Eye On Energy MLPs-A Dry Hole?

energy MLPs

(Philadelphia Inquirer-Reported by Erin Arvedlund)

It’s been a harsh winter for investors in master limited partnerships (MLPs), which invest in energy pipelines and oil and gas exploration. Oil prices dropping by half has routed the sector.

And one of the most popular MLPs, Kinder Morgan, is an example of what may happen with other MLPs this year.

In December, Kinder Morgan Inc. (KMI) said it would slash its quarterly dividend to $0.125 per share ($0.50 per share annually), vs. its previous payout of $0.51 per share ($2.04 annually).

That was the second round of bad news for Kinder Morgan investors, who already had paid a whopping tax bill the previous year. In 2014, Kinder Morgan rolled up several partnerships under its control and restructured, converting from an MLP to a regularly listed C-corporation.

As a result, Kinder Morgan MLP owners got a surprise tax bill.Why? They lost the tax-sheltered income under MLPs, and had to report sizable taxable income when KMI decided to convert from an MLP into a regular corporation.

Then, in 2015, came the other shoe to drop, notes Alan Mandeloff, partner at accounting firm Citrin Cooperman in Center City.

The newly restructured Kinder Morgan stock slid from $42 early last year to just under $15 at year end, a loss of about 65 percent.

“If an investor sold their KMI stock during 2015, they would have been limited to the realization of a capital loss,” Mandeloff said: The maximum deduction of $3,000 per year.

“It’s true that the amount of loss in excess of $3,000 can be carried forward, but that’s a small consolation for someone who was forced to recognize what amounted to a fabricated profit in 2014,” Mandeloff said.

Morningstar, for instance, says similarly debt-burdened MLPs such as Plains All American Pipeline LP (PAA), ONEOK Partners (OKS), and Williams Partners (WPZ) may face the same choice: cut their dividends or restructure into a C-corporation. That could mean more painful tax bills for investors.

This has been a wake-up call to MLP management teams. Many did not manage their capital for a stressed market environment, Morningstar notes. MLPs likely will now want to position themselves to be less reliant on capital markets, analysts note.

“The midstream companies are not tied to the price of oil like the upstream companies are. They are basically collecting tolls on transportation of the commodity through their pipelines,” says Stan Hadam, senior vice president at Wells Fargo Advisors in Vineland, N.J.

What’s being called into question is the MLP business model – which has been paying out the majority of the cash flow in dividends and financing growth with debt and/or equity.

Amid volatile markets, MLP investors should choose even more carefully, says Richard Daskin, a New York City money manager who oversees income portfolios for individuals and also analyzes energy partnerships for Cumberland Advisors in Sarasota, Fla.

He still like MLPs for older investors – including his mother.

To continue reading Erin Arvedlund’s coverage via the Philadelphia Inquirer, please click here

“When you buy an MLP, part of the advantage is that when you get a payout, or distribution, it’s not from a corporation. Money you get isn’t considered a corporate dividend. It’s a payout from a partnership. A large part of that is sheltered from taxes,” he notes.

But when Kinder Morgan switched from an MLP to a corporation, investors had to pay up. Even Daskin’s mother paid a big tax bill, although she had owned the MLP for some time and had built up some price appreciation in the underlying security.

MLPs are ideal for older investors who like the income, and have the time to hold them for years and even pass them on to their heirs, Daskin says.

When he’s swapping in and out of MLPs, Daskin likes as a placeholder in a portfolio the ETRACS Alerian MLP Infrastructure Index (MLPI), an exchange-traded note. He stays away from the popular Alerian MLP ETF (AMLP), which tracks the Alerian MLP Infrastructure Index.

[email protected]215-854-2808 @erinarvedlund

Broker-Dealers Move Into Crowdfunding

brokerdealers crowdfunding

(WealthManagement.com) A new crop of broker-dealers and funding portals are forming to capitalize on new equity crowdfunding rules.

The total number of Financial Industry Regulatory Authority (FINRA) member retail brokerages has been on the decline for the last five years, but one sliver of the universe is showing new signs of life: A new crop of broker/dealers and online funding portals are joining FINRA to capitalize on new opportunities made possible by the JOBS Act of 2012. The legislation prompted the SEC to make it easier to market and solicit investments, and opened the door for small businesses to engage in so-called “equity crowdfunding.”

About 15 to 20 of these new firms have signed on since 2013, according to Fishbowl Strategies, with another three to six launching soon, in anticipation of a wave of issuers and investors entering the market. Whether there is a crowd for equity crowdfunding remains to be seen.

But Paul Boyd, managing partner at ClearPath Capital Partners, a wealth management firm for tech entrepreneurs, says there
is plenty of pent-up demand and a backlog of Reg D deals that are moving forward.

Boyd also expects the next phase of the JOBS Act, Title III, will bring a lot more attention to capital raises online. Set to go into effect in May, those rules let any investor, accredited or not, invest in unregistered securities online (with limits on the amounts that can both be invested, and raised, in a year). The tech-fueled vision of bypassing stuffy financial intermediaries in favor of a new-class of SEC-registered and FINRA member “crowdfunding portals” has inspired a flotilla of startups to enter the space.

Many of the new entrants have affiliated agreements with brokerdealers. Some have launched their own b/ds.

WealthForge launched its own b/d to provide all the services needed to complete a private securities transaction, including investor accreditation, regulatory filings and escrow. Co-founder and CEO Mat Dellorso says the new rules—and bringing the process online—have spurred their growth.

“When you bring the internet and you’re allowed to advertise a private security through 506(c), more investors do take part,” he says. WealthForge has completed 150 private financing transactions, bringing in 2,500 investors. “A traditional investment bank might complete three or five a year,” he says. “It’s a lot more volume because it’s more transparent and online now.

“Normally these transactions take weeks and months, but an investor can literally invest in a private placement on our platform in a matter of minutes,” he says.

Dellorso doubts they will do much work with firms looking to raise capital through the exemptions for non-accredted investors.

CircleUp is another new broker-dealer with a focus on consumer products and retail companies. Bhakti Chai, which makes Fair Trade Certified tea, raised nearly $865,000 on the platform.

Folio Institutional, a self-clearing broker/dealer, saw the interest around equity crowdfunding and decided to launch an online equity and debt-funding platform in September. Since the firm can custody the securities, it can enage in secondary-market transactions and, potentially, public offerings.

For the entire article from WealthManagement.com please click here

Morgan Stanley CDO Fraud Update-Trial Time

morgan-stanley-cdo-fraud

Morgan Stanley Must Face Fraud Claim Over $500M CDO

Law360, New York (January 4, 2016) A New York state appeals court has upheld a trial judge’s refusal to dismiss fraud claims against brokerdealer Morgan Stanley brought by a Cayman Islands vehicle that bought $17 million in high-risk notes tied to residential mortgage-backed securities in a $500 million collateralized debt obligation (CDO) that were wiped out.

For those not familiar with the background story, this is a long-tailed civil litigation that began 3 years ago…

(Huffington Post Jan 13 2013) It’s becoming depressingly familiar: Bankers joke openly in emails about a toxic investment they’re creating. Bankers sell said toxic investment to clients while betting against it. Everybody loses money, nobody goes to jail. Rinse, repeat, crash the economy.

The latest round of emails was produced in a lawsuit by a Chinese bank suing Morgan Stanley over a $500 million subprime-mortgage collateralized debt obligation the bank created and marketed as “Stack 2006-1.” ProPublica’s Jesse Eisinger writes that documents in the case show Morgan Stanley bankers had very different ideas about what it should be called.

Those names, according to internal emails from early 2007 unearthed in the case, included “Shitbag,” “Nuclear Holocaust,” “Subprime Meltdown” and “Mike Tyson’s Punchout.”