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Author: trader2012 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35259  
Subject: Opportunity, or Value Trap? Date: 3/22/2012 11:16 AM
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It's not often that I'm willing to discuss specific issues before a trade has been closed. But the features of this one are unusual. Zions Direct is auctioning:

5-Year Senior Medium-Term Notes
Coupon: 4.50%
Maturity: March 27, 2017

Offer Size: $300,000,000
Sold in Units of $1,000

Auction opens at 8:00 AM ET, Thursday, March 22, 2012.
Auction closes at 3:00 PM ET, Thursday, March 22, 2012,
and is expected to settle on March 27, 2012 (T+3)


The offering docs are sucky:

We may not redeem the notes prior to maturity.
The notes will not be listed on any national securities exchange. Currently, there is no public market for the notes.

The public offering price and the allocation of the notes in this offering will be determined by an online auction process. During
the auction period, potential bidders will be able to place bids at any price at or above the minimum bid price of 93.000000% of the
principal amount (or conversely, a maximum yield to maturity of 6.147%) per note and up to and including the maximum bid price of
100.000000% of the principal amount (or conversely, a minimum yield to maturity of 4.500%) per note.


Currently, there are few of Zion's bonds being offered out (by which one might benchmark the bond being auctioned). But a list of all of the currently-active bonds can be pulled from FINRA.

ZION.GW ZIONS BANCORP - 06/21/2012 No Aaa AA+ AAA 100.841 -
ZION.HK ZIONS BANCORP 2.00 09/19/2012 No - BBB- BBB- 100.351 1.409
ZION.HM ZIONS BANCORP 2.25 10/29/2012 No - BBB- BBB- 100.000 -
ZION.HH ZIONS BANCORP 4.00 10/29/2012 No NR BBB- BBB- 100.000 -
ZION.HF ZIONS BANCORP 5.00 11/07/2012 No NR BBB- BBB- 101.500 2.560
ZION.HN ZIONS BANCORP 2.00 12/12/2012 No - BBB- - 99.997 2.002
ZION.HG ZIONS BANCORP 4.25 02/01/2013 No NR BBB- BBB- 101.500 2.486
ZION3822926 Zions 2.00 03/05/2013 No - BBB- - 100.000 -
ZION3822940 Zions 3.50 02/28/2014 No - BBB- - 100.000 -
ZION.GN ZIONS BANCORP 5.65 05/15/2014 No B1 BB+ BB+ 104.125 3.623
ZION.GY Zions 5.65 05/15/2014 No - BB+ BB+ 103.534 3.965
ZION.HE Zions 7.75 09/23/2014 No - BBB- BBB- 109.100 3.878
ZION.GZ Zions 6.00 09/15/2015 No - BB+ BB+ 103.226 4.975
ZION.GL ZIONS BANCORP 6.00 09/15/2015 No B1 BB+ BB+ 101.619 5.480
ZION.HA Zions 5.50 11/16/2015 No - BB+ BB+ 102.000 4.892
ZION.GO ZIONS BANCORP 5.50 11/16/2015 No - BB+ BB+ 103.750 4.372
ZION.HI ZIONS BANCORP 5.50 05/10/2016 Yes - BBB- BBB- 100.500 2.174
ZION.HJ ZIONS BANCORP 5.00 08/01/2016 Yes - BBB- BBB- 99.750 5.063
ZION.HL ZIONS BANCORP 5.25 11/07/2016 Yes - BBB- BBB- 99.625 5.339
ZION.HO ZIONS BANCORP 5.45 08/01/2017 Yes - NR - 100.000 -

As you can see, Moody's doesn't like them very much (and their report details the reasons). But another tactic is to benchmark the bond agasint whatever else is being offered out in that credit range and maturity and projected yield, which isn't much, just Icahn's 7.75's of '16, which is hugely worrisome. The bond being auctioned, if it could be obtained at 93, would be a price outlier, which raises this question.

"Why is Zions having to pay up to borrow?"

My instincts tell me that a YTM of 6-1/8 isn't worth fussing with (given that bigger money could be made elsewhere). But I could be wrong, and I'm tempted to nibble or maybe not and, instead, to deploy the cash elsewhere, because if stock prices end the day where they are now headed, in three days I'll have made from my shorts as much money as I would from holding this bond for a year. But for some accounts, a 5-year note offering 6% might be attractive, even with its onerous illiquidity.
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Author: folgore Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 33886 of 35259
Subject: Re: Opportunity, or Value Trap? Date: 3/22/2012 11:36 AM
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I tried digging up Zions bonds on Etrade but only came up with two very overpriced issues. It's a pity because some of them look like good CD substitutes.

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Author: trader2012 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 33888 of 35259
Subject: Re: Opportunity, or Value Trap? Date: 3/22/2012 12:32 PM
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I tried digging up Zions bonds on Etrade but only came up with two very overpriced issues. It's a pity because some of them look like good CD substitutes.

folgore,

Not a chance, not even close.

What is the essence of a CD? This single fact: principal and interest are guaranteed. Sometimes, a corporate issuer is of such impeccable financial strength that their promise to repay the loan is, de facto, as good as a guarantee. But that isn't the case with Zions. The fact they are having to beg for money says they're in trouble, to say nothing of the typical spec-grade ratings on their debt (and BBB- and below are spec-grade).

I like the bank (and own their debt). I like the brokerage firm (and do a lot of business with them.) But I was buying their bonds mid-70's (when they should have been bought), not now at today's prices. Heck, during the 2009 lows, I even picked up some of their 6's of '15 at 55.

It's buying at those kind of prices that creates Graham's "margin of safety" and why bond-investing is best understood (and practiced) as a value discipline, not as a cash-management gig. This is exactly where Loki (and his camp followers) screwed up and why his advice to them was/is so bad. He failed to understand the difference in purpose of the two and led them (and himself) right into the poverty of negative returns they now find themselves. Loser, losers, losers all of them, and Bernanke (and his ZIRP) isn't the one who did it to them. It was their own greed, timidity, and stupidity.

Cash (and cash-equivalents) are held (only in judicious amounts) for liquidity. Bonds (and other investments) are held for the income-stream and/or cap gains they might offer. The upside of cash (and cash-equivalents) is that it has no nominal downside. The downside of cash (and true equivalents) is that it is is nearly always a sure way to lose money (after taxes and inflation). The downside of any true investment is the true possibility of nominal loss. But its upside, if purchased properly, is true gains (after taxes and inflation). The delusion that Loki (and his camp followers) suffers under is a belief that "riskless" assets can offer real rates of return. Yes, occasionally and anomalously, such a thing does happen. But when the historical record is examined, it can be seen just how rare those times have been. So that's a third criticism that can be leveled against them. They are ignorant of market history.

Bottom line? CD substitutes can be found, but Zion's bonds aren't some of them.

Charlie

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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 33899 of 35259
Subject: Re: Opportunity, or Value Trap? Date: 3/22/2012 7:01 PM
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I tried digging up Zions bonds on Etrade but only came up with two very overpriced issues. It's a pity because some of them look like good CD substitutes.

Really? Are you aware that Zion's is one of the banks that has yet to repay it's borrowing from TARP - not because they haven't tried, but because the Fed hasn't allowed them to? And that the 'passing grade' that they got from the stress test apparently did not stress them as much as the banks that failed were stressed?

http://finance.fortune.cnn.com/2012/03/21/federal-reserve-st...

Nonetheless, it appears the Fed was more lenient with Zions than with other banks. Last month, Zions told analysts it projected that $1.7 billion, or 4.5% of its loans, would go unpaid under the Fed's stress scenario. That's significantly lower than average 8.1% loan loss estimate that the Fed used to determine whether the nation's 19 largest banks had enough capital or not. Go with Zion's estimate, which it appears the Fed did, and the bank comes out of the stress test with 60% more capital than is required. A pass. But if the Fed had applied the same loan loss ratio to Zions that it did on average to the other banks, Zions' stress test would have shown that the bank has 30% less capital than it needs, meaning it would have failed.

The 'passing' grade that Zion's was given will allow them to repay the TARP money, but they said that they would have to borrow $600 million to do so. This $300 million offering is probably part of that debt issuance. Since the Zion's TARP borrowings were scheduled to go to a rate of 9% (from 5%) on 11/14/13, the $300 million that they are borrowing at 4.5% - 6.15% (depending on their auction results) will definitely save them money in the long term, and may even save them money in the short term, compared to the TARP costs.

But I certainly wouldn't call Zion's debt a 'CD substitute'. There is significantly more risk than CDs carry because the debt isn't guaranteed.

AJ

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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 33900 of 35259
Subject: Re: Opportunity, or Value Trap? Date: 3/22/2012 7:31 PM
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"Why is Zions having to pay up to borrow?"

To repay TARP.

AJ

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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 33913 of 35259
Subject: Re: Opportunity, or Value Trap? Date: 3/23/2012 6:41 PM
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It's not often that I'm willing to discuss specific issues before a trade has been closed. But the features of this one are unusual. Zions Direct is auctioning:

5-Year Senior Medium-Term Notes
Coupon: 4.50%
Maturity: March 27, 2017

Offer Size: $300,000,000
Sold in Units of $1,000

Auction opens at 8:00 AM ET, Thursday, March 22, 2012.
Auction closes at 3:00 PM ET, Thursday, March 22, 2012,
and is expected to settle on March 27, 2012 (T+3)


Here's an interesting footnote on the auction that Zion's held. Apparently, they proposed using the same auction process for the Facebook IPO. They were turned down, losing to Morgan Stanley (among others) but the article brings up some interesting points.

http://blogs.wsj.com/deals/2012/03/23/facebook-rejected-zion...

Zions lacks the balance sheet and client relationships of those investment banking powerhouses but it does have one competitive advantage – a field-tested online auction platform that the bank thought might appeal to Facebook.

Facebook’s CEO Mark Zuckerberg eventually decided against an auction and picked Morgan Stanley (and now 30 other underwrites too) to syndicate its offering. But Zions still believes in the mechanism, so much so that the bank sold a $300 million senior unsecured bond Thursday using its online auction platform.


AJ

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