Monday, November 3, 2008

Relationships: Trust Certificates for the Same ATT Bond

One of the factors that I consider when buying a TC is the relationship between two Trust Certificates containing the same underlying bond and having the same terms.  The only difference between the two securities would be the name of the brokerage firm that originally created the trust and the stock symbol.  This factor does not tell me to buy the TC containing the bond but it helps me to decide which one to buy after I have already made a decision to buy based on other factors discussed in this weekend's post.Trust Certificates: Issues with Long Term Corporate Bonds  There are several examples of wide disparities in price at a particular moment in time between two TCs that are functionally equivalent.  I would just highlight one today.  
     Compare this TC with an underlying AT & T bond with the symbol GJF with this TC containing the same AT & T bond with the symbol JZE,  JZJ has slightly better terms than both of these TCs due to its higher minimum rate of 6.375%.  GJF and JZE are in all respects, as far as I can tell,  identical.  Both contain the same senior AT & T bond due in 2031.  Both TCs start with a coupon of 6.75% which can be reduced to 6% at the rate of .25% for each upgrade in AT & T's debt and that has happened at least three times since these TCs were issued bringing the rate back down to 6%.  For each downgrade, the coupon goes up .25%.  Par value for both TCs is $25.   Interest is paid semi-annually at the same time for both TCs.  The call date for the underlying securities is slightly different with JZE being in January 2009 (or thereafter)  and GJF being in February 2009 (or thereafter).  I do not know the origin of that difference but it may have something to do with issuing securities from the same shelf prospectus at slightly different times.  The underlying bond in JZJ is callable on November 18, 2008 or thereafter. 

I am not in the market to buy anymore of these TCs.  If I was and assuming the market in TCs was rational, which it is not, I would expect JZJ to be price above JZE and GJF and the later two being priced at virtually identical prices.  Here are the quotes from a few minutes ago: 

JZJ 18.63 up .63, bid 17.7 and ask 19.13 with a daily range of  17.60 to 18.63
JZE 18.66 WITH NO TRADES, bid at 18.26 and ask at 19.66
GJF  21 WITH NO TRADES bid at 21 and ask at 21.99.

As I said, this does not tell me to buy a TC containing this AT & T bond.  It does suggest of course to use a limit order. And it tells me that GJF is the worst buy of the three.  JZJ would be the best at this moment in time among the three, particularly if a limit order could be hit at 17.6.  I copied my early October discussion of JZJ in this weekend's post. Stocks & Politics: Trust Certificates: Issues with Long Term Corporate Bonds

The AT & T bond for all of these TCs does have a higher minimum coupon at 8% which likewise can be increased by .25% for each downgrade in the debt.  I am hoping that AT & T will at some point, within the next year, call the underlying bond and refinance it at a lower coupon and without the enhancement features.  When that happens, the TC is also called at its par value of $25 plus accrued interest.   This debt was originally issued before AT & T's  acquisition by SBC (see summary of acquisitions in AT&T - Wikipedia, the free encyclopedia) and it was at the time of issuance a debt obligation of the  old AT & T,  a lower rated debt having to pay a higher rate with these enhancement features than the current AT & T.  After SBC acquired AT & T and Bell South, the name was changed to AT & T; and it is my understanding that as the surviving company the current AT & T is responsible for the old AT & T's debt (I AM CERTAINLY NO EXPERT IN THAT AREA).  I may be wrong about that but it seems reasonable to me.    

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