Monday, March 16, 2009

Couple Points-GE, CCS, and HIG update

GE-A preferred- Over the past week there was an exceptional opportunity in GE baby-bonds, those listed and traded as preferred-stocks on the NYSE (even though they represent senior unsecured notes of GE Capital). The one I honed in on was GE-A Preferreds. This is a 2048 $25 par bond that was trading at $14 (below 60% of par!, for an 11% yield). Currently, this has rallied back up to $80 (8.9% yield). This is in-line with where GE's other long-term debt is trading, so the arbitrage is out of this for now.

CCS (Comcast Senior Note) is trading up to $18, up approximately $2.50 from my recommendation price on this blog (and about $2 from my average-buy in price. It should still claw its way higher, but at the current yield above 9% it still trades too low versus Comcast senior debt.

Finally, Hartford senior holding company debt appears extremely attractive, offered at a yield of 15% ($56 price for the 6.30% 2018 bonds). The holdco of Hartford carries $2Bln cash vs. $6Bln debt, which suggests it could repay 33% of outstanding bonds. Additionally, it controls interests in a property-casualty insurance company and a life insurance company, each of which generate north of $2bln pre-tax profits per year. The life insurance company has been bogged down by variable annuity/investment portfolio problems and may wind up being a writeoff (or only worth a few billion $ in a firesale). The P&C insurance company carries $12Bln statutory capital and is probably worth at least .8x book value, or a multiple of 5x normalized pre-tax profits= $10Bln nominal value. Based on this analysis, HIG's holding company should be worth approximately $10Bln (P&C)+$2Bln (cash)+$2Bln (firesale value of life insurance co.)=$14Bln, which represents 2.25x coverage of the outstanding holding company-debt.

Based on this analysis, Hartford financial service's 6.3% 2018 senior bonds are very attractive at $56, for a 15% yield-to-maturity. While the stock may have additional upside, given the vagaries of the current marketplace, we believe the bonds represent the most attractive risk-reward opportunity.

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