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Coupon 7.20% past call date, currently selling above par.

I bought fbf.pr.m last year at a nice discount, planning to hold until it got called. Since it is a TRU-PS it will almost certainly be called in 2012. The idea was to buy it for the YTC, 9% built-in capgain (due to the discount) plus $0.45/quarter dividend.

Now it's selling slightly over par. It hasn't been called yet, but I could effectively do a pseudo-call by selling it.
Tring to decide if I should do that, or just keep it and collect the dividends until the call.

Selling now would be in keeping with the original planned strategy. Of course, whether it's me voluntarily selling or them calling, I have to re-invest my proceeds. My heart tells me "take the money and run". My greed tells me to hold on and keep collecting that nice 7.2% dividend.

My intellect tells me that I've achieved my objective and so I should roll into another BAC preferred TRU-PS that is still at a discount and will also probably be called in 2012. I'd re-establish the discount but lose a little bit of yield but greatly increase the YTC (assuming that these TRU-PS's will all get called).

Also, the ex-dividend date is Mar 10, so should I wait until then if I decide to sell?

Any thoughts or suggestions?
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Rayvt,

You wrote, I bought fbf.pr.m last year at a nice discount, planning to hold until it got called. Since it is a TRU-PS it will almost certainly be called in 2012. The idea was to buy it for the YTC, 9% built-in capgain (due to the discount) plus $0.45/quarter dividend.

Now it's selling slightly over par. It hasn't been called yet, but I could effectively do a pseudo-call by selling it.
Tring to decide if I should do that, or just keep it and collect the dividends until the call.

Selling now would be in keeping with the original planned strategy. Of course, whether it's me voluntarily selling or them calling, I have to re-invest my proceeds. My heart tells me "take the money and run". My greed tells me to hold on and keep collecting that nice 7.2% dividend.

My intellect tells me that I've achieved my objective and so I should roll into another BAC preferred TRU-PS that is still at a discount and will also probably be called in 2012. I'd re-establish the discount but lose a little bit of yield but greatly increase the YTC (assuming that these TRU-PS's will all get called).

Also, the ex-dividend date is Mar 10, so should I wait until then if I decide to sell?

Any thoughts or suggestions?


Food for thought...

First, there are no great deals in any of the BAC trust preferreds now.

Second, FBF-M last traded at $25.09; but it is trading with about 39 cents worth of accrued, but unpaid interest. To call the issue tomorrow, BAC would have to pay $25.39 - a 30 cent/share premium to today's market price. Adjusted for accrued interest, today's price is really more like $24.70.

Third, at the moment I don't think BAC really wants to spend its cash reserves on paying down debt ... though some of the higher priced issues might be good candidates. FBF-M isn't their highest coupon trust preferred issue. That would be KRB-D at 8.13%.

Fourth, there's no guarantee that FNF-M will get called in 2012 or even later. It all depends on how much BAC would need to pay to raise the same capital in other markets and whether or not they do so before interest rates rise.

Fifth, if you hold the issue in a taxable account you'll get hit with capital gains which might make the early swap seem pointless - especially if you swap into another BAC trust that then gets called as well. Of course that depends on how deep a discount to par you're looking at.

I'm holding 2 BAC issues that are much more likely to to be called. KRB-E (8.10% coupon; 7.98% YTM) and CPP (8.05% coupon; 7.77% YTM). I bought these as a calculated bet that BAC wouldn't be the first big bank to refi their trust preferreds and if I could get them at least no higher than par plus accrued interest, I would still make a tidy sum on the interest payments. (In fact, I bought most of my CPPs well below par.)

Of course I'm also holding CFC-B as my largest BAC issue - CFC-B is more middle-of-the-road in their capital trust's coupon heirarchy at 7.00%. I bought all of those while they were deep under par (they closed at $24.46 today) and I expect to see some of their higher coupon issues called before I have to worry about these.

On the other hand I have in the past sold some of my CFC-Bs in my IRA to diversify and increase my effective yield and I've recently been thinking about selling more to buy something else. But the question has to be, What else am I going to replace this with? At the moment I only have a couple of ideas that might be a better choice.

And to address your concern a little more directly, consider this: BAC will almost certainly call the trust preferreds in order of coupon - high to low. If you sell FBF-M today and replace it with a lower coupon issue, it could be a good long while before BAC actually calls that lower coupon issue. Do you think the loss of yield will make your YTC superior ... when you don't even know when that call date might be?

- Joel
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Coupon 7.20% past call date, currently selling above par.

I bought fbf.pr.m last year at a nice discount, planning to hold until it got called. Since it is a TRU-PS it will almost certainly be called in 2012. The idea was to buy it for the YTC, 9% built-in capgain (due to the discount) plus $0.45/quarter dividend.


I don't think that your assumption that FBF-M will 'almost certainly be called in 2012' is all that certain. Trust Preferreds for large banks already have had 'regulatory events' occur with the passage of Dodd-Frank, the passage of the Collins amendment, and the actual signing of the bill. They will continue to have 'regulatory events' occur as the provisions of Dodd-Frank take effect, so 2012 isn't a 'watershed' that banks are waiting for to call Trust Preferreds. They are waiting until they have enough capital that they can divert some to debt payoff. That makes it even more likely that BAC's Trust Preferreds will be called in coupon rate order, highest to lowest, as capital becomes available to pay back debt, with little or no regard to the call dates.

The question is, for this particular issue, when will BAC have enough of a 'fortress balance sheet' (as the CEO is aiming for http://www.istockanalyst.com/article/viewiStockNews/articlei... ) to begin buying back Trust Preferreds, in addition to paying a dividend? Given the bad news that keeps coming out about legal costs for mortgage issues http://finance.fortune.cnn.com/2011/02/28/big-banks-see-6-7-... it may be some time before BAC has enough capital to have a 'fortress balance sheet', divert earnings to a dividend rather than capital increase, and pay off all the debt with higher coupons before it gets to FBF-M. Even given the revenue that BAC has the potential to create, if the economy stays on a positive track, 2012 seems optimistic to me, given all the other expensive issues that continue to occur.

AJ
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Hmmmm, I guess it's best to research details before taking as gospel things you read on the internet. Google Is Your Friend.

I had been assuming that the crucial date was mid-2012, but this is what google found:
TRUPS issued before May 19, 2010, by larger bank and thrift holding companies will continue to be treated as Tier 1 capital until January 2013. At that time, the Tier 1 capital treatment will be phased out over a three-year period ending in January 2016. The specifics of this phaseout of Tier 1 capital treatment are to be determined.

So it appears that the strong incentives for large banks to refinance their TRUPS's won't happen until some time between Jan'13 and Jan'16.

Guess I'd best stick to my basic strategy: Don't sell a preferred until after the call date and if the price gets to par + 3-5 quarters of dividends. For FBF-M that would be 26.80.
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Hmmmm, I guess it's best to research details before taking as gospel things you read on the internet. Google Is Your Friend.

I had been assuming that the crucial date was mid-2012, but this is what google found:
TRUPS issued before May 19, 2010, by larger bank and thrift holding companies will continue to be treated as Tier 1 capital until January 2013. At that time, the Tier 1 capital treatment will be phased out over a three-year period ending in January 2016. The specifics of this phaseout of Tier 1 capital treatment are to be determined.


Well this is from the internet, too, but it indicates, at least as of October that even if BAC (and several other large banks) had to just stop counting their Trust Preferreds as Tier 1 capital, they would still have enough Tier 1 capital to meet regulatory requirements. http://seekingalpha.com/article/229901-capital-rule-changes-... Even though it's from the internet, there are some numbers that you can verify, and you can probably update with the 2010 Q4 capital numbers to update.

AJ
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If you would like to keep your investment in BAC pfds, you might consider switching to another issue. BAC-I is a regular non-cumulative pfd discounted at 23.46 and yielding 7.04%. It's not a trup so not affected by finreg. The best feature is that this issue isn't callable till 10/2017. The non-cumulative feature is a drawback but if we expect that to come into play for BAC, we shouldn't own any of them.

From my point of view, there's no reason to keep FBF-M over par at a yield of 7.17%. That's a fairly conservative yield in the pfd world and easily replaced by something discounted to par and yielding more. Perhaps tax issues would lead you to keep it. But then again, you did say your plan was to sell at this level. I would replace it if held in an IRA. You can view many BAC pfds at the link below..................Xot


https://spreadsheets.google.com/ccc?key=0Ai6nAWjRjzKlcHh3bzN...
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Thanks for all the thoughts.

I'm having a hard time finding another pfd to switch into that makes sense to me. Too, I guess I got spoiled by having bought a potload of these 12-24 months ago at mouth-watering discounts and sky-high yields. ;-) Guess I need to get realistic about expectations.

I'm finding once again that it's largely a matter of swapping capgain (discount) with dividends (yield). Although FBF-M --> CFC-B would pick up $.25 dividend and $.63 in discount. The only one so far I'd found that would pick up both, usually one is up and the other is down. Guess that means the market is pretty efficient.
Stirring the pot to merely shuffle things around -- except for giving the broker 2 commissions -- doesn't seem like a good tactic.

Good comment about the accrued dividend for FBF-M, I hadn't thought of it that way----still not used to thinking of things the bond way. Will take another close look at things next week when it goex ex-div.

Alas, what with all the rolled-over capital losses I'm carrying, capgains isn't much of an issue for me.
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