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Subject:  Re: HFC-B Date:  5/13/2010  10:09 PM
Author:  joelcorley Number:  30852 of 36299


You wrote, It probably is all right, but I'm not sure about the health of the banking industry even today, including HSBC. Is this one of those preferreds with a maturity date in which they can skip 20 quarters of dividends until maturity? I've stayed away from banking preferreds because of this.

You're thinking of preferreds typically known as Capital Trust Preferreds. Those are a special class of Trust Preferreds (Trust Preferreds are the preferred stock of a trust that holds some asset, usually bonds, for the beneficial interest of its shareholders - this is also the basis of how complex derivatives are typically structured; but the things I've been investing in are fairly simple) that are usually issued by bank holding companies to help meet capital requirements. The ability to DEFER dividends is an FDIC regulatory requirement. DEFERRAL of dividends is not necessarily the same thing as SKIPPING dividends ... though it can amount to the same thing if the bank defaults. If it recovers, the bank owes you the back interest. (Even if you acquired the issue after the suspension, you get all back interest payments.) Plus you receive interest on the suspended interest at the coupon rate.

Typically with Direct Corporate Preferreds, a SUSPENSION of dividends means they SKIP paying dividends for that period. In other words, you will NEVER, EVER receive the unpaid dividends. EVER.

Also, Capital Trust Preferreds, as junior subordinate debt are SENIOR to Direct Corporate Preferreds and a DEFERRAL event requires the issuer to SUSPEND all dividends to both the Common and the Direct Corporate Preferreds. A failure to do so is a default under the bond's covenants. Therefore, Capital Trust Preferred dividends are AT LEAST as safe any Direct Corporate Preferred from the same issuer. The only creditors senior to a Capital Trust Preferred shareholder are Senior unsecured bondholders, vendors, secured creditors and since its a bank, depositors.

Of course we're talking about a bank, so the odds of any class below the senior bondholders receiving any funds in bankruptcy or seizure are almost zero. Even senior unsecured bondholders will likely be wiped out.

Also, The safest preferreds I know of are those of PSA (Public Storage) because PSA has done their financing through issuing of preferred stocks. They have no debt so they are not beholden to the whims of the financial industry. They have almost a whole alphabet of preferreds to choose from. We have lots of PSA-D which is the lowest cost preferred, but you aren't going to get 7.5% on it.

Risk and reward should go hand-in-hand. I've looked at public storage issues and like them. I don't own them because I didn't think they were an adequate value at the time I was reviewing them. That and I like to think I understand banks at least as well as I understand the storage rental market.

Don't get me wrong, I wouldn't ask you to switch out of PSA to bank issues. But ALL bank issues were punished severely during the credit crisis - more so than any other industry. I felt that the recovery in bank issues would be just as dramatic - and it has been. Now that I'm near par with my bank holdings, I'm trying to diversify. But I also think its crazy to stay away from banks because of some irrational fear that they're all going to fall off of a cliff.

- Joel
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