1. Update on ZBPRA (owned): ZBPRA (ZB-PA) is a floating rate equity preferred security issued by Zions Bancorp (ZION). I bought 100 shares at $7.8. Bought 100 ZBPRA at $7.8/ This is a $25 par value security that pays quarterly dividends computed at the higher of 4% or .52% above 3 month LIBOR. The Quantum site has ZBPRA grouped with the preferred stocks that pay qualified dividends. When I receive my 1099 for 2009, I hope to confirm that claim.
Shortly after buying it, ZIONS commenced a Dutch tender offer for the shares in a range of $10.5 to $11.50, less than 1/2 of the par value at the highest price possible. I declined to participate, viewing the offer as being too low. ZBPRA I had just received a few days earlier a 50% pop in two Bank of America equity preferred due to a conversion offer from BAC that was far more generous than the Dutch tender offer made by Zions. Sold BACPRE/BAC Exchange Offer to Convert Equity Preferred into Common Stock Sold BMLPRG
Zions ultimately completed the Dutch tender offer, buying 4,020,435 shares of ZBPRA at $11.5. Form 8-K I am somewhat surprised that anyone tendered their shares.
Yesterday, Zions declared its quarterly dividend on the remaining shares, with an ex dividend date on 8/28. The penny rate is .2555. This would be based on the 4% guarantee, given the abnormally low LIBOR rates, currently at less than 1/2%. As I have mentioned in several posts, I am attracted to securities that pay me the greater of a guarantee or a percentage above a short term rate, such as the 3 month LIBOR of the 3 month U.S. Treasury Bill rate. When I purchased ZBPRA at $7.8, an abnormally low price, the value of both the 4% guarantee and the floating rate, when triggered, was enhanced to such a degree that I had both inflation and deflation protection in the same security. The guarantee at my cost is worth 12.8% perpetually, or until an early call, and the LIBOR float would have value once inflation returns. The problem is that this is a non-cumulative security that is senior only to common stock. If Zions was ever seized by the FDIC, it would become worthless. The only protection that I have for continued payment of the dividend is a dividend paid to the common shareholders. If Zions eliminated its common dividend, it may still pay the preferred dividend but is not required to do so. Consequently, even though my position is small, I monitor what is happening at this bank.
Prior to buying the preferred, I was only vaguely familiar with the bank. After reading a few earnings reports, I concluded that the bank was hurt a great deal by the real estate mess, particularly in its Arizona and Nevada operations. Yet, I believed that it had recovery potential, though that was far from clear. Since this is an update, I am not going to rehash that opinion. Instead, I will mention that Credit Suisse recently included Zions as one of the two banks within its coverage universe with the highest risk of capital raises. I view a capital raise as a positive for a preferred shareholder. Yes, just dilute those common shareholders all you want, just be sure to pay them a penny dividend per year. Zions did declare a penny a share common stock dividend for the quarter on 7/22/09.
I also reviewed Zions latest quarterly report filed with the SEC. Form 10-Q Zions reported a much smaller loss of 41 million in the 2nd quarter, down from a whopping 852 million loss in the 1st quarter, which was impacted by a 634 million goodwill charge. The loss is the 2nd quarter would have been worse, except for gains realized in a debt modification and the preferred stock buyback in the amounts of 290 and 52 million respectively. The loss would have been about 380 million without those one time gains. As of 6/30, Zions common equity ratio increased to 5.7% from 5.3% in the first quarter. My reaction is that I am concerned but not yet worried enough to sell ZBPRA at close to a$500 profit on a $788 investment, plus one dividend paid to date.
I also noted that the Value Line timeliness rank is its lowest at 5. But, I am not an owner of the common stock.
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