Tuesday, April 28, 2009

ING Hybrids: Links in one Post

Added January 2012: I have liquidated my holdings in ING hybrids until I have better clarity on the European sovereign debt and banking problems. I have been trading their volatility since the summer of 2008. 

Snapshots of trades can be found at the end of this post. 

I started owning ING's common stock before purchasing my first shares in in one of its hybrids. Consequently, I was already familiar with the firm. I do not recall the specific date or even the month, but I sold my common shares of ING Group (sometimes spelled Groep for reasons that escape me) at over $30 a share. I do recall that the sell was generated solely out of my concern about all financial companies rather than something specific about ING. I was aware of the hybrids at that time, but had little interest in them due to their prices which were close to par value. I vaguely remember trading the hybrid INZ at a profit before October 2008. My interest in them started to gather steam after the meltdown in virtually all financial preferred stocks after the Lehman bankruptcy and the annihilation of the Fannie and Freddie equity preferred stock owners. I believe that the first mention in these posts, which started in October 2008, was a buy of INZ at around $10 sometime in October and those shares were quickly sold at a profit and the trading strategy became apparent. Sell on the pops and buy on the dips, splitting the orders into pieces, and monitor closely.

After the meltdown started in earnest with the Lehman Brothers failure, the pricing of every financial preferred within my sphere of knowledge, and I know about quite a few, became extremely volatile with a strong downside bias. The ING hybrids were certainly no exception to that phenomenon. With this kind of volatility, there is opportunity but at an enhanced risk. In February and early March of this year, these issues underwent a cataclysmic fall, and the common stock price fell to $3.02, down from around $40 just last April. An enhanced risk is still with us, though the price swings have become less subject to wild emotional swings over the past few weeks.

All of the ING hybrids that I monitor are taxed as equity preferred issues, to the best of my knowledge, which has relevance to a U.S. taxpayer. During the 4th quarter of 2008, I owned both INZ and IND in a taxable account and my 2008 1099 listed those dividends as qualified dividends. I own ISF in a retirement account. I have not received a 1099 covering any of the others. On ING's balance sheet however, these securities are listed as "subordinated loans": ( page: F-4920-F) I compared the list on that page of the annual report with the list provided by ING of these perpetual hybrid securities:  Debt securities ING Groep N.V. | ING  (Note: ING KEEPS Changing this Link. If that link does not work, the information can be found by going to ING's main web site, click investor relations, and then look under ING debt securities)

This is how ING explains these strange creatures in its SEC filing: "Subordinated loans consist of perpetual subordinated bonds issued by ING Groep N.V. These bonds have been issued to raise hybrid capital for ING Verzekeringen N.V. and Tier-1 capital for ING Bank N.V. Under IFRS-EU these bonds are classified as liabilities. They are considered capital for regulatory purposes."

So these securities are like equity preferred for "regulatory purposes" and like "subordinated bonds" on the balance sheet, see page F-3. This is the reason that these securities are called hybrids.  

As with the REIT cumulative preferred stocks, the ING hybrids have no maturity date which is a significant negative. Unlike the U.S. bank equity preferred stocks, they have cumulative features so that skipped payments accrue, and the accrual is with interest under certain circumstances. ING has the option to pay deferred interest in common shares. The investor just has to read this kind of material in the prospectus for themselves. I am not aware of any deferral ever taking place.

Links to the prospectuses can also be found at QuantumOnline.com (free site, registration required).

Some of the prospectus links:







The prospectuses are available at the ING web site in PDF format which is the only place I could find IND. Debt securities ING Groep N.V. | ING 

Some of my posts on ING and/or one or more of its preferred stocks include the following:

Possibly the post that contains the most expression of concern was this one from 3/10/09:

ISF was bought on a day that seemed to me at the time to be the height of the fear at $4.6. BUY OF ISF

It then proceeded to collapse more in early March falling to an intra-day low of $2.6 on March 9th which provoked the post expressing concern but still noting that it appeared to me to be more of a reflection on the human psyche. The dividend yield at the $2.6 price was around 61.5%. It closed today at $9.8 down 30 cents which equates to a yield of over 16%. I see from one of the linked posts above that the last buy of INZ was at $6.52, also of recent vintage, and the shares in the regular IRA have a cost maybe a buck higher than that. INZ closed at $10.9 today. The volatility, risk and opportunity is obvious.

A list of the ING equity preferred issues traded in the U.S. can be found at its web site: Hybrid Securities - ING

The danger in investing in any of these securities is apparent. First, ING has eliminated the common share dividend, the security blanket for a preferred shareholder. Second, ING has been hit hard by the credit crisis. In some of the above linked posts I have discussed the Dutch government's first effort to stabilize this large financial institution. The latest round is discussed in these posts:

I have successfully reduced my risk by trading the positions at a profit, so that I now hold the lowest cost shares using FIFO accounting which is my custom for securities viewed as having an enhanced risk to them. An individual investor has to become knowledgeable about these risks in my opinion in order to make an intelligent decision whether or not to buy, how much capital to expose given the balance of risk/reward, and the method to be used to manage the risk. That judgment can not be made for you.

When I have functionally equivalent securities from the same issuer with no maturity, the only issue of any importance to me at the trading desk, when I have already made a decision to buy, is which one gives me the highest yield at the time of purchase. If there is not much difference, then an issue like bid/ask spread may come into play. Oddly, there seems to be a significant difference in the yield on many occasions. Sometimes I might not spot it but I try to make that evaluation most of the time, sometimes forgetting to do it as a result of old age infirmities.

I will add links to this post as they become available. I will color the new ones composed after this post green and any older ones as blue.

Total= $2,117.96