Wednesday, December 3, 2008

Added to Long Bond Positions: AT & T Senior Bond/JZJ

Yesterday, I added to my existing position in JZJ at 17.50. This is a trust certificate containing a senior AT & T bond maturing in 2031. The rate on this bond and the TC float up and down by .25% for ratings upgrades or downgrades of the debt. If I bought the underlying bond, there is a minimum guarantee of 8%, but it is selling near par now. The coupon on the TC has a lower minimum guarantee of 6.375% but is selling as of yesterday at a 30% discount to par value. At the current prices of the two securities, the TC actually yields close to 1% more than the underlying bond and sells for approximately 30% more of a discount to par. JZJ Stock Quote - Corporate Backed Tr Ctfs Stock Quote - JZJ Quote - JZJ Stock PriceInstitutional trades of the underlying bond can be monitored at the FINRA site free of charge. JZE AND JZJ: UNDERLYING AT & T BOND DATA at FINRA So, in summary, the TC gives me more yield at the current price, over 9%, even though it is currently paying the minimum guarantee of 6.375% whereas the underlying bond has a higher guarantee at 8% which is the current yield for a trade at par value.  If the bond is called by the owner of the call warrant, the TC will pay $25 giving me a 30% profit for my latest buy whereas the buyer of the underlying bond would receive the purchase price back, or less for purchases made over par. I have discussed these securities at length elsewhere.

I am now above my normal limit for a single position when I combine the value of both JZE and JZJ in my portfolio. I am willing to do this only because of my comfort with AT & T's credit but mostly due to the possibility of an early call on the underlying bond at some point when the corporate bond market settles down and AT & T wants to refinance a 8% long bond with an undesirable yield enhancement feature that could take the yield higher but not lower than the current rate.  

Based on the price AT & T had to pay to issue a five year note recently, I thought that an early call of the underlying bond would have to wait for the corporate bond market to calm down. Corporate Bonds, Citigroup & Robert Rubin, DKR  I can not find my earlier discussion of this point.

Some TCs, like JZJ, have a lower coupon than the underlying bond while others like the TC containing a Goodyear Tire bond have a higher coupon. Emerson Electric and the Goodyear Tire TC XKK This factor has to be taken into account when purchasing a TC.

I have said many times this market is extremely unstable. The bad news will continue to flow for many months and the market continues to act surprised by each piece of bad news. The report from ADP showing job losses in November at 7 year high is just the latest example. MarketWatch

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