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Thanks for the reply, and I’ll bother you some more. I don’t think I’m going to run out and buy these, but this has opened up a line of questions, and I think that I’d be well served by gaining a better understanding...

“First, note that you are talking about a trust preferred issue. "The trust's assets consist of the 6.50% Junior Subordinated Deferrable Interest Convertible Debentures due 1/15/2032." Your preferred is a derivative. Its only income source is this debenture. And the issue is carred on Ford's books as a debenture."

From my web browsing, here’s my understanding: This preferred is issued by a Ford subsidiary. That subsidiary holds Ford bonds yielding 6.5%, as well as deposited common shares. It’s sole purpose is to facilitate the trust. Nothing is collateralized, and all debt is subordinate. So, in a legal sense these hold the bankruptcy rights of bonds, but those right are inferior to senior debt.

“In bankrupcy court or in liquidation it stands ahead of common shareholders and other preferred shareholders to get paid, but behind other bonds...”

I did find this in the prospectus. It also seems that this puts a limitation on the dividend as well? Ford cannot pay a dividend if any senior debt is in default (they’d have to preferentially default on any junior debt first, correct?). However, they must eliminate any other preferred dividend before they can eliminate dividends on the S shares, since the S shares are really bonds held in trust, right? I would think though, that this requirement would only apply with regard to a default. Suspension with accrual would not be default, since it's within the rights of Ford as defined by the Prospectus, right?

“Yes, the issue is cumulative and you will get paid if Ford survives and this issue makes it too. But that is not a sure thing by any means.”

I’m not sure what you mean by “if this issue makes it too”. If Ford survives, this debt survives, right? Or do you mean that Ford could be absolved of the debt (especially since it’s subordinate) in a chapter 11 filing? I can understand this, I guess...

“Defaults are not so common, but when they happen with large companies they make big news. That is what is happening with the US auto industry right now. They are likely to fail unless a bailout is arranged. Usually a trust preferred in a major company reporting profits is a great investment. But once you know they are in trouble, investing in a losing company is very risky. “

Agreed. But wouldn’t these shares represent a less risky proposition than common? The income they generate, while it can be suspended, mitigates losses. Furthermore, since they’re convertible, even without a dividend, they can’t fall below their conversion to common value. So, even without a dividend, they really can’t fall below common. Someone would arbitrage them, wouldn’t they?

For that matter, these issues shouldn’t default in the first place, since they don’t need to—they can be suspended with accrual. Obviously, bankruptcy changes everything. (For that matter, waiting 5 years to get your money, while their value deflates is not really going to be any consolation... )

I don’t see it as likely that that the auto industry can be allowed to collapse. There are too many jobs linked to it, and it spreads this virus directly onto Main St. Those who bet on the Chrysler bailout did pretty well. I don’t think that the pols will allow GM or Ford to fail. The backlash would be substantial.

Given that thesis, are preferred shares a safer option given the income, or am I just full of manure? If I am, go ahead and tell me so, LOL. I’m a big boy, and I’d rather learn by being wrong on a message board, than in my brokerage account. I’ll readily agree that there are safer investments by far. But, is the central premise that the preferreds offer a greater measure of safety than common reasonable? Or would you just buy the common, if you were already ready to accept the risk in the first place.

Thanks again for “listening” to my ramblings.
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