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No. of Recommendations: 8
Hi Hewitt-

Perhaps it's because I'm afraid of the Montpelier Re folks that I've been reticent to post here.

My biggest blunder, bar none, this year, was one that I actually got off relatively clean on. I owned DNT, which was a subordinate class of debt paying 8.25% face through 2039 for ..... Delta Airlines. Par for DNT was $25 per share. I bought it at a little more than 7, so my yield to maturity was...29%, payable quarterly.

I bought on the day that the pilots union agreed to all those billions in salary concessions, after the security had risen 75%, from 4. In the next few months the shares rose as high as 14 following the refinance from GE, and I got 3 separate payments of $0.51 per share, which helped. But I failed to consider two things.

First, even though I was clear on the fact that I was betting that the price offered overstated the chance of bankruptcy, I still was very aware that Delta was a pretty unhealthy company. But I did not count on oil prices rising as they did, and staying high. Oil prices destroyed Delta's chance to recover. Of course, this is the equivalent to the small cold that kills the cancer patient. I started playing speculator with oil prices, rather than recognizing that I had no ability to predict and cash on the line in a security that would be impacted badly if I were wrong.

Second, and more damning to my own analytical skills, I completely failed to consider the entire capital structure of Delta. It has two senior classes of debt to which DNT was subordinate. But more importantly, all of Delta's assets are pledged as collateral to bank debt and other financing tranches, so the second part of my investment in the company -- to get in line in the event of bankruptcy, was completely off. DNT holders are likely to get something when Delta emerges from chapter in, oh, 2 years, but the value of that is something like $3 per share, not $5-6 like I originally calculated.

And most of all, recognizing that I had gotten it wrong and knowing that I didn't have a clue what oil prices were going to do (they were at $50 and the company was saying "we can't meet our costs at prices over $43), I didn't sell. Rather, I watched DNT drift from 14, through 10, down to 5, where I finally unloaded it. Including my coupons, my losses didn't exceed 15%, but I earned every penny of them.

Interestingly, the security still trades as DNTNQ, is accruing its coupons, and trades...at $4.65.

Best regards-
Bill Mann
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