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Subject:  Re: HFC-B Date:  5/13/2010  1:11 AM
Author:  joelcorley Number:  30841 of 36325


You wrote, Hi I've been lurking for years and am very grateful for what I have learned here. I am retired and am looking for a safe investment. On Quantum I found a preferred issued by HSBC Finance Corp. Its quopon is 6.36% and call date of 6/24/10. NYSE symbol is HFC-b and it closed today at 21.05 (call price is $25) If I buy it and it is called at $25 I will collect a capital gain. If not I still collect todays yield being 7.55% as per yahoo finance. What am I missing? It seems too good to be true. Does anyone have anything to add plus or minus. Thanks.

I have a Google spreadsheet that lists exchange-traded income securities based on a snapshot of Quantum Online from October of 2009. The spreadsheet is useful because it lists current prices, yields and YTM as well as pay dates and then-current credit ratings - Quantum lacks any way to compare current securities based on yields. It's posted somewhere on this board; but I don't have access to Google Docs from where I'm at. (I'm in Korea right now and the company is blocking that site.)

I'll try to post it later; but before you buy, it's a good idea to get a comparative feel for all the issuers in a particular rating range. Once you've narrowed down to a single issuer that has a good yield / risk profile, you might want to create a new spreadsheet based on that existing one - one that just has the issues from a single issuer sorted by YTM. (Sorting order can change in surprising ways over time.) Limit yourself to a maximum maturity date and pick the highest yielding issue and buy that. If YTMs are very close, you might have to use the payment dates or average trading volume (liquidity) as a distinguishing factor.

Anyway, you should definitely do more due diligence on HFC-B - at the very least, read through much of the prospectus. I happen to think there are other issues that offer similar or better risks and at least as good a yield.

For one thing, HFC-B is a straight corporate preferred. That makes it more like a non-voting equity position. Corporate preferreds are considered income securities; but on the company's books, they are only senior to the company's common stock. For a bank if it has to suspend dividends on the common, it's because it needs to suspend dividends on the preferreds as well. And the corporate preferreds are the next in line after the common.

Also in terms of default risk, straight corporate preferreds rank behind all other debt, including junior unsecured bonds. Junior unsecured bonds are the types of securities usually held by capital trusts, which also issue preferreds. I buy a lot of these myself. If a bank is taken over by its regulator, junior bond holders (including capital trust preferred shareholders) are probably going to be wiped out; but corporate preferred shareholders almost certainly are.

Ironically capital trust issues have taken just as hard a beating as other types of preferreds, so often you can buy a capital trust issue for about the same yield as the corporate preferreds. In such a case, you should prefer the capital trust issue.

Of course the issue with the best security position is the exchange-traded note, which is usually on parity with senior unsecured bond holders.

BTW, HSBC's presence in the USA is primarily through its acquisition of Household Bank. Household Bank was one of the most predatory sub-prime lenders of the last decade. The one smart thing Household did was sell out to HSBC before the **** hit the fan.

- Joel
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