Wednesday, October 8, 2008

Trust Certificates PJL and XFL: Verizon Bond

Added 3/24/2010: The Trust Certificate XFL was called on 3/24/2010 by the owner of the call warrant at its $25 par value plus accrued interest: Item # 6 Call Warrants and Trust Certificates

ADDED 5/29/2009:
My Gateway Post for Trust Certificates is: Trust Certificate Links in One Post

The prospectuses for XFL and PJL, Trust Certificates containing a senior Verizon Global Funding bond, discussed in the following post, are linked at the free site Quantumonline (registration required), grouped under the heading Third Party Trust Preferred. Third Party Trust Preferred Securities Table -

For convenience, I have linked those SEC filings below:
XFL: (Called at par + accrued interest by the owner of the Call Warrant in 2010)

Trading and symbols for all Verizon bonds can be found at the free FINRA site. Search Results

This is the FINRA link for the underlying bond in XFL and PJL: FINRA

There are 3 more Trust Certificates that contain this Verizon bond: HYA, HJE & HYY

*********************************original Post October 2008:

With the global reduction in short rates this morning, I would expect further declines in short rates making investments like money market funds and treasury bills even less desirable than they were yesterday. The yields yesterday provided a negative rate of return when adjusted before inflation and without making a further reduction for income taxes, which would only increase the negative rate. Last night, I did lock in some higher rates purchasing some CDs with staggered maturities at 6, 12 and 14 months at 4 to 4.5%. I am also continuing to invest in senior bonds from corporations that are contained in Trust Certificates trading on the exchange. The following discussion assumes familiarity with my earlier discussion explaining Trust Certificates, and why they present opportunities to individual investors (SEE JZJ POST).

The symbols for the Trust Certificates (TC) that I am going to discuss this morning are XFL and PJL and both of them contain the same underlying SENIOR bond from Verizon Global Funding . Verizon (VZ) guarantees the payment of this bond from its subsidiary. The SEC filing for the underlying bond contained in both of these TCs can be found at SEC.GOV under the search term Verizon Global Funding filed 8/07/2001. This bond matures 12/1/2030 and it has a 7 3/4% coupon paid semi-annually in June and December. The TCs both pay a coupon slightly less at 7.625%. The bond may be called now if Verizon so chooses. The reason for having two TCs for the same bond is that one TC was originated by Merrill Lynch (PJL) and the other by Lehman (XFL) (Series 2002-16). I mentioned yesterday how to find the SEC PROSPECTUS for Lehman ABS in a prior post and the Merrill Lynch TCs can be found usually with the search terms "Merrill Lynch Depositor" or "PPlus". It is no longer relevant who form the trust and deposited the corporate bonds into the trust.

What is relevant is that the pricing on these two TCs will often vary significantly and both provide yields substantially in excess to the closing price of the underlying bond. PJL closed at 19.99 yesterday and it has a $25 par as does XFL which closed at 19.52. The last price that I have for the underlying bond for a significant trade, Cusip 92344GAM8, was from 10/6/08, 200 at 97.369 and 200 at 96.896 (PAR AT 100 IN THAT MARKET, 200 units at 973.69 and 968.96 per unit respectively which is what those trades in the institutional bond market mean to me). The discounts to par of the two TCs is greater. The effective yield on XFL at yesterday's close is around 9.75%. The TC market is undoubtedly inefficient and subject to wild swings up and down so it takes some getting use to do. I did own XFL earlier in the year when it shot up to over 33 near the close. I never knew why but suspect that it may have had something to do with a forced short covering in what is invariably a thinly traded market for TCs. I sold the $25 par value XFL at over 33 without a moment's hesitation.

In full disclosure, I own shares of XFL AND PJL and will continue to buy additional shares at or below the current price, or even slightly above. This is not a recommendation to buy or to sell. Trade at your own risk, and perform research about this security by reading the prospectus at and further studying the financial health of VERIZON (symbol VZ at yahoo finance) before making any investment. Consult with your financial advisor prior to making any purchase. In this blog, I am merely describing my reasons for purchasing this security and the potential pitfalls that I identified prior to purchase. This security may not be suitable for others based on their unique financial position and risk profile. Moreover, my discussion of TC's assumes prior knowledge of these instruments gained from a person's review of the applicable SEC material AND MY PRIOR BLOGS ON THIS SUBJECT INCLUDING THE DISCUSSION ON THE ERRATIC PRICE SWINGS OF THESE SECURITIES. THE PROSPECTUS ON THIS TC CAN BE FOUND AT SEC.GOV

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