I will euphemistically call a subdued capital gain operating environment.

So the income tax rate differential between a bond and a qualified dividend is not likely to come into play this year.

NGHCZ is a 7.625% junior bond issued by National General Holdings that matures in 2055. On or after 9/15/2020, the issuer has the option to redeem at the $25 par value plus accrued and unpaid interest. NGHCZ Prospectus

At an all-in price of $23.19, the current yield is about 8.22%.

NGHCP is a non-cumulative equity preferred stock that pays qualified dividends at the fixed coupon rate of 7.5% on a $25 par value. The issuer, National General Holdings (NASDAQ:NGHC), has the option to redeem the issue on or after 7/15/2019. This preferred stock will be perpetual until the issuer elects to redeem it. The issuer may redeem on or after 7/15/2019 when it is in its interest to do so. Prospectus

At an all-in price of $25.07, NGHCP has a current yield of about 7.48%.

The issuer is the same for both securities.

(1) The bond is superior in the capital structure to the equity preferred stock.

(2) The bond's interest payments can not be deferred or cancelled short of a bankruptcy while the issuer can legally eliminate the non-cumulative preferred stock dividend when it eliminates all cash dividends paid to the common shareholders.

(3) The bond was bought at a discount and consequently has some upside capital appreciation potential in the event of an early optional redemption which is not the case for the equity preferred stock. The yield-to-call differential would be even higher the current yield differential.

4. Bought Back 50 THGA at $24.98: This Exchange Traded Baby Bond was one of many bought during the later stages of the 2013 interest rate spike and then sold in 2014.

Trade Snapshot ($1 Commission):

Prior Trades: Sold THGA: 50 Shares at $23.46-Roth IRA and 50 Shares Taxable Account at $23.67 (5/17/14 Post)(profit snapshots=$143.84 plus interest payments)-Item # 3 Roth IRA: Bought 50 THGA at $21.58 (11/6/13 Post)

Security Description: The Hanover Insurance Group Inc. 6.35% Subordinated Debenture due 2053 (NYSE:THGA) is an Exchange Traded junior bond issued by the Hanover Insurance Group (NYSE:THG). Hanover is one of the top 25 property and casualty insurers in the U.S.

THGA will make quarterly interest payments at the fixed coupon rate of 6.35% on a $25 par value. This security may be redeemed by the issuer on or after 3/30/18.

Hanover may defer interest payments for up to 5 years. However, during any such deferral, Hanover can not make cash dividend payments on its junior securities. The stopper clause can be found starting at page S-15. PROSPECTUS Hanover recently increased its quarterly common share dividend by 12% to $.45 per share. The Hanover Insurance Group, Inc. (THG) Dividend History During the recent Near Depression, Hanover did cut, but did not eliminate its common share dividend. The only way to defer interest payments on the junior bond is to first eliminate the common share cash dividend.

Given the $1 brokerage commission and the $24.98 price, my all-in yield will be the coupon rate of 6.35%.

This bond is currently rated Ba1 by Moody's and BB+ by S & P.

Hanover Insurance Group Profile Page at Reuters

Hanover Insurance Group Key Developments Page at Reuters

2012 Annual Report Form 10-K (annual net income is erratic-see page 39)

SEC Filings for Hanover Insurance

The company discusses risks incident to its operations starting at page 22 of its 2014 Annual Report: 10-K

Related Trades: There were two trust certificates (PKM and KRH) containing a junior Hanover Insurance bond. PKM had a 8% coupon, while KRH was .25% lower. Both had the same junior bond with a 8.207% coupon maturing in 2027 as their respective underlying security. Both were called by their call warrant owners. That bond is still outstanding, Finra. A purchase near par would be a better deal than THGA, given the higher current yield, identical credit rating for the two bonds since both are junior bonds, and an earlier maturity. I had forgotten about the bond altogether and will look for an opportunity to buy it.

Realized Gains PKM AND KRH:$1,151.6

Item # 3 Bought 150 TC PKM at 17.8 & 17.5 June 2009; Item # 3 Pared PKM-Sold 50 at $20.11 July 2009; Bought 50 PKM at $24.84 September 2010; PKM Called; Item # 4 Sold 100 of 150 PKM at $25.93 January 2011

KRH-Exercise of Call Warrant December 2010-Bought: KRH at $24.85 Bought 50 of the TC KRH at $19 November 2009-

Sold 50 KRH at 24.6 (October 2010)-Bought 50 KRH at $18.62 in IRA-

Snapshots are located in the Trust Certificate Gateway Post.

Recent Earnings Report:

Sourced: SEC Filed Press Release

10-Q Q3

Given the potentially long maturity date, which creates a ton of potential interest rate risk for a long term holder, I am more likely to dart into and out of this type of security.

Hanover does have some senior unsecured debt ($1,000 par value per bond) that is traded in the bond market. Those instruments are rated at Baa3 by Moody's and BBB by S & P.

7.5% Maturing in 2020

6.375% Maturing in 2021

7.625% Maturing in 2025

Those senior unsecured bonds are trading well in excess of their par value.

There is a thinly traded junior bond that used to be the underlying security in several trust certificates that were called and redeemed by the respectives owners of the "call warrant".

8.207% Maturing in 2027

I had forgotten about that junior Hanover bond.

5. Bought 50 AGIIL at $24.6

Trade Snapshot ($1 Commission):

This purchase brings me up to 100 shares.

I last discussed this exchange traded bond here: Update On Bond And Preferred Stock Basket Strategy As Of 9/29/15 - South Gent | Seeking Alpha (scroll to 2. BOUGHT 50 AGIIL at $24.86-Roth IRA). I will be dragging and dropping some of that prior discussion here, updating it where appropriate.

I view the lot owned in the Roth to be a long term holding, whereas the lot bought in the IB account will most likely be another trade.

Prior Trade: During the interest rate spike in 2013, I managed to buy this senior bond at $20.02, which highlights the interest rate risk issue. Item # 6 Bought 50 AGIIL at $20.2 (December 2013 Post).

I sold that lot at $24.21: Item # 2 Sold 50 AGIIL at $24.21-Roth IRA (6/28/14 Post)(profit snapshot=$186.48 plus two quarterly interest payments totaling $40.62; total return 22.33% in about 6 months)

I had bought in October 2013 another 50 share lot at a higher price.

Item # 3 Bought: 50 AGIIL at $21.11 (10/13/13 Post).

Interest rates continued to rise after that October 2013 purchase which precipitated the decline from $21.11 to $20.2. I am highlighting this 2013 history to illustrate the interest rate risk inherent in long term bonds.

I sold the lot bought in October 2013 at $24.48: Item # 2 Sold: 50 AGIIL at $24.48 (6/7/14 Post)(profit snapshot=$152.58; total return of $193.2 or 18.17$ in about 7 months).

Total Trading Gains: $339.06

Security Description: The Argo Group International Holdings Ltd. 6.5% Senior Notes Due 2042 (AGIIL) is a senior Exchange Traded bond issued by the Argo Group US, the U.S. subsidiary of Argo Group International Holdings Ltd. (NASDAQ:AGII). The note is guaranteed as provided in the prospectus by the parent company. Argo is currently paying a quarterly common share of $.2 per share.

AGII is an international underwriter of specialty insurance and reinsurance products in the property and casualty market. Reinsurance companies make me nervous. I will generally avoid the common stocks altogether and will dabble only in their bonds.

AGILL will make quarterly interest payments at 6.5% on a $25 par value. The issuer has the option to redeem at par value on or after 9/15/17. Unless redeemed early, the bond matures on 9/15/42. Final Prospectus Supplement The optional redemption date reserved to this issuer always creates asymmetric interest risk that disfavors the bond's owner.

At an all-in cost of $24.6, the current yield is about 6.61%.

Any bond with a maturity in 2042 has a ton of interest rate risk. The coupon is sufficiently low that the issuer may never redeem it early.

The bond is currently rated BBB- by S & P.

AM Best reaffirmed this senior bond's rating at BBB last October.

This bond was sold to the public at $25 back in September 2012. The bond traded mostly between $25 to $26 until May 2013, whereupon it slid rapidly to $21 as interest rates started to spike up. AGIIL Interactive Chart The price only stabilized at close to $21 after interest rates started to go back down, starting in January 2014.

Argo Group International Holdings Key Developments Page at Reuters

AGII Key Statistics Page at YF

ARGO SEC Filings

The consensus E.P.S. estimate for AGII is $3.68 this year and $3.84 next year. AGII Analyst Estimates

Argo Group International was formerly known as PXRE Group.

Earnings can be erratic as shown at page 46 of the 2012 Annual Report: Form 10-K

SEC Filed November 2015 Investor Presentation

Argo International SEC Filings

The company discusses risks incident to its operations starting at page 16 of its SEC Filed 2014 Annual Report: 10-k Some risk factors relating to the bond are discussed starting at page S-12 of the Prospectus.

Recent Earnings Report:

Sourced: SEC Filed Press Release

10-Q for the Q/E 9/30/15 ($172.7M in junior debt listed at page 3 and $143.8M of senior unsecured debt which is AGIIL)


Appendix: I have snapshots of trading gains for the following exchange traded bonds and preferred stock categories:

Trust Certificates: New Gateway Post= $28,971.16

Advantages and Disadvantages of Equity Preferred Floating Rate Securities= +$13,515.73

Advantages and Disadvantages of REIT Cumulative Equity Preferred Stocks= +$6,061.71

Aegon Hybrids: Gateway Post= +$3,811.2

Synthetic Floater transactions are included in the Trust Certificate category.

I have not yet compiled snapshots for Trust Preferred securities, baby bonds, non-REIT equity preferred stocks with fixed coupons, "principal protected notes", and ING hybrids.

Exchange Traded Bonds: New Gateway Post

ING Hybrids: Links in one Post

Trust Preferred Securities: Links in One Post

Examples of Exchange Traded Bond and Equity Preferred Stock Categories:

Senior Unsecured Baby Bonds:

Kennedy-Wilson Holdings Inc. 7.75% Senior Notes due 2042 (KWN:NYSE

Banc of California Inc. 7.5% Senior Notes due 2020 (BOCA:NYSE)

Argo Group International Holdings Ltd. 6.5% Senior Notes Due 2042 (AGIIL:NASDAQ)

TravelCenters of America LLC 8% Senior Notes (TANP)

TravelCenters of America LLC 8% Senior Notes 12/15/29 (TANO)

THL Credit Inc. 6.75% Notes Maturing 12/30/22 (TCRZ:NYSE)

Prospect Capital Corp. 6.25% Notes Due 2024 (PBB:NYSE)

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

Junior Baby Bonds:

AmTrust Financial Services Inc. 7.25% Subordinated Notes due 2055 (AFSS:NYSE)

National General Holdings Corp. 7.625% Subordinated Notes (NGHCZ:NASDAQ)

Global Indemnity PLC 7.75% Subordinated Notes Due 2045 (NASDAQ:GBLIZ)

Texas Capital Bancshares Inc. 6.5% Subordinated Notes due 2042 (TCBIL:NASDAQ)

Hanover Insurance Group Inc. 6.35% Subordinated Debentures due 2053 (THGA:NYSE)

First Mortgage Bonds:

Entergy Mississippi Inc. 6.20% Series First Mortgage Bonds due 2040 (EFM)

Entergy Louisiana LLC First Mortgage Bonds 6.00% Series 2040 Stock Price Today (ELB:NYSE) - MarketWatch

Trust Certificate-Junior Bond

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

Trust Certificate-Synthetic Floaters with Minimum Guarantees

Corporate Asset Backed Corp. CABCO Series 2004-101 Trust Goldman Sachs Capital I Floating Rate Certficates (GYB:NYSE)

Corporate Asset Backed Corp. CABCO Series 2004-102 Trust SBC Communication Inc Floting Rate Certificates (GYC:NYSE)

Trust Certificate-Synthetic Floaters with No Minimum Coupon

Synthetic Fixed-Income Securities Inc. Fltg Rate STRATS Series 2006-1 for Procter & Gamble Secs. Seies 2006-1 (GJR:NYSE)

Synthetic Fixed-Income Securities Inc. STRATS Trust for Allstate Corp. Securities, Series 2006-(GJT:NYSE)

Synthetic Fixed-Income Securities Inc. Floating Rate STRATS Series 2006-2 for Goldman Sachs Group Secs (GJS:NYSE)

Fixed Coupon Equity Preferred Stock: Non-Cumulative

TCF Financial Corp. 6.45% Preferred Stock (TCB.PC:NYSE)

National General Holdings Corp. 7.5% Preferred Stock Series A (NGHCP:NASDAQ)

JPMorgan Chase & Co. 6.15% Preferred Series BB (JPM.PH:NYSE)

EverBank Financial 6.75% Non-Cumulative Preferred Series A (EVER.PA:NYSE)

Fixed Coupon Equity Preferred Stock: Cumulative

Digital Realty Trust Inc. 6.35% Cumulative Preferred Series I (DLR.PI:NYSE)

Bluerock Residential Growth REIT Inc. 8.25% Series A Preferred Stock (BRG.PA:NYSE)

Floating Rate Equity Preferred Stock with Minimum Guarantees: Non-Cumulative (both of the following have 4% minimums)

Goldman Sachs Group Series D Preferred Stock (GS.PD:NYSE)

Morgan Stanley Non-Cumulative Preferred Series (MS.PA:NYSE)

Fixed to Floating Rate Equity Preferred Stock: Non-Cumulative

Goldman Sachs Group Series J Fixed-to-Floating Rate Preferred Stock Price Today (GS.PJ:NYSE)

IBERIABANK Corp. 6.625% Series B Preferred Stock (IBKCP:NASDAQ)


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.

Disclosure: I am/we are long PFXF.