Preferred Stocks

[ericd1]

I tried today...couldn't borrow any C shares...:(

 

Over the last week+ the basket of PFDs I've been tracking (most listed in this thread) moved up nicely ~60% and PGF (the ETF) gained 71%

 

The basket yield is currently yielding ~15.8%. Last Monday the yield was 22.1%.  (Thanks DC & OEC)

 

I've read there are other price anonomolies, similar to the PFD's in convertible bonds...(ok, also high yield bonds, corp bonds, etc.)

 

Are the converts really out of wack?  How would you trade these? Closed end convertible funds (Calamos) funds, other ideas?

 

Thanks / Eric

[cheapguy]

Is there a way for a small investor to make money by lending their shares for shorts ? 

At the end of this article, it says the borrow rates for Citi were at 120%/annum.

==================================================================

 

http://online.wsj.com/article/SB123739700104873325.html?mod=loomia&loomia_si=t0:a16:g2:r4:c0.0707206:b23116072

 

 

By JOHN JANNARONE

 

First, shareholders were burned by Citigroup Inc.'s offer to swap $27.5 billion of preferred securities for common stock.

 

Columnist John Jannarone explains how the government's increased stake in beleaguered bank Citigroup is very bad news for short sellers.

 

Now, it is short sellers in the hot seat.

 

Thanks to sweet conversion terms in the February offer, investors holding the preferreds could short the common stock to lock in a likely profit. That lured in a flood of arbitragers and pummeled the shares.

 

But Citi's stock has tripled since March 5. Even with short sellers now willing to pay through the nose to borrow stock, the supply has virtually dried up. The result: a short squeeze exacerbated by a series of bullish comments from banking executives.

 

Some arbitragers, with memories of last year's Volkswagen pileup and fears that brokers might force them to return borrowed stock, have rushed to close positions.

[citigroup daily share price]

 

That has made the trade appear juicier for new investors. Last Friday, one Citi 8.125% Series AA preferred security could be bought for $12, but was exchangeable for a fixed 7.3 shares of common stock valued at $13. Now, the preferreds are valued at $13, but 7.3 shares of common are $22.

 

The spread implies an absolute return of about 70% in a matter of weeks if Citigroup sticks to its plan. Risks include a change in the terms if, say, the government decides to take a larger equity stake.

 

A few arbitragers still are playing. A large prime broker said Tuesday that a client borrowed five million Citi shares at an annualized interest rate of 120% to go short.

 

At those rates, Citi shareholders might decide lending out their stock isn't such a bad idea after all.

[oec2000]

After the huge run in pfds, just wanted to get some of your thoughts. I'm feeling a little tempted to lock in some gains but feel rationally that that might not be the right thing to do since yields are still quite attractive.

 

My head says to stick with the original plan - i.e. hold the pfds through to recovery of the financial sector and collect the fat yields in the meantime.

 

My heart wants to gradually scale out of some positions or switch to more attractive alternatives.

 

Advice, anyone?

[Kiltacular]

Hi OEC,

 

I'll throw my 2 cents in... (1)  The preferreds discussed here were great...I thought this was one of the best threads ever.  (2)  You have pushed the idea of sitting back and collecting on WFC-L for an extended period....that's my plan.  We've got a ridiculously high return from these and as you pointed out, they effectively can't be called for a very, very long time.  I think this is an incredibly unusual opportunity that resulted from the fact that they were just issued by Wachovia and it seems to me that barring the financial meltdown, Wachovia (or any issuer of a preferred like this) would have always intended to force conversion or figured that they'd never be converted if the stock went to zero.  The fact that Wells stepped in makes these a highly unusual opportunity.

 

My feeling is that you collect these amazing yields and use the proceeds to buy better opportunities.  Personally, in my many years of investing, I can hardly recall an investment where I thought I could get a 20% return on the initial investment for as far as I could see.  I mean, when I was younger, I "expected" to get those kinds of returns but my experience is that they are extremely rare.  The fact that many of the preferreds discussed -- assuming they work out -- offer a great opportunity to avoid the problems so common to outside passive investment.  Namely, actually getting money back in your hands and not having to rely on the market to revalue the holding and/or finding that management has squandered excess profits before the market comes around to your view.

 

I have no plans to sell these holdings for some time.

 

Thanks again to all who posted on these ideas.

[cheapguy]

Would buying WFC-L at about $500 is still good.

With 15% yield currently, and possibly getting the appreciation when the share goes towards the par value of $1000, it still looks good for me.

 

Other than opportunity costs, is there something I am missing.

 

I am assuming these preferred would not be wiped out (either bankruptcy, suspension of dividend for a long time...)

 

I am hoping other than volatility, there is no capital risk over say 3-4 years.

 

Want to hear what can go wrong.

 

Cheapguy

[Kiltacular]

Well, WFC-L is a non-cumulative preferred.  But, as long as Wells pays a common dividend, it is obligated to pay on this preferred.  But, on the what could go wrong front....things could deteriorate even further for the banks, leading Wells to cut its common dividend to zero and decide to quite paying on WFC-L.  You would never get back the lost payments.  Wells does have some cumulative preferreds where this wouldn't be the case, but IIRC, they are callable on certain dates.

 

So, there is the possibility that this happens and in that case, I think you would see the price get crushed.  But, my read of the situation -- and as discussed in the thread -- it seems that since FRE and FNM quit on their preferreds and the system coninued to implode, it seems the gov't is intent on putting the banks in a position to keep paying on their preferreds and everything that has happened in recent weeks on the gov't front suggests to me that the risks of losing on these preferreds is shrinking by the day.

 

In my mind, buying WFC-L at $500 is still steal given that as you point out, you're still getting 15% until Wells common goes up about 10 fold from here and stays there for 20 of 30 days. 

 

Perhaps others have seen some more significant downsides emerging in recent weeks...I see the downside outcomes receding over the last couple of weeks....of course, that is probably the main reason these things are all up 50% or more in that time...

[cheapguy]

Let us update the List of preferred still good to buy

 

(capital preservation is first rule, so no potential bankruptcies)

 

Please post your favorite preferred.

 

My pick is PSA's preferreds, with basically zero debt and about $10Billion Equity, they look good.

The yield is about 10% on most series and going about 70c on a dollar (par value)

[dcollon]

I still like the following:

 

Everest Re (re.b)

Markel (mkv)

Hilltop Hldgs (hth.a)

 

I'm glad this thread has worked out so well.  Some great idea sharing.

[StubbleJumper]

I agree with Kiltacular.  

 

I consider WFC-L to still be a hot deal at $500 --although I still really drool about brief period that it traded at $325 a few weeks ago!  Assuming that WFC does not run into serious trouble over the next couple of years, it would be a reasonable expectation that WFC-L will trade somewhere near par in the next 5-10 years.  So if your purchase price is $500, you sit back and collect your 15% annual dividend while WFC-L slowly climbs up to $900 or $1000.  Even from today's prices, it's hard to see how you'd have an annual return of less than 20% over the next 10 years....  So it all comes down to the question of whether WFC has as much earning power as they suggested in their Q4 release and whether they've written down loans as conservatively as they suggested in their Q4 release.  I'm pretty comfortable with this.

 

I apply the same kind of thinking to Harris Preferred Capital, HBC-.  Assuming that the Bank of Montreal does not run into any serious trouble, it may be reasonable to think that HBC- could rise to somewhere near par over the next 5-10 years.  So, if you buy at today's price of $13.75, you just sit back and collect a 13% dividend while HBC- creeps upwards to $22 or $23.  Hard to see how you could do any worse than 16% or 18% over the next 10 years.  It all comes down to whether the Bank of Montreal stays out of trouble and is prepared to prop up their US operations.  I'm pretty comfortable with this.

 

We've already discussed ORH-A at length, and concluded that the return will range somewhere between solid (like 14-15% annually over five years) if the preferreds are not called and spectacular if they are called in 2010.  Heads I win big-time, tails I just win!

 

I have also taken a medium-sized position in Co-operators Insurance preferreds, TSX:CCS.PR.C which currently yield just north of 10%.  Again, assuming that the Cooperators continue to make money as they have for the past 60 years, this should work out quite nicely.  An annual yield of 10% which is a qualifying dividend for Canadian tax purposes, and presumably when spreads narrow, the price of CCS-C should edge higher...but I'd guess it will permanently remain somewhat shy of par because the original dividend was not exceptionally high.

 

I'm currently bidding on another preferred that is very illiquid, so I cannot really divulge what it is until I get my shares!

 

The nice thing about all four of these options is that the underlying businesses seem to be strong.  Even if the equity market goes sideways for 5 more years (which it has done in the past!) it is possible to have a half-decent return.  These are not necessarily home runs, but they certainly appear to be singles or doubles.

 

 

SJ

 

 

[ericd1]

I second the idea of reinvesting the 20% dividends rather than taking the gains now. Plus there's still potential for an additional 100% upside to my basket.

 

I took big risk on a very small position of RBS-P and -M  yield ~40%+ and the gains have been nice. Not sure what to do with these now - anyone following these?

 

Also on the REIT thread HRP was mentioned. It's yielding ~20%

 

I added HRP to my basket

 

 

[Kiltacular]

Hey ericd....I also bought a very small position in RBS-P in my personal account.  I'm prepared to watch it go to zero.  I also have a very nice gain in a short time but I'm holding this one unless/until we get to at least 80% of Par.  This one is for a home run....though my investment is small enough that it won't move the needle much.  I did but it in an IRA so the gains and big dividend -- if it works out -- will be tax free for a long time.

 

I have been searching daily for information which supports or undermines the idea that with the U.K gov't bailout, the preferreds will be protected.  I have not seen much either way.

 

Reading between the lines, however, you have a firm like AFLAC which holds huge positions in many bank preferreds, including RBS.  It seems to me that gov't, banking and insurance regulators are EXTREMELY concerned that if they let preferreds continue to fail in the U.S. and the U.K., the follow-on effects will be horrible.  Frankly, that is my bet with the RBS preferreds and to a lesser extent with the other bank preferreds.  I think these gov't's decided that letting FNM and FRE preferreds go to zero was a disaster.  Since then, you've seen that the preferreds got a sweet deal in the Citigroup bailout (as discussed in this thread).  You've also seen that BofA kept their common dividend at 1 penny which forces them (signals to the market) to continue to pay on their preferreds as if they pay any common dividend, they have to pay their preferreds. 

 

When you step back and look at how intertwined all these financial institution holdings actually are and you see that the gov't's both understand this and appreciate the downside risks to the system in letting them fail (MORE BAILOUTS), my read is that preferreds in the U.S., U.K. and Canada are mostly, if not all, in the too big to let go pile.

 

Obviously, even if this is right, things could change and we should continue to hunt for any info. which throws a wrench in this analysis (assuming it is even correct for now).

[oec2000]

Thanks Kiltacular, SJ, and Eric for your feedback. You pretty much confirmed what I though made sense - good to have some reinforcement though. (I hope this time the consensus is not wrong as it so often is! ;))

 

Eric, I'm holding on to my RBS but have switched from the Ps to the Ls, following my prescription of buying the lowest to par issue.

 

SJ, I sold some of my HBC.PR at 13.2% yld to switch to WFC.L at 15.5% yield and ORH-A at just under 12%. 

[Kiltacular]

Hey oec...Just want to take a moment to say thanks for highlighting the particular attractiveness of WFC-L.  I had been looking at WSF (another Wells one) but this one is callable (already) and doesn't get the good tax treatment....I didn't buy it....of course, it has been a pretty quick double.  But, when you pointed out WFC-L I got excited again.

 

Also, a big thanks to ericd for the spreadsheet you put together.

 

This thread, I think I already said, was really one of the best I've seen in a while and shows what a benefit you can get from a community like this. 

 

Thinking back to what happpened in the meltdown in the municipal market -- there were probably similar opportunities and I let them go by. 

 

This thread on preferreds allowed me to get a handle on what was out there, get some input from smart investors looking at the downside, etc.  Obviously, no investment is certain and these may not workout but the risk/reward seems great.

 

This board has turned into my most useful resource -- not because of the ideas alone...but rather because people question each other with logical insights, there is little "ego", I see people questioning ideas that they like -- always a very good sign, etc., etc.

 

I also really like the new board format.  At first, I felt that three sub-boards was too many.  Now, I feel the opposite...the sub-boards allow for much more focussed conversation.

 

Anyway, next time there is a big dislocation in some area of the market, I hope we get another thread like this one.  These dislocations obviously don't happen that frequently but when they do the window doesn't seem to stay open that long.

[RusticFrank41]

Moodys has just downgraded WFC preferreds to junk. May be a buying opportunity to those who believe the company has enough cash to avoid cutting the dividends

[ericd1]

Kilt - as you I used my tax-advantaged accounts for RBS and most of the other PFDs. I too searched and couldn't find any info on the RBS PFDs, I presume the low price reflects relative risk and uncertainty...but they aren't zero (yet)...Agree the Govt better understands the risks of zeroing out the PFDs (but not certain).  (I'm long RBS PFDs)

 

My assessment (which may be wrong) is the credit markets need to stabilize...risk is reduced and yields come back to some sense of normalcy...before the market can make a meaningful move. Then earnings improvement will drive the market. While the wave will lift all boats, I expect the PFDs/bonds to ride higher on the first wave. I also see lower risk with PFDs/bonds.

 

I also think there's opportunity in other areas - Muni's (like FFH/ORH is buying), high yield and convertible bonds...So far I've nibbled on three Pimco closed-end bond funds: Corp Oppty (PTY ~17% yield), High Yield (PHK ~24%) and Float Rate (PFL ~19%).

 

As always - am I missing something? Other ideas?  Thanks all!

[Junto]

After the huge run in pfds, just wanted to get some of your thoughts. I'm feeling a little tempted to lock in some gains but feel rationally that that might not be the right thing to do since yields are still quite attractive.

 

My head says to stick with the original plan - i.e. hold the pfds through to recovery of the financial sector and collect the fat yields in the meantime.

 

My heart wants to gradually scale out of some positions or switch to more attractive alternatives.

 

Advice, anyone?

 

I was thinking in the same boat as you. I put together a basket of preferreds that pay on the 15th of every month of the year. Most yield over 10% and have seen some great price appreciation over the past couple of weeks. However, I have decided to stay the course instead of liquidate any of the positions.

 

Currently this is my basket/portfolio mix:

 

CTZPRA Citizens Funding (Preferred)

WFCPRL Wells Fargo & Co. (Preferred)

HRPPRB HRPT Properties Trust (Preferred)

LNCPRG Lincoln National Corporation (Preferred)

AIVPRY Apartment Investment Mgt Company (Preferred)

HRPPRD HRPT Properties Trust PRFD 'D' (Preferred)

JPMPRY JP Morgan Chase Cap XI (Preferred)

ORHPRA Odyssey Holdings PFD A (Preferred)

 

I continue to look at them on a weekly basis. WSJ.COM has an excellent listing of all preferreds that you can download into excel and sort. Once sorted, I use Quantumonline.com to research specific issues. It has worked great for me. Now I just look forward to collecting my dividend on the 15th of every month!

 

I should note that I levered my portfolio about 30% into this deal, so I have taken some substantial risk, but based on the returns if the preferreds continue to pay my payback on the debt is two years. Needless to say I am confident in this basket and the companies I have invested in. CRBC/CTZPRA is my deep value play, but my longest owned preferred as I have been building this position over the past year.

 

[Kiltacular]

For those holding RBS-P and/or RBS-S, you may have noticed each spiked almost to $7 today and both closed at $6 -- up over 40% and 30% respectively.

 

Apparently, RBS is offering to buy back some debt at prices much higher than it is currently trading at in the secondary.  I couldn't find all the details and had to talk to my broker, who has a Dow Jones feed.

 

But, I think that is the reason for the spike.

 

Here's one article I found: http://www.reuters.com/article/rbssFinancialServicesAndRealEstateNews/idUSLQ97321220090326

 

If anyone has anything better, please post.

[RusticFrank41]

Although BAC-L (google finance) has been doing quite well BML-Q has in fact become cheaper over the past couple of days. The BML-Q is a preferred taken over from Merrill Lynch, I believe, and wonder why this discrepancy in price should be so. I saw a reference, very vaguely worded, to the unwinding of the purchase, as well as an investor move to unseat some of the BAC board. Comments appreciated. BML-Q now at about 20%, BAC-L about 17%.

[ericd1]

Good question on BML-I -- I figured it had something to do with the ML controversy but I don't see how the purchase could be reversed now. Unless there's something else Mr Market has it mis-priced.

[cheapguy]

Junto and others---

 

Can you post the link to WSJ which has the preferred's file to download ?

 

Why do you like CTZPRA ?

[StubbleJumper]

http://online.wsj.com/mdc/public/page/2_3024-Preferreds.html

 

This is one of the tables that I like to look at.....but you cannot beat QuantumOnline for the comprehensive information that they maintain on the terms and conditions of the various preferreds.

 

SJ

[cheapguy]

What can go wrong with WFC-L ?

 

I have a small amount of WFC-L preferred's.

 

Trying to see what are all the things which can go wrong with this issue.

 

Does the recent rating of junk status for the preferred's affect the dividends going forward ?

Some questions :

1. Is there a definining legal event, after which time Wells Fargo assumes this preferred stock.

    Are we past that event, or it can still legally not accept this preferred issue ?

 

 

Fed's stress test ?

    Waiting for the FED stress test...I am hoping that even if Wells falls short, they maybe able to shore up the capital  soon, without diluting the capability to pay dividends on preferreds/

 

More asset writedowns ?

  With deepening recession, maybe more writedown ahead ?

[cheapguy]

http://online.wsj.com/article/SB123844052183070639.html#mod=todays_us_money_and_investing

 

 

 

 

Distressed Bank Investors Are Aiming for Preferred Treatment

 

 

By PETER EAVIS

 

No investor has nine lives. But those who think the recent bank-stock recovery is more than a dead-cat bounce are making some interesting bets.

 

As well as buying banks' common shares and certain types of bank debt, they are dabbling in banks' preferred stock.

 

These preferreds have been mauled as the financial system has come under stress -- and tend to move with whiplash volatility. Certain institutions have seen their preferreds wiped out completely, or their dividends rescinded, which destroys their value. And if the government's bank rescue shows signs of failing, preferreds could tank again, even at the stronger banks.

 

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[ericd1]

Preferred's continue to perplex -

 

Here's an REIT -- FelCor, a real estate investment trust, is the nation’s largest owner of upper upscale, all-suite hotels. FelCor owns interests in 88 hotels and resorts, located in 23 states and Canada. FelCor’s portfolio consists mostly of upper upscale hotels, which are flagged under global brands such as Embassy Suites Hotels, Doubletree, Hilton, Renaissance, Sheraton, Westin and Holiday Inn.

 

Today they announced -- “We are pleased to have successfully refinanced our only significant 2009 debt maturity." (a $120M secured loan) Also - "The Company’s next significant debt maturity is not until May 2010. FelCor continues to progress on the completion of a new $200 million secured term loan to replace its existing line of credit. The new loan is not subject to any corporate financial covenants."

 

http://finance.yahoo.com/news/FelCor-Announces-Closing-of-bw-14800528.html

 

Their cumulative pfd - FCH Series C yields ~51% It is trading at $3.90  (8% coupon)

 

From their 10K Annual Report - © We suspended payment of our quarterly common dividend in December 2008 in light of the deepening recession, the attendant impact on our industry and FelCor, and the severe contraction in the capital markets. We paid quarterly common dividends starting in the fourth quarter of 2005 through the third quarter of 2008. Prior to the fourth quarter of 2005, we had suspended paying quarterly common dividends in the aftermath of September 11, 2001. We have, however, continued to pay the full accrued dividends on our outstanding preferred stock.

 

There's certainly a lot of risk here...

 

I'm long FCH-C in my small high risk PFD basket

 

[cheapguy]

Ericd1---If you did their (FCH-c) cash flow analysis or how much their future cash flows can cover the preferred dividends, can you please share it.