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Convertible and Preferred Stocks


Myth465
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Reboting an old conversation. What do you guys like in this space. I am building a yield oriented portfolio, and have taken a liking to convertible and traditional preferreds.

 

Here is what I like.

 

FUR-D, fairly safe 9.25%, not convertible so no real upside unless people bid the price above PAR. Ashner is getting mid teens returns so I dont think there is much to worry about in terms of downside.

 

ATPGP, hairy 15% yield. At 50% of par, you get 100% upside to par, plus it converts at $22. I bought against my better judgement.

 

SDRXP, SD converts. Safe in my opinion and will convert in the money at some point (again in my opinion). I had a buy order for them, but believe they should come down to $118 or $120. Relatively safe 5%.

 

Will also buy or look at SD's trust. The last 2 have done quite well.

 

These guys have several lists which I will comb through once work lets up.

 

http://www.quantumonline.com/incomelists.cfm

 

 

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Myth,

 

Depending on a person's views on the underlying business the following are interesting to me around current prices:

 

HIG,a

NXY,b

 

I agree with your thoughts on FUR,d.  There are certainly others that could become interesting, but in my opinion we have to have some panic again before they get to compelling prices.

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Myth, I've sold ~80% of my ATPGP at high 40 & mid-50. At mid 50, they are not cheap given the default risk. Plus, what I see now is the management can keep milking the revenue with ORRI and NPI to survive and I am not sure if pfd will rank above those in case of BK.

 

Having said that, I actually bot commons at mid 8 (ouch) and waiting for a home run. ;) With > 30k now and 45k year end, I see this a mid teen stock.

 

For yield, I like FTR, SLF, SQR.UN.

 

Note: SQR.UN's payout ratio is 140% so they can cut anytime.

 

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Myth, I've sold ~80% of my ATPGP at high 40 & mid-50. At mid 50, they are not cheap given the default risk. Plus, what I see now is the management can keep milking the revenue with ORRI and NPI to survive and I am not sure if pfd will rank above those in case of BK.

 

Having said that, I actually bot commons at mid 8 (ouch) and waiting for a home run. ;) With > 30k now and 45k year end, I see this a mid teen stock.

 

For yield, I like FTR, SLF, SQR.UN.

 

Note: SQR.UN's payout ratio is 140% so they can cut anytime.

 

Forgive me but I don't understand the logic. You sold the prefs at ~50 because of default risk, and moved down the capital structure to purchase equity? If the stock heads up to the mid teens wouldn't you expect the prefs to be closer to par than 50? Maybe looking at a 75% return for the prefs vs about 100% for the equity and giving up the ability to take dividends and moving down the capital structure. Curious to know your logic.

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ATPGP, hairy 15% yield. At 50% of par, you get 100% upside to par, plus it converts at $22. I bought against my better judgement.

 

 

 

I've put myself in jail after losing a chunk on atpg  ;). I vow never to touch their securities unless they file Ch.11, and only then will I look at their debt.

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1) I am just going for more upside and liquidity (at least I can see the bid/ask :))

 

2) the amount I put in into the commons is quite a bit less than what I put on in the pfd before.

 

3) Re: the default risk, I still think it is low. What I am seeing if this goes to BK, I don't see any differences between pfd and commons - so for me, being common or pfd doesn't really matter for me in that regard, only the price matters.

 

4) I was hoping the management will issue shares to cover their funding gap before. But seems like they are addicted to selling their revenue streaming instead.

 

5) I get more comfortable with the company - management finally know they should not over-promise and absent any black-swan event, they will...

 

6) Being a Canadian, ATPGP dividend stream is not tax-efficient for me. 15% withholding + income tax.

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ATPGP, hairy 15% yield. At 50% of par, you get 100% upside to par, plus it converts at $22. I bought against my better judgement.

 

 

 

I've put myself in jail after losing a chunk on atpg  ;). I vow never to touch their securities unless they file Ch.11, and only then will I look at their debt.

 

It's risky business, if another BP spills like incident, they are done. But I don't see another BP like incident this year and I give 80% chance of ~45k by year end - that's almost 10$ plus cash flow for 13.

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From a guy who doesn't know much about this space at all, I've been looking at putting some money into VCVSX, which is vanguard's low cost convertibles mutual fund.  As is usual for a Vanguard fund, it's the low cost one in the space (0.59%), and morningstar ranks it as a "gold" pick.  Looks like it's subadvisor is Oaktree, which I have heard quoted on this board on several occasions.  Looks like they are trying to go from 15->30% foreign exposure.  Yield is listed as 3.95% which isn't much compared to your 9%+  ;).  But I suppose it's a good way to get some general exposure to convertibles...  Minimum is 3K which is pretty low...

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I dont see how you can like ATPG common, but not the preferreds. The converts let you buy ATPG at basically $12, and pay you 15% while you wait. I am not a big fan of ATPG, but think they will keep the lights on...

 

Thanks for the link on the fund, I have been trolling a few convertible funds looking for ideas.

 

dcollon Hartford looks interesting, I was going to look into the warrants after looking at a chart. With NXY do you just see it as a safe way to get 7%.

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Cause ATPG has crap Management and this will either be worth $40 or $0. Plus you get paid 15% while they muck around, and have a tiny silver of protection should they lose the game of musical chairs (capex spending vs cash flow) they love to play.

 

Until APTG trades for $33.3 (and it cant be force converted to 10/2014). ATPG has to pay me 15%. My basis at $50 will also be around $11. I get 15% till I have a 300% realized gain on my converts. My math may be off, but thats a great deal (let me know if I am missing something).

 

ATPG is a lotto ticket, but its one I cant move on from. Look at the 5 year chart, they have been on the cusp of great success for the better part of 5 years. I was on that ride for 2 years, and left disappointed. I find it easier to bet they keep on the court, then that they make the playoffs. The assets are there, but can they be turned into cash flow. I dont know, and dont have to care as much with the preferreds.

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Colony Financial issued $145 million of 8.5% preferreds about a week ago.  Colony was formed in 2009 to buy post-crisis real estate debt.  The preferred will be used to payoff a line of credit.

 

In rough numbers capital structure is:

 

$730 mm assets (various real estate debt instruments purchased since mid 2009)

$145 preferred

$14 mm long term debt

$30 mm other liabilities

 

So with the current balance sheet the 8.5% preferreds are super low risk.  I assume they'll use the additional equity to add more long term debt and continue buying loans, but I think the market will limit the amount of leverage they can take on.  Anyway, I don't see much downside.

 

Currently around 25, no redemption until 2017.

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Cause ATPG has crap Management and this will either be worth $40 or $0. Plus you get paid 15% while they muck around, and have a tiny silver of protection should they lose the game of musical chairs (capex spending vs cash flow) they love to play.

 

Until APTG trades for $33.3 (and it cant be force converted to 10/2014). ATPG has to pay me 15%. My basis at $50 will also be around $11. I get 15% till I have a 300% realized gain on my converts. My math may be off, but thats a great deal (let me know if I am missing something).

 

ATPG is a lotto ticket, but its one I cant move on from. Look at the 5 year chart, they have been on the cusp of great success for the better part of 5 years. I was on that ride for 2 years, and left disappointed. I find it easier to bet they keep on the court, then that they make the playoffs. The assets are there, but can they be turned into cash flow. I dont know, and dont have to care as much with the preferreds.

 

Same logic as mine when I bot them after the latest crash. The only thing is they can pay shares in lieu of cash as dividend, but I don't see them do it since it's mini cash outlay compared to their cap ex. I bet they won't be so stupid to make ppl scared to save a few millions div payment.

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FTP 6.5% 31Dec2016 convertible debenture.

The conversion price will be $37.50 for each common share.

 

But by the end of 2016 - both mills should be up and running producing lots of EBITDA.

 

I'd expect the stock price to be significantly higher than the conversion price and you get paid while you wait for the new mills to be built.

 

Trades at a bit of a premuim but think it's going much higher over the holding period.

 

;)

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Myth, I've sold ~80% of my ATPGP at high 40 & mid-50. At mid 50, they are not cheap given the default risk. Plus, what I see now is the management can keep milking the revenue with ORRI and NPI to survive and I am not sure if pfd will rank above those in case of BK.

 

Having said that, I actually bot commons at mid 8 (ouch) and waiting for a home run. ;) With > 30k now and 45k year end, I see this a mid teen stock.

 

For yield, I like FTR, SLF, SQR.UN.

 

Note: SQR.UN's payout ratio is 140% so they can cut anytime.

 

One of the best articles I have read on Seeking Alpha is the article by a hedge fund guy on ATPGP.  He did a statistically sophisticated analysis of equity, preferred, and bonds, and the preferred came out by far the best investment, using a monte carlo analysis to simulate many possible outcomes.  The author of that article is extremely bright and I wish he would write more often.    I also like the ATPG bonds at 60% of par or thereabouts.  Preferred start to look good to me again around $40.

 

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FTP 6.5% 31Dec2016 convertible debenture.

The conversion price will be $37.50 for each common share.

 

But by the end of 2016 - both mills should be up and running producing lots of EBITDA.

 

I'd expect the stock price to be significantly higher than the conversion price and you get paid while you wait for the new mills to be built.

 

Trades at a bit of a premuim but think it's going much higher over the holding period.

 

;)

 

Hey thanks. I hold FTP at $37. I could buy at 22% cheaper today, or could sell and buy the preferreds and get 6% for 4 years. Whats the ticker for the converts.

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FTP.db

 

:)

 

Normally Reuters is one of the few sites that will provide a time graph of a Canadian debenture.  I wasn't able to locate Fortress Paper debentures there however.  Is there a retail web site that will provide a time graph for a few years of trading on the debenture?

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FTP 6.5% 31Dec2016 convertible debenture.

The conversion price will be $37.50 for each common share.

 

But by the end of 2016 - both mills should be up and running producing lots of EBITDA.

 

I'd expect the stock price to be significantly higher than the conversion price and you get paid while you wait for the new mills to be built.

 

Trades at a bit of a premuim but think it's going much higher over the holding period.

 

;)

 

PaperAge discusses the Fortress Paper venture and the convertible that partly finances it.  They mention that "The cost structure of the LSQ Mill will be materially impacted by the ability of Fortress Global to upgrade the cogeneration facility and to service the facility through a long-term power supply agreement with Hydro Quebec on satisfactory terms."  That's an awfully important variable, and it's a non trivial thing to implement.  Shouldn't an investor here want to wait until that upgrade is finished and the agreement with Hydro Quebec is signed, on financial terms that meet the business plan's objectives?

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FTP 6.5% 31Dec2016 convertible debenture.

The conversion price will be $37.50 for each common share.

 

But by the end of 2016 - both mills should be up and running producing lots of EBITDA.

 

I'd expect the stock price to be significantly higher than the conversion price and you get paid while you wait for the new mills to be built.

 

Trades at a bit of a premuim but think it's going much higher over the holding period.

 

;)

 

I have been looking at FTP.db as well but I have no idea how I can value the convertibles correctly. Anyone got an idea?

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Start with FTP with all plants running and a kicker on upside due to Chad. Then discount it for operational risk. Lets say FTP is worth $80 in 2016, with a risked value of $60. Then ask yourself which would you rather be in. I think FTP will be stuck until the price goes up. You can take the equity at a 25% discount to the convertibles, or you can take the convertible with a 6% yield over the next 4 year. I think it works out to almost the same should FTP go up, but the converts give you a bit of downside protection should things go wrong. Thats how I look at it.

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FTP 6.5% 31Dec2016 convertible debenture.

The conversion price will be $37.50 for each common share.

 

But by the end of 2016 - both mills should be up and running producing lots of EBITDA.

 

I'd expect the stock price to be significantly higher than the conversion price and you get paid while you wait for the new mills to be built.

 

Trades at a bit of a premuim but think it's going much higher over the holding period.

 

;)

 

PaperAge discusses the Fortress Paper venture and the convertible that partly finances it.  They mention that "The cost structure of the LSQ Mill will be materially impacted by the ability of Fortress Global to upgrade the cogeneration facility and to service the facility through a long-term power supply agreement with Hydro Quebec on satisfactory terms."  That's an awfully important variable, and it's a non trivial thing to implement.  Shouldn't an investor here want to wait until that upgrade is finished and the agreement with Hydro Quebec is signed, on financial terms that meet the business plan's objectives?

 

You can read back on the FTP Investment thread. Lot's of good information there. I posted this a while back:

 

 

Current Sales Structure;

 

1)  Capacity sold under 5 yr contracts @ floor of $1200 MT =                        84,000MT

2)  Capacity sold under 10 yr contracts @ (Rayon - $1000US) =                    72,000MT

3)  Capacity currently open for additional sales =                                          44,000MT

4)  Current total production capacity =                                                            200,000MT

 

Now let’s make some assumptions based on company presented data and other info;

 

1)  Dissolving Pulp prices drop to $950/MT

2)  Current Excess capacity is sold at spot rates

3)  Rayon contract gives us a $200/MT premium to spot

4)  Pre-Cogen cash cost delivered to Shanghai =  $720/MT

5)  Post-Cogen cash cost delivered to Shanghai = $632/MT

6)  Commission = 2% list price

 

Weighted Sales/MT

 

42% @  $1200 = $504

36% @  $1150 = $414

22% @  $950 =  $209

 

Weighted Average Sales Price/MT = $1127/MT

 

Pre-Cogen Cost :

 

            Volume (MT) =                                              200,000MT

            Average Weighted Price ($)                          $1,127/MT

            Commission (2%)                                        ($22.54)/MT

            Sales Price net of commission                        $1,104.46/MT

            Pre-Cogen EBITDA Contribution                  $81,400,000.00

            Post-Cogen EBITDA Contribution                $94,500,000.00

 

 

The pre-cogen operation will obviously have thinner margins but with the floor prices in place on close to 80% of their sales, they have lot's of margin of safety in my mind.

 

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FTP.db

 

:)

 

Normally Reuters is one of the few sites that will provide a time graph of a Canadian debenture.  I wasn't able to locate Fortress Paper debentures there however.  Is there a retail web site that will provide a time graph for a few years of trading on the debenture?

 

You can get it from the exchange site:

 

http://tmx.quotemedia.com/quote.php?qm_symbol=FTP.DB

 

 

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I've been buying the CHK-DG (their non-exchange listed preferred).

 

A friend did a blog post on how much cheaper it is than their listed preferred (CHK-D):

 

http://www.creditbubblestocks.com/2012/02/limits-to-arbitrgage-dual-chesapeake.html

 

The "DG" trades at about 83, and is convertible into 2.5766 shares.  At par it yields 5%

 

At the current price of 83, it yields 6% and effectively converts at $32.21 (83/2.5766)

 

I think this is one of the best and safest and cheapest ways to play a natural gas rebound.

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I like FFH preferred stock as substitute to cash when it comes to hedge against economic downturn risk. What I mean is that if market goes south, Fairfax common and preferred stocks should hold on pretty well. In the case of preferred, you get paid quaterly while protecting your portfolio.

 

 

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