Tuesday, December 23, 2008

Buy FJA preferred (Embarq 2036 bonds)

FJA is a preferred listed on the nyse. The underlying asset interest that is owned in the preferred trust is embarq long- dated senior debt securities. The preferred pays dividends of 1.78, which equates to 17pct current yield and a discount to par of 55 percent (paying 45 cents on the dollar). Embarq is a decent, but not great credit... Wireline subscribers are shrinking 5-7pcercent, and debt leverage is high, but manageable for the business risk profile (2.2x levered). The company is switching subscribers of phone service over to dsl, which should limit the defections of subscriber base to digital cable. Another plus is that centurytel is acquiring embarq, which should result in better efficiency, larger size, and improved credit profile ( centurytel is more rural, thus more protected from cable penetration). Aside from these factors, long embarq debt trades around 65$, which is 20$ (42pct) higher than the implied purchase price via the FJA preferred. Thus the below-market price, high yield, and potential upside in credit profile make this security extremely attractive at prices below $12.50. Recommendation- buy FJA

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Thursday, December 11, 2008

BUY UZG/UZV Preferred

The UZV/UZG are preferred stocks traded on the NYSE. The preferreds represent ownership interest in a trust, which owns 7.5% and 8.75% US Cellular Senior Notes, due in the 2030s.

The "par" amount of the preferred shares is $25, although the UZV currently trades at $13.25 (14.16% yield) and the UZG currently trades at $18.9 (11.7% yield). There is another US Cellular baby-bond listed under GJH, which trades at $4.80 ($10 "par" value), for a yield of 13.2%. I am ignoring the GJH issue for now.

US Cellular is 70% owned by TDS and represents the primary asset of TDS.. US Cellular currently has $1Bln in debt vs. $177MMln cash. Trailing EBITDA over the past twelve months is $1.06Bln, on revenues of $4.2Bln (25% ebitda margin). US Cellular also owns some partnership interests in Verizon's Los-Angeles cell network In 2007, US Cellular generated operating cashflow of $863Mln, less capital expenditures of $565Mln, for free-cashflow of $298Mln. The company has adequate liquidity between its cash holdings and $700Mln revolver (expires 12/2009) and is currently profitable. USM is the last independent carrier, following the acquisition of Alltel by Verizon. Currently, Verizon bonds trade at +500/30yr (8.1% yield). Verizon Wireless bonds trade 50bp tighter than the holdco bonds.

As such, buying the US Cellular bonds appears to be attractively valued, in the form of this structured note. At current yields, I would recommend buying UZV, as the 14% yield and $13.25 price is very attractive (53% of par, a high discount for a non-distressed credit.. In fact, the dislocation in bond pricing actually presents an arbitrage opportunity, in which you can sell the high-priced UZG (76% of par, $18.90 price, 11.6% yield) and buy the lower-priced UZV notes for a positive arbitrage of 240 basis points and a significantly lower-dollar price relative to par. Its a win-win, or you could keep it simple and just buy UZV. I've tried a little of both, K-dawg

Thursday, December 04, 2008

Okay, if you bought CCS at my recommendation at $15, I am currently selling that at $17.10 ( 9.76% yield) and putting all proceeds into CCW at $17.35 (10.1% yield).

Even with a bit of commission, it is a nice pickup in yield. More importantly, CCW is larger/more liquid and generally trades at a lower yield than CCS (by like 20bps). That means CCS will normally trade $1.50 below CCW.... so this should be an easy trade.

Or, you can just sell CCS and pocket your 13% over the past week! I like the swap better though, as 10% is a nice yield.