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Linn Energy, LLC (LINE) Message Board

  • ibpawnin1 ibpawnin1 Jan 5, 2011 1:03 AM Flag

    Buy LINE on margin?

    I am with IB Interactive Brokers. They charge 1.16pc margin and have for about 30 months. 0.16 above FFR. What would be the downside of buying LINE on margin. It is fairly stable, the distribution would be a net 6pc to me and still get the possible appreciation as the distribution is raised.

    I can also borrow up to 5 times my equity, not that I would ever take that to the extreme. Seems like that kind of leverage with a divvie payer like Line is a good combo.

    Of course they will not let you borrow 5 times your equity if you only have 1 position. you must be fairly well diversified. It is an intriguing deal.

    Imagine the simplified version if you 200k in your account. You could buy 1,200,000 of LINe and the like, collect 84,000 in distributions and pay 11,160 in interest (which is fully deductible regardless of the tax status of the LINE dist.

    Thoughts??

    IB

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    • "Imagine the simplified version if you 200k in your account. You could buy 1,200,000 of LINe and the like, collect 84,000 in distributions and pay 11,160 in interest (which is fully deductible regardless of the tax status of the LINE dist."

      Believe margin interest in only deductible if you have investment income to offset against. (and investment income means income that doess not get preferential tax treatment, so LTCG and QDs do not count). Generally only investment income that gets taxed as ordinary income counts so taxable interest qualfies and most net income on Sched E but don't think that LINE has much of that. Probably the UBTI box on line 20V represents a good estimate of taxable income from LINE (even though UBTI doesn't apply to taxable accounts). See IRS form 4952 for details.

      • 2 Replies to PSHONORE
      • I'm sure that is right about the interest. I would think that in most diversified accounts that would be able to be written off against other income, dividends, investment interest etc. That's what I do.

        IB would not let you leverage your account more than 1 to 1 unless you had adequate diversification.

        I have a some cefs and etfs and preferreds which all yield very well and pay the carry out of that.

        I am trying to be careful and conservative but get some yield. (no bonds though)

      • You pay less than 2% on margin? Wow! I thought I was doing pretty well at 3.25%. I've been leveraged for the last 2 1/2 years with bonds that pay over 8% on my original purchase prices. And PSHONORE is right about qualified offsetting interest for tax-deduction purposes. If you've got that, it's worth a shot, I think, but don't risk overdoing it. No sure things in the market. nd that includes LINE.

    • I have never traded options etc. but LINE seems very strong here and I am happy with it's performance. I own 5500 shares and if it pulls back at all I am buying. By distribution it will be at $41.00 plus I believe if oil doesn't crater. Don't believe it will especially with OPEC being led by Iran this year. LINE should be called OBM (only buy more). JMHO!

    • Am guessing that you realize the energy sector in general, and Linn in specific could go down? That would be the main reason not to buy on margin. Loss of capital is a real loss, regardless of the 7% distribution. Personally, I like Linn, but margin buying is risky unless you KNOW the price isn't going down (or you can afford to lose your invested capital and the extra you put on margin).

    • you are creating a "spread" just like banks do. or the mortgage finance cos like NLY etc. the main difference is they lock in their spread, they say borrow at 2% and lend at 5%, so they get 3% spread locked in. if the asset gets crushed they need to have the equity to withstand the mark to market

      as long as you can take a 10% drop in the stock which levered 2 to 1 means you lose 20% on your equity, then it makes sense. also realize dividends they take it out of the stock price. for most of us, it recovers and you actually got the dividend in your pocket. if you on leverage you might sweat a lot more if the stock drops $3 and then goes ex dividend by 65c and you have to wait for that cash.

      i would recommend reasonable leverage like 1.3 to 1, not 2 or 5 to 1....thats recipe for disaster

 
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