Wednesday, February 19, 2014

Call Warrant Exercise on PJA/Trust Termination for PKH

I noticed this morning that the symbol no longer worked, and the security was listed in my account only by the Cusip number. 

That type of event normally indicates that the call warrant owner has exercised its right to redeem the trust certificate at par value plus accrued interest, though there have been at least two exceptions. In one of the exceptions, the trust was terminated, and the underlying bonds were delivered to the TC owners.

The call warrant attached to PJA has been exercised by its owner, most likely Merrill Lynch, the brokerage company that formed the Grantor Trust that owns the underlying bonds. 

I checked this morning and found this notice published by PR Newswire:

I am surprised by that exercise given the small profit that could be realized by the call warrant owner. 

The owner of the call warrant will have to deliver the redemption proceeds to the trustee on 2/21/14 in order to acquire the bonds owned by the Grantor Trust. If that is done, then I will thereafter receive the $25 par value, plus any accrued interest, for my 200 PJA shares. There will not be much, if any, accrued interest since PJA just made its semi-annual payment.


For the reasons mentioned in the comment section by me, the owners of the trust certificate PKH, which contains the same underlying bond as PJA discussed above, will likely soon receive their pro-rata share of the $1,000 par value underlying bonds in exchange for their trust certificates plus some cash. Since the trust is being terminated, the owners of PKH will receive their pro-rata share of the underlying bonds (plus cash). For example, the owner of 100 PKH shares will receive two $1,000 par value ($2,000) underlying bonds currently owned by the PKH Grantor Trust, plus their pro-rata share of the net cash proceeds realized by the trustee from selling a sufficient number of bonds to pay the remaining odd lot portion of that 100 share position which I suspect will be close to $500-assuming that the bonds are sold near par value.

See: Notice Of Termination Of Trust To The Certificate Holders Of PreferredPLUS Trust Series QWS-1 Certificates (Cusip NO. 740434873)

That notice basically says that the trustee gave the call warrant owner the requisite ten days notice to exercise the call option, and the call warrant owner did not do so. Therefore, the trustee will deliver the bonds and the cash to the owners of PKH on 2/24/14.

PKH has the same 7.75% coupon as the underlying bond and closed today at par. The underlying bond information can be found at Finra. Bonds Detail

I no longer own that one.  


  1. This notice was issued for PKH through an SEC filing:

    "On February 7, 2014 The Bank of New York Mellon, as Trustee for the PreferredPLUS Trust Series QWS-1 Trust (the “Trust”), issued a press release regarding the receipt of a notice from the Depositor that the Depositor recently determined that the guarantor of the Underlying Securities, Qwest Communications International Inc., is no longer a reporting company under the Exchange Act. A Form 15 “Certification and Notice of Termination of Registration under Section 12(g) of the Securities Exchange Act of 1934 or Suspension of Duty to File Reports Under Section 13 and 15(d) of the Securities Exchange Act of 1934” was filed for Qwest Communications International Inc., the underlying securities guarantor, on January 21, 2014. This requires termination of the trust."

    Given the large number for sale south of par yesterday, I wouldn't be surprised if the bonds are delivered to trust holders rather than $25+accrued.

    The CTL 7.75 '31 currently has a market of 97.25/99.00.

  2. Scott: I did not see the PKH filing since I did not own it. It does explain why there was a call warrant exercise on PJA and a likely bond delivery to the owners of PKH. The trustee forced Merrill's hand by opting to terminate the PJA trust unless Merrill exercised the call warrant.

    The trustee will be delivering the bonds to the PKH owners. This has happened once before for a bond originally issued by Embarq that was acquired by CTL. The Embarq bond was the underlying bond in FJA.

    I can tell you what happened for a 100 share lot of FJA. I had sold out of my position, but still had the security in a family member's account. He received 2 $1,000 par value CTL bonds plus $500 and accrued interest.

    I have a family member that owns PKH. I suspect that he will receive the bonds plus cash. Why?

    This has already been worked out. PKH has the same coupon as the underlying bond, so the call warrant owner would in effect be paying more of the bonds by exercising the warrant.

    However, PJA has a 8% coupon, which means there will be more bonds supporting the coupon. There would be a slight profit, and you can do the math which I did once in connection with the redeemed TC XFJ containing a Motorola bond. The TC had a 8.375% coupon while the bond was at 6.5%:

    Item # 7 7. Call Warrant Exercise When the TC Has a Significantly Larger Coupon Than the Underlying Bond: Why Was XFJ Called

    I have not done the math but suspect that Merrill already has buyers lined up for the bonds owned by the PJA trust and could make a slim profit on those bonds after redemption.

  3. After reviewing the PKH notice this evening, I left an addendum to this post dealing with that situation. There is no doubt about what the PKH owners will receive on 2/24/14. The trustee has already given Merrill Lynch the requisite 10 days to exercise the call warrant and Merrill failed to do so. That ends the option to redeem the trust certificates at $25 plus accrued interest.

    Instead, the owners of PKH will receive their pro-rata share of the underlying bonds owned by the PKH Grantor Trust and some cash. The trustee can only deliver two $1000 par value bonds to the owner of 100 PKH shares. Some bonds will be sold so that cash will also be distributed.

    I noted in the preceding comment that the same deal occurred in connection with the TC FJA. I do not own PKH but a family member does still own a position.

  4. I see you recently bought more COP; I am also a holder of the stock; Is your purchase just based on valuation or in this part of a large cap strategy?
    I see recently that W. BUffett sold his cop shares; I know that COP has morphed into an exploration company and is looking at the US as it comes to energy independence.
    My question is related to the price of oil; I knows that the shale oil industry is very capital intense and if there is an abundance of oil in relation to use of other fuels and demand changes, then it becomes difficult to make a profit on this oil at some price point.
    I was wondering about your views on the price of oil as the US is able to produce more.

    And its effect on COP?

    thanks a lot; and thanks for sharing your vast experience in your blog!!


  5. The future course of natural gas and oil prices have always been wild cards when it comes to investing in energy companies.

    Berkshire still has a Conoco stake but did reduce its holdings again:

    Berkshire's original investment in COP was $6B in 2008, which Buffet referred to as a mistake, and the position is being sold off.

    Motley Fool Article on this subject:

    The unpredictability of price is a reason to keep my exposure to E & P companies relatively small. It is not a reason in my opinion to avoid the sector. I basically sold out of Royal Dutch and used the proceeds to pay for most of the two recent COP purchases.

    Sure, natural gas production is increasing in the U.S. but demand for energy is also increasing worldwide, particularly for distillate products like gasoline. New uses of U.S. natural gas production are accelerating too (e.g more baseload generation with gas turbines, cars, locomotives, etc.)

    COP has a good dividend growth history, and qualifies under both my large cap value and dividend growth strategies.

    As to the U.S. Permian Basin, Eagle Ford and Bakken shale assets, they look good to me, but I am certainly no expert.

    You may want to read some of the recent COP articles at SeekingAlpha:

  6. You have detailed your rationale of jettisoning RDS in favor of COP. Not sure if you still own XOM. I am curious about your view on other Integrated E&P majors, such as BP. CVX, OXY, STO or TOT with respect of your large cap value and dividend growth strategies. Won't it be better to hold a basket of the majors with equal weight?


  7. At the moment, COP is my favorite large cap energy based in the U.S., based on dividend growth history, current valuation, and forecasted production growth.

    I have bought and sold STO and XOM.

    Looking at Exxon's dividend growth history, the quarterly dividend doubled from 2005 to 2013, rising from $.29 to $.63.

    COP's dividend rose from $.31 to $.69.

    While those rates of growth are similar, I start with a better dividend yield with COP which is about 1.5% higher.

    CVX has gone from $.45 to $1.

    I am not familiar with Total. The dividend has gone down:

    I did not find any stock splits either that may explain the drift down in the dividend rate, since some sites do not adjust for split when providing dividend information.

    I own small stakes in Canadian energy companies, one of which, CNQ, is mentioned in today's blog.

    I also have a position in the CEFs IRR and BCF. I am not happy with either of them. Both are buy write funds and will jettison both at some point.

    There are several alternatives. Some individuals call PEO a dog, but it has performed okay over the years. It closed yesterday at a -15.47% discount to NAV and has large positions in XOM, CVX and OXY. Another option is to buy a low cost ETF such as XLE or Vanguard's energy ETF VDE:

    If you want to add world energy company exposure, then IShares has an ETF that would include Total, Royal Dutch, BP and Statoil: IXC

  8. Another alternative for U.S. energy stocks for Fidelity customers is its new sector ETF FENY. This ETF can be bought commission free by Fidelity customer and has a .12% expense ratio:

    I just bought 50 shares as an inexpensive way to increase my U.S. energy stock exposure. Since I am running about a week behind discussing trades, this purchase will not be discussed until the week of March 10.