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Assured Guaranty Ltd. Message Board

  • tony27719 tony27719 Sep 19, 2009 5:23 PM Flag

    JIm and Rusty Part 2

    The other day I was looking at a preferred (ALPVN.OB ) that was issued by Alabama Power in 1950 with a coupon of 4.6%. Today that preferred is now valued at $65 versus the $100 it sold for in 1950. Alabama Power has had no incentive to call it in the 59 years since it was issued. They may never call it since as time goes by the purchasing power of the interest payment will continue to erode and be less of a burden on its operating expenses. In 1950 a bottle of Coke cost a dime and a ticket to a movie was 50 cents for an adult and 20 cents for a kid. The point I'm making is that hybrid bonds, preferreds and other corporate debt forms shouldn't be bought at or near par if they have no maturity date. I doubt if Alabama Power had any trouble selling this bond issue in 1950, but today hardly anyone is interested. Those who bought this preferred and others like it back in 1950 are now long gone, but their heirs or subsequent owners will have a though time selling them even if they yield more than 7% since weeks can go buy without a single trade occurring However, for a retiree they may actually be a good deal so long as you don't buy more than a couple of hundred of them. Maybe inflation isn't always bad.

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    • I think what you need to do is buy Richard Lehmann's book, "Income Investing Today". You might also talk to a bond desk representative at your broker.You need to discuss your concerns with a professional. As to the bankruptcy of the trustor, Lehman Bros. did several of these and its bankruptcy has had no effect on its third party trust preferreds. If you are uncomfortable with these just avoid them. RRW

    • When you are buying a third party trust preferred, how do you evaluate the risk due to possible bankruptcy of the trustor?

      For example, for GJAX, I see the trustor was Wachovia. As I understand it, Wachovia came within a razor's edge of leaving all of its bondholders hanging in bankruptcy. Had that happened, what would happen to the Third Party Trust Preferreds?

      In general, if you put a really safe bond into the hands of a really risky trustor, don't you simply get a really risky bond disguised as a safe one?

      Also, how do you ensure that the trustor isn't just stuffing the trust with some proportion of bonds to trust units that distorts the value? For example, the GJAX appear to trade at 7.5% against a bond that trades at 6% if bought directly. But what prevents a trust arrangement of this type to not put bonds in a 1:1 proportion with every trust unit? You think you are getting 7.5% equivalent for each bond, but maybe you are actually getting less per underlying bond, and presumably the trustor is pocketing the difference as a profit.

      What is the usual business model for the trustor? They are just taking a percentage of assets each quarter? In the case of GJAZ, I couldn't find a clear statement in the prospectus about what the actual expense charge was. It just repetitively says we will pay various kinds of expenses and fees without clearly defining the amounts.

      In looking at one of the prospectus it is a long complex document and there are probably 100 tricks they could throw in there to make you think you are buying a bowl of soup when you are really buying a bowl of water with the word soup on it. :)

      What are other risks we should scan for in these types of securities?

    • Jim,

      I like trading in the BBs and it's far less expensive than trading institutional bonds. I did some shopping today picked GJAZ at 20.05 for a 7.5% yield. The issue has an A rating. Another non-financial I got today was GPD, a utility also A rated for a tad below a 6% yield. These choices help me get the diversification that I really need after concentrating on financials. Until a never sell off takes place it's going to be difficult to get much higher than 8% yield unless you get into financial subordinated debt issues.

    • And forgot to add more AGO "baby bonds"!

    • I agree that any leg down won't be any thing like what we saw in March. It doesn't have to be that bad to make decent capital gains. A re-tracement of only 25%-30% would be a bonanza. I'm probably going to sell some more of what little I have in stocks next week. If I can end the year where I'm at today would be outstanding. I expect to start next year far better than this year. Regarding your thoughts on the exchange traded debt isues. The safest category is the utilities. Last week I bought Public Service of Oklahoma(POH) 5 cents above par and don't expect any capital gains. Two years ago it sold around par then went down, but is right back up where it started. The same can be said of other utilities.

    • Down here in the "more replies" there are too many replies and no will notice me wandering too far from the AGO subject... :-) Virtually everything here meant to trade as exchange-traded debt on NYSE is subordinated in some form or other, i.e., they're not "secured". Whether or not they senior or junior debt, or notes, its still down there on the debt food chain. Don't think I'd want too much of any security where things are THAT dire and was going to get deferred in the first place. If things are THAT bad I'd sell first. Just ask GJW and ABK, or Thornburg Mortgage!

      Whether or not there is another leg down is anyone's guess, but quite possible if not probable. But don't think we'll see much movement THIS time from the the preferreds or exchange-traded debt issues, except maybe the weakest banks. The recent freeze-up was a once-in-a-generation event, not to be repeated again for another distant generation. On the other hand, all bets are off if the dollar becomes another latin-American depreciating currency.

    • I don't know when the next leg down will take place but feel strongly it'll happen before year end. Consequently, I have raised cash reserves to 12% of my total IRA investments. Patience is a virtue. Most of the big capital gains are now behind us in my opinion with the exception of the FSA BBs. If I'm right about the next "correction"(what a euphemism) the biggest price declines will be in the same ones that appreciated the most primarily the subordinated debt of major banks. As a side, isn't all subordinated debt Tier 1? I love the terms that the bb issuers come up with. The risky stuff comes with labels such as Tier 1, enhanced, junior subordinated, etc. I love it!

    • It seems to me that the reason so many of these new "hybrid" offer such high "coupon rates" is that they can defer the coupon up to 10 years without endangering the payer's financial health. But we all know that if the financial health is already in doubt, the price of these hybrids will already be headed downward in lots of time and plenty of warning. Probably a problem for casual observer, but for people like us who watch this stuff everyday and can take appropriate measures if necessary. Still, I would like a little breathing room by buying at less than par. And as always, caveat emptor.

    • Well the EU has certainly cooled my fondness for European junior debentures with deferral provisions. I agree it would take a bigger price drop than has occurred for me to bite.RRW

    • I am monitoring AZM as well, but won't take any action until October 22 when they're removed from the NYSE. In another post you may recall that I expressed the opinion that a price decline may not be that much because it still will continue to trade on the Frankfurt Exchange. The fact that this bb is back to near par suggests that it won't drop much if any. I may buy, but only if gets to the $22-23 price range. I want to have some capital gains potential in addition to yield. This is only logical to me since it's subordinated debt and the issuer has the right to defer payments for up to 10 years without being in default. Now that I've said that I may skip it altogether. 10 years is a heck of a long time.

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