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Update For Exchange Traded Bonds And Preferred Stocks Basket Strategy As Of 3/19/16

|Includes: BANC, ETR, EVER-OLD, Global Indemnity plc (GBLI), HUSKF

My next two updates will be the Equity REIT Basket Strategy and the CEF Basket Strategy. I wanted to have more trades before writing those updates. I have been more active in the Exchange Traded Bond and Preferred Stock Basket Strategy.

I have started to cut back some on my fixed coupon preferred stocks based on my opinion relating to inflation risks.

I have been increasing my exposure to floaters.

Closing Prices 3/19/16:

TLT: $129.06 +0.27 (+0.21%) : iShares 20+ Year Treasury Bond ETF

LQD: $117.73 +0.29 (+0.25%): iShares Investment Grade Corporate Bond ETF

JNK: $34.54 +0.04 (+0.12%): SPDR Barclays High Yield Bond ETF

PGX: $14.79 +0.03 (+0.20%): PowerShares Preferred ETF

BABS: $62.24 +0.04 (+0.07%): SPDR Nuveen Barclays Build America Bond ETF

EMB: $110.09 +0.18 (+0.16%): iShares J,P. Morgan USD Emerging Market Bond ETF

BWX: $55.24 +0.02 (+0.04%) : SPDR Barclays International Treasury Bond ETF


This topic was last update here: Update For Exchange Traded Bonds And Preferred Stocks Basket Strategy As Of 3/11/16 - South Gent | Seeking Alpha

Given their current values, and the issuers optional call right, capital appreciation for the total basket is expected to be minimal at best going forward, but may improve depending on the severity of future declines and whether I play them successfully.

I have received pops in recently purchased Canadian preferred stocks that were bought near 50% discounts to their C$25 par values.

This basket is now being managed with the objective of harvesting the income without suffering a net loss on the shares. I expect to have losers, which is one reason for a basket strategy.

I do believe that the Bond Ghouls are seriously mispricing inflation risk now.

Exchange traded bonds and preferred stocks 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)

I discussed the interest rate risk and other material topics here: Update On Bond And Equity Preferred Stock Basket Strategy As Of 8/14/15 - South Gent | Seeking Alpha (scroll to following titles in the Appendix section: Interest Rate and Lost Opportunity Risks for Fixed Rate Coupon Equity Preferred Stocks; Credit Risks; Volatility Risk for Equity Preferred Stocks)

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.

This portfolio has a significantly higher yield than the bond ETFs mentioned above.


1. Added 50 ELA at $25.17-Commission Free in Fidelity Account: This purchase is merely a temporary alternative to cash earning close to zilch. The next ex interest date is 6/10/16.

Quote: Entergy Louisiana LLC 1ST Mortgage Bond Series 2041 (ELA:NYSE)

Trade Snapshot:

Security Description: The Entergy Louisiana 5.875% 1ST Mortgage Bond Series 2041 (ELA:NYSE) is an Exchange Traded first lien Baby Bond that makes quarterly interest payments at a 5.875% fixed coupon rate on a $25 par value. Prospectus Entergy Louisiana is a distribution subsidiary of Entergy Corp.(NYSE:ETR).

The issuer may redeem this bond at par value plus accrued interest now:

"We may redeem the bonds prior to maturity, in whole or in part, at our option, on not less than 30 days' nor more than 60 days' notice, at any time on or after November 23, 2015, at a redemption price equal to 100% of the principal amount of the bonds to be redeemed, plus accrued and unpaid interest thereon to the redemption date." Page S-3

If not redeemed at the issuer's option, this bond will mature on 6/15/2041.

This first lien bond is rated A2 by Moody's and A- by S & P.

I recently discussed this bond here: Update For Exchange Traded Bonds And Preferred Stocks Basket Strategy As Of 2/14/16 - South Gent | Seeking Alpha (scroll to 2. Bought 100 of the First Mortgage ELA at $25.29).

That purchase was made in my IB account and I will consider selling it when and if I have a small profit in the shares.

The only subsequent development is that Entergy Louisiana sold earlier this month $200M more of its 4.95% series first mortgage bonds. Prospectus

When I first saw that document, I went directly to the Use of Proceeds section expecting to find a statement about redeeming more of ELB or ELA. That was not the case, however. The company was issuing more bonds to facilitate some asset purchases and to pay down other debt:

Entergy Louisiana has the capacity to issue additional first mortgage bonds as noted in the most recent prospectus under " Issuance of Additional First Mortgage Bonds" starting at page 7. Prospectus

So, it remains open whether the company will refinance the 5.875% first mortgage bond by selling more of the 4.95%. With a rise in longer term rates, it may become uneconomical to do so.

I discussed other Entergy Louisiana first mortgage bonds in several posts here:

Bond And Preferred Stock Basket Strategy As Of 9/18/15 - South Gent | Seeking Alpha {scroll to 1. Added 50 ELB at $25.15 and to Appendix section Item # 2 Entergy Louisiana LLC First Mortgage Bonds 6.00% Series 2040 (ELB)}

The discussion in the Appendix section covers several important topics: Scenario 1: Risks from Rising Interest Rates; Scenario 2: Risks From Falling Rates; Credit Risk; and Current Yield)

I also discussed in that Appendix section my trading activity in first mortgage bonds issued by Entergy subsidiaries. I am flipping these securities to generate a total return in excess of their current yields which are low by my standards.

2. Pared EVERPRA by Selling Highest Cost 50 Share Lot at $25.41: This lot was held at my most expensive broker which is Charles Schwab.

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

Trade Snapshot:

I realized only a $8.57 gain.

I kept the following shares: Update For Exchange Traded Bonds And Preferred Stock Basket Strategy As Of 1/22/16 - South Gent | Seeking Alpha {scroll to 1. Added 50 EVERPRA at $24.65 (IB account) and Another 50 at $24.29 (Schwab account average down)}

My only prior sale was discussed here: 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)

I am not satisfied with the prices paid for these lots. I may dump the IB shares soon with the hope of buying the lot back below $23.5. I would then consider averaging down in the Schwab account with a 50 share purchase at less than $22. Those prices could easily be hit during an interest rate spike.

There is a lot of potential downside risk in fixed coupon preferred stocks with relatively low coupons selling above par value.

Just to put a number on that risk, assume a share price decline to $20 from $25. The annual interest payment is $1.6875 per share. Divide a $5 loss per share by the annual dividend. It would take almost 3 years of dividends to recoup that loss in order to have a total return of zero unadjusted for inflation and taxes.

A 15% to 25% decline in this preferred stock could be reasonably anticipated with the ten year treasury moving from 1.9% to a range between 3% to 3.5%-without any change in EVER's credit risk.

Security Description: The EverBank Financial 6.75% Non-Cumulative Preferred Stock (EVER.PA:NYSE) is an equity preferred stock issued by EverBank Financial Corp (NYSE: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

EVERPRA went ex dividend for its quarterly distribution on 3/17/16. The penny rate is $.421875.

Recent Earnings Report: The market responded favorably to the 2015 4th quarter report that stopped the slide in the preferred and common shares.

"GAAP net income available to common shareholders was $42.6 million for the fourth quarter 2015, compared to $27.1 million for the third quarter 2015 and $35.5 million for the fourth quarter 2014. GAAP diluted earnings per share were $0.34 for the fourth quarter 2015, compared to $0.21 in the third quarter 2015 and $0.28 in the fourth quarter 2014."

EverBank Financial Corp Announces Fourth Quarter and Full Year 2015 Financial Results

EVER Historical Prices

EVER Analyst Estimates

3. Sold 100 of 150 BOCA:

Profit Snapshot (commission free at Fidelity)

Security Description: The Banc of California Inc. 7/5% Senior Note Maturing in 2020 (BOCA:NYSE) is being called by the issuer at its $25 par value plus accrued interest. There will be one more interest payment prior to redemption. The redemption will occur on 4/15/2016.

Banc of California Announces Redemption of 7.50% Senior Notes

I originally bought this exchange traded bond when the issuer was known as First PacTrust: Prospectus

Item # 2 Added 100 BANCL at $25.1 (10/14/13 Post)

I will lose $17 on the shares when the 50 shares are redeemed in my Roth IRA ($10 principal and $7 commission): Bought Roth IRA: 50 BANCL at $25.2 (12/6/12 Post) I will however receive 5 more quarterly interest payments on that 50 share lot than the 100 share lot bought later and sold sooner.

The name and symbol changed thereafter to Banc of California and BOCA respectively.

Whenever I pay a premium to par value and escape with a profit after harvesting 2+ years of interest payments at a 7.5% coupon, I view that result as a victory. I was not expecting much going into this callable at par bond other than the interest payments and hopefully no belly flop before maturity.

The optional redemption provision at par value is part of the asymmetric interest rate risk issue.

I sold the 100 share owned in a Fidelity taxable account at $25.42 and used one of my existing commission free trades. I would not have sold and paid a commission. It is slightly more tax efficient to realize a LT capital gain rather than ordinary income. It goes beyond the different rates in favor of LT capital gains. Tennessee will tax my interest payments for this security at 6%. whereas I pay no income tax on gains realized from selling any type of security. There is no income tax on earned income or retirement account distributions. I would not live in a state that taxes retirement distributions.

I will simply allow the issuer to redeem the 50 shares held in the Vanguard Roth IRA.

4. Bought 100 HSEPRA at C$9.34: This is another example of Canada's variation of the U.S. fixed-to-floating rate equity preferred stocks.

Trade Snapshot ($1 Commission):

Security Description: Husky Energy Inc. Series 1 Preferred Stock is an equity preferred stock issued by the Canadian E & P Husky Energy (HSE:TOR), whose ordinary shares also trade on the U.S. pink sheet exchange. Husky Energy (OTCPK:HUSKF).

This security is similar in many respects to three other Canadian reset preferred stocks previously disccused here:

Scroll to 2. Bought 100 VSNPRC at C$12.96: Update For Exchange Traded Bonds And Preferred Stocks Basket Strategy As Of 3/11/16 - South Gent | Seeking Alpha

Scroll to 1. Bought 300 ENBPRP:CA at C$12.39 and 2. Bought 100 ENBPRF at C$12.58: Update For Exchange Traded Bond And Preferred Stock Basket Strategy As Of 2/29/16 - South Gent | Seeking Alpha

HSEPRA had a fixed coupon that expired on 3/31/16, and no further payments will be made at that rate.

The coupon for the five year period starting on 4/1/2016 will be 2.404% payable on a $25 par value. Husky Energy Provides Dividend Rate Notice for Series 1 and 2 Preferred Shares

At a total cost of C$9.34 per share, that coupon produces a current yield of about 6.43%.

The rate will reset in five years at a 1.73% spread to the five year Canadian government bond unless Husky then elects to redeem at par value plus any unpaid and accrued dividend.

In the unlikely event that I still own this stock on 4/1/2021, I would be fine with Husky electing to exercise its optional redemption right. That would result in about a 167+% capital gain on the shares plus dividends.

Husky has three other equity preferred stocks outstanding. The preferred shares reset in five years after the IPO so all of these stocks were issued after crude had collapsed. Husky had to pay much greater spreads to the 5 year Canadian government bond than for the Series 1.

Series 3 Fixed at 4.5% to 12/31/19 Then Spread of 3.13%
Series 5 Fixed at 4.5% to 3/31/20 Then Spread of 3.57%
Series 7 Fixed at 4.6% to 6/30/20 Then Spread of 3.52%

Note Husky is issuing more preferred stock after crude started to crater and is having to offer increasingly better terms. That highlights the credit risk.

The issue then involves whether the higher spreads and later reset dates with higher coupons than the Series 1 offsets the current price disadvantage which clearly favors the Series 1 that I bought.

All of these preferred stocks pay cumulative dividends on $25 par values. All have the same credit risk and have identical claims on Husky's income. It would not be possible for Husky to defer payment on one series and to continue paying the other three. These securities are in pari passu with each other.

Closing Prices Day of Trade and Current Yields (3/15/16)

TOR:CA:HSE.PR.A Series 1 C$9.55 Current Yield 6.43%

Husky Energy Inc. Cumulative Series 1 Preferred Stock (HSE.PR.A:TOR)

TOR: CA:HSE.PR.C Series 3 C$15.79 Current yield 7.12%

Husky Energy Cumulative Series 3 Preferred Stock (HSE.PR.C:TOR)

TOR: CA:HSE.PR.E Series 5 C$17.58 Current Yield 6.4%

HSE.PR.E Stock Quote - Husky Energy Inc. Cumulatives Series 5 Preferred Stock (HSE.PR.E:TOR)

TOR: CA:HSE.PR.G Series 7 C$17.8 Current Yield 6.46%

Husky Energy Inc. Cumulative Series 7 Preferred Stock (HSE.PR.G:TOR)

My current yield is about the same as the Series 5 and 7 due to the lower price.

I have a greater price appreciation potential when and if crude recovers to $80+.

I view the Series 3 as somewhat mispriced compared to the Series 5 and 7 based on the 3/15/16 closing prices.

The Series 3 then had a higher current yield. There is no way to know now whether the 12/31/2019 reset period will be inferior or superior to 3/31/2020 or 6/30/20. The odds are probably that there will not be much difference given the short time period.

The Series 5 and 7 have slightly higher spreads which make it more likely that they will be called compared to the Series 3, but all may be called if conditions favor an issuer redemption at that time.

Remember the differences between the Series 1, issued when WTI was close to $100, and the other 3 on the spread percentages.

Say the 5 year is at 3% when all reset. What would be the current yield on all four assuming a purchase at today's closing price.

Series 1 $9.55 Coupon 4.73% Current yield 12.38%
Series 3 $15.79 Coupon 6.13% Current Yield 9.71%
Series 5 $17.58 Coupon 6.57% 9.343%
Series 7 $17.8 Coupon 6.52% 9.16%

Even though the Series 1 has a much lower coupon than the other three, it would have a much higher current yield due to the contstant cost per share in its favor.

Last Earnings Report: Not Good.

Husky Energy Reports Fourth Quarter Results

As noted in that earnings release, Husky "suspended" its quarterly cash dividend and paid a share dividend for one quarter before suspending it. Husky Energy Updates 2016 Guidance

Husky Energy Lowers Break Even to Sub-$40 US WTI, Announces 2016 Guidance

Given the lack of a cash common share dividend payment, Husky has the option of deferring its preferred share dividend payments but has not done so-yet.

4. Added 50 GBLIZ at $23.75-ROTH IRA: This brings me up to 300 shares. I intend to eliminate 100 shares held in the IB taxable account at or above $24.15.

Trade Snapshot:

Last Discussed Here: Scroll to 4. Averaged Down: Bought 50 GBLIZ at $23 (IB Account): Update For Exchange Traded Bond And Preferred Stock Basket As Of 12/18/15 - South Gent | Seeking Alpha

The other 50 share lot held in the IB account was bought at $24.12.

Scroll to 1. Bought 50 GBLIZ at $24.12 ): Update For Exchange Traded Bond And Preferred Stock Basket As Of 12/18/15 - South Gent | Seeking Alpha

Security Description: The Global Indemnity PLC 7.75% Subordinated Notes Due 2045 (GBLIZ:NASDAQ) is an exchange traded junior bond issued by insurance company Global Indemnity PLC Stock Price (NASDAQ:GBLI) based in Ireland. Ireland has not imposed a withholding tax on interest payments, as previously discussed and apparently required under Article 11 of the Tax Treaty with Ireland. (see also: Worldwide Corporate Tax Guide - Ireland, Republic of - EY - Global)


A.M.Best rated this subordinated bond BBB-. Senior unsecured debt is rated by Best at BBB. A.M. Best Assigns Issue Rating to Global Indemnity plc's New Subordinated Note Offering

I would simply call this "subordinated bond" to be a junior bond that sits below all senior debt in the capital structure.

The company discusses risks incident to its business starting at page 32 of its 2015 Annual Report: Form 10-K

SEC Filings for Global Indemnity

Investor Relations: Global Indemnity plc

The current yield at a total cost of $23.75 per share is about 8.16%.

Par value: $25

Maturity Date: 8/15/2045

Issuer Optional Call Date: On 8/15/2020 or on any interest payment thereafter at par value plus any accrued and unpaid interest.

The optional call date creates asymmetric interest rate risk in favor of the issuer. Update For Bond And Preferred Stock Basket Strategy As Of 9/10/15 - South Gent | Seeking Alpha (scroll to "1. Exchange Traded Bonds and Preferred Stocks: Asymmetric Interest Rate Risks")

Most Recent Earnings Report: 2015 4th Quarter

Sourced: SEC Filed Press Release


I will discuss 4 dispositions in the next update. They are no longer included in the table. I did not want to lengthen this post further.

I will be paring some positions due to an incoming inheritance giving me more of a position than I want in certain securities.


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.