Saturday, December 27, 2008

Bary's Column In This Week's Barron's: Floating Rate Preferred Stocks METPRA GSPRA HBAPRF BACPRE MERPRL/ Gross interview Forbes

Added 5/7/09: Anyone interested in this subject matter, floating rate equity preferred stocks, may want to register at the free site QuantumOnline that has links to prospectuses and other information regarding these securities, and those securities can be found in the section at that site under preferred stocks subject to the 15% max tax rate for qualified dividends. QuantumOnline Credit Ratings -

ADDED 5/23/09. Updated Discussion on Floating Rate Equity Preferred securities: Advantages and Disadvantages of Equity Preferred Floating Rate Securities This post also contains basic information about the terms of each of the floaters.

Added 6/24/2009 My Gateway Post which contains links to my discussions of floating rate equity preferred stocks, synthetic floaters and CPI floaters is Floaters: Links in One Post

I mention briefly in this original post a Merrill Lynch floater. All of the Merrill floaters changed their symbols after the acquisition by Bank of America. I subsequently bought after this post BMLPRG, one of the Merrill floaters, shortly before Bank of America announced its conversion offer for its equity preferred issues, including those acquired as a result of its MER acquisition. I subsequently sold it. (Added 3/14/2010: I did subsequently add 100 shares of BMLPRH (2 50 share lots) after performing the following analysis based on the then prevailing prices: Item # 6 BMLPRH vs. BMLPRJ Bought 50 BMLPRH at $13.25 Bought 50 of the Floaters USBPRH & BMLPRH

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S L Green became the latest REIT to lower its common stock dividend, slashing it from $.785 to $.375. SL Green Trims Dividend - I have a very small investment in the common and a larger one in SLG's preferred stock. In the current climate, I view these common stock dividend cuts to be positive for the preferred stock shareholder in that more money is being kept by the REIT to service its debt and pay dividends on the preferred stock issues.

Andrew Bary's column in Barron's discusses the benefits of floating rate preferred stocks that I have discussed in these posts since I started to write them. I have owned or still own all of the ones mentioned in his column except for the Merrill Lynch adjustable rate preferred series L, MERPRL. I did not know about that one. I currently own AEB, which he does not mention, METPRA, BACPRE, and GSPRA. Bary asserts that these floaters have some of the characteristics of the treasury inflation protected securities in that they provide some protection against inflation. I made the same point in an earlier post. Inflation or Deflation: Bond Alternatives/
I also mentioned in the above linked posts that the floaters, at their currently depressed prices, provide protection in both inflation and deflation scenarios, because the guaranteed yields are now generous when bought at the current depressed prices. My buy of METPRA at 7, for example, provides a guaranteed yield of 14.2%, which is the deflation protection, and the 1% over LIBOR component of the equation provides some inflation protection. I have a more extensive discussion of the drawbacks of these securities than Bary since he merely mentions the opinion of Bill Gross and how the government's involvement in these large financial firms may serve to keep them alive. The drawbacks include a lack of a maturity date, most but not all of these securities are non-cumulative, the preference right of preferred shares is just above common which raises the spectre of a total loss in the event of a bankruptcy, and the prospectus needs to be read to determine the circumstances that allow dividends to be suspended which is important due to most of them being non-cumulative preferred stocks. Consequently, I under-weight them compared to the cumulative preferred stocks. I also place all preferred stocks with long term bonds in my asset allocation model due to their lack of maturity and the fact that their bond characteristics are far more dominant for an owner of these securities than any alleged equity feature. My view of them is not governed by the fact that the issuer treats them as equity.

The Merrill Lynch floater was offered last year and now trades at around $8.64. MER-PL: Summary for MER LYN DEP SHS SR 5 - Yahoo! Finance It offers dividends at the greater of 4% or 1/2% above 3 month LIBOR. Since Merrill is about to be acquired by Bank of America, I would put the credit risk of MERPRL in the same boat as BACPRE. I have a small position in BACPRE as discussed in my post dated 10/8/2008. 3 month Libor and Floating Rate Preferred Issues The guarantee and float provisions of BACPRE and MERPRL are the same. Since Merrill is about the be acquired by Bank of America, I do not see any reason to prefer one over the other except for a difference in price/purchase cost. I think this is the link to the Merrill security discussed by Bary in his column. Term Sheet

I owned for a brief time HBAPRF mentioned by Bary and sold it at a profit. It has only a 3.5% guarantee and a .75% float over LIBOR. It was also selling at a significantly higher price than the AEGON and MET LIFE floaters (METPRA has since rallied) that have a better guarantee at 4% with METPRA having a better float provision at 1% over three month LIBOR. So HBAPRF would be added back but only at a much lower price. HBA-PF: Summary for HSBC USA PFD F - Yahoo! Finance
(this is the U.S. sub for HSBC ) If I was going to buy this one again, I would review the financials. The prospectus link is Form 424(b)(5)
Bary does not give the symbol for the HSBC issue. He does give the symbol for the parent bank HSBC Holdings (HSC).

While I mix my discussions of these floaters with other topics, some of my more detailed discussions are contained in these earlier posts, along with a more detailed analysis of their drawbacks.

AEB Prospectus

I also think that it is important to keep in mind what happened to the Lehman floating rate preferred as I discussed in this post: PHOENIX SENIOR BOND: PFX /AIG /A RISK OF PREFERRED STOCKS (LEHPRG REMEMBERED)

When anyone mentions a bank trust preferred or a floating rate preferred, I always believe that it is important to understand the preference rights after a FDIC seizure of a bankKEYPRAOut of the Frying Pan Into the Fire My opinion is that a preferred stockholder of a bank would likely receive nothing after a FDIC seizure.

I sometimes bring these subjects up in emails to Bary and others journalists and never hear back. Of course, I generally torch journalists for their financial columns, as I did with the writer in Forbes who tried to discuss a few TCs in a column.Article in this Week's Forbes on Trust Certificates/Trust the Government?Continued Discussion on Trust Certificates & Forbes Article/DKR Possibly, if they had to manage their own money and actually had to put it on the line, they might look at the issues in more depth. Or, alternatively, if they eat their own cooking, then maybe they need to look at all the variables, alternatives and issues a lot harder.

I did read an interview with Bill Gross in the current Forbes' issue. He is basically saying that stocks will be lucky to return 6% per year. This view is based in part on consumers adjusting their buying habits after being singed in the current credit crisis. If I had to guess, and we are both guessing, I would say the return will be closer to 8% annually over the next decade or around a double in the market averages in 9 years rather than the 12 suggested by Gross. In a year, for most consumers, this current downturn will be a distant memory in the remote control nation. I was also interested in his purchases of International Lease Finance bonds, a subsidiary of AIG likely to be sold soon. I have bought three of them, with two maturing in 2009 in May and August, still selling at good discounts to par value. His reasons for buying are similar to mine, except I would add that International Lease is still profitable with a viable business even though it is of course heavily indebted. International Lease has separate filings at the SEC which I examined before buying these three short bonds. e10vq The problems with AIG caused International Lease to draw down its bank lines of credit and it was no longer able to float new debt issues to repay maturing ones, which has caused a liquidity crunch.


  1. Hi TENN
    GREAT BLOG. I just discovered it while researching floating rate preferreds. You mentioned AEB which looks like an interesting pick. Do you own any other ones besides those mentioned in the article. do you list all your holdings any where. Keep up the good work.

  2. I have discussed some other adjustable rate securities that are not directly tied to 3 month LIBOR, and I just summarized some of these issues in my most recent blog titled

  3. A very intelligent analysis of these securities which I have been following for a couple of years with mixed results.

    I wonder about two things:

    What kind of preferred does the government have in BAC? If BAC suspended preferred dividends would it also suspend government preferred? In oher words does the government preferreds offer protection to other preferreds?

    Secondly I have seen bizarre moves on low volume preferred as you have
    I wonder if the very low volume lends itself to price manipulation?

    Appreciate your sharing your hard earned knowledge with us.

    Happy (and profitalbe) New Year


  4. To Sebastian: I simply view the infusion of capital into the banks to be a positive for a preferred shareholder. Anything that bolsters the capital position is overall a net positive. The terms were favorable to the banks. They certainly are paying the government a lot less than they would have had to pay private investors for the same type of security. I have only briefly discussed the impact of the Dutch governments purchased of preference shares as it relates to my investment in the AEB floater from Aegon and the opportunistic buy of the ING perpetual preferred issues INZ and IND. My position in BACPRE is very small and I do not like it very much due to its 3/8% float provision when a MET Life would give me a 1%. There was a time with METPRA was being priced below BACPRE. I also referenced in a post an interview with Bill Gross who viewed the infusion of capital by the government as a positive for all of these companies including the likes of AIG. I have also mentioned my understanding of the FDIC preference rules applicable whenever that agency seizes a U.S. bank. If that occurs, I would expect my preference shares to become worthless. You can google 1993 FDIC preference rule change and see more. I have known about these floating rate preferred issues for sometime but they did not interest me until recently when the prices on all of them started to fall precipitously thereby juicing the guarantee to attractive levels. During their meltdown, the float provision which does provide a measure of inflation protection was not being valued at all in my opinion. I place a significant value on something that might pay me 1% over 3 month Libor while giving me a guaranteed rate of around 14% for my last buy of METPRA and AEB would still give a new purchaser, based on Friday's closing price of less than 9, a guaranteed yield of over 11%.

    I have no evidence of manipulation. Low volume equates with low interest. Price declines are possibly more indicative of individuals selling for losses after being sold these securities like MERPRL at 25 last year. In other words, the decline until Bary's column was due to considerations probably reflecting heavy individual ownership. I have seen similar activity in the Trust Certificate market during October and November,which presented excellent opportunities for anyone understanding those securities. The volume is generally low and most of the time interest is non-existent, with heavy domination of trading by individuals many of whom may not fully comprehend what they own and how the pricing of the bonds in TC form may be way out of line with the pricing of the same bond traded by institutions. I have seen first hand trading aberrations in all of these thinly traded markets with the most bizarre being a price spike near the close of a TC containing a senior bond issued by Verizon (XFL) to over 33 from 25 and it had a $25 par value. That was the strangest example that I know from this year. I mention it in an earlier post. I was a seller of 100 held in an IRA and can only guess at why and what happened.