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 - QuantumOnline.com
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
S L Green became the latest REIT to lower its common stock dividend, slashing it from $.785 to $.375. SL Green Trims Dividend - WSJ.com 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. Barrons.com 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.
From 10/5/08:LIBOR AND THE MET LIFE FLOATING RATE PREFERRED STOCK
From 10/6/2008: LIBOR AND THE AEGON FLOATING RATE PREFERRED STOCK
METPRA Prospectus: METLIFE INC
AEB Prospectus www.sec.gov
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.