8 Bank Bonds: Once Failures, Now Too Big To Fail

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 |  Includes: BAC, JPM, WFC
by: The Financial Lexicon

Just a few short years ago, Wachovia, Bear Stearns, Merrill Lynch, and Countrywide Financial were saved from the brink of disaster by Wells Fargo (NYSE:WFC), JPMorgan Chase (NYSE:JPM), and Bank of America (NYSE:BAC). As part of the acquisitions, the three too-big-to-fail institutions assumed the unsubordinated and subordinated debt of the companies being acquired.

Some of that debt still trades today. While these bonds were never themselves failures, the companies that issued the bonds were rescued from a future that likely would have been bankruptcy. Under such a scenario, these bonds would have ended up in a default status. Instead, they live on.

If you are interested in purchasing the bonds of Wachovia, Bear Stearns, Merrill Lynch, or Countrywide Financial, it is important to keep in mind that your bond could be susceptible to a spin-off resulting in bankruptcy.

Over the past few months, there were rumblings in the financial world about Bank of America possibly spinning off Countrywide Financial, with the former mortgage giant filing for bankruptcy. If this were ever to happen, clearly this would not be a positive for Countrywide’s bonds. Furthermore, if Bank of America were ever willing to do this, it might cause investors to question the safety of Merrill Lynch bonds.

Of course, the possibility of a spin off and subsequent bankruptcy could be a risk for many subsidiaries of many corporations and should give corporate bond buyers pause when doing an analysis of the default prospects of certain debt securities. If the spinoff scenario concerns you, you might be more interested in the bonds mentioned in “12 Too Big To Fail Junior Bonds,” which currently offer yields as high as 8%.

Without further ado, I present a list of eight bonds once part of failing institutions but now the liability of far bigger, systemically important banks. Please note that the equity symbol in parentheses refers to the current parent companies of these former well-known American institutions.

Wachovia’s (WFC) senior unsecured note (CUSIP: 929903DT6) maturing 6/15/2017 has a coupon of 5.75% and is asking 113.609 cents on the dollar (3.053% yield-to-maturity before commissions). It is non-callable and pays interest semi-annually. Moody’s currently rates the note A2; S&P rates it A+. It was originally offered at a price of 99.577 on June 5, 2007.

Wachovia’s (WFC) subordinated note (CUSIP: 929903AM4) maturing 8/1/2035 has a coupon of 5.50% and is asking 98.233 cents on the dollar (5.635% yield-to-maturity before commissions). It is non-callable and pays interest semi-annually. Moody’s currently rates the note A3; S&P rates it A. It was originally offered at a price of 99.738 on July 27, 2005.

Merrill Lynch’s (BAC) senior unsecured note (CUSIP: 59018YUW9) maturing 1/15/2015 has a coupon of 5.00% and is asking 97.59 cents on the dollar (5.858% yield-to-maturity before commissions). It is non-callable and pays interest semi-annually. Moody’s currently rates the note Baa1; S&P rates it A-. It was originally offered at a price of 99.323 on November 16, 2004.

Merrill Lynch’s (BAC) subordinated note (CUSIP: 59023VAA8) maturing 5/14/2038 has a coupon of 7.75% and is asking 92.746 cents on the dollar (8.439% yield-to-maturity before commissions). It pays interest semi-annually and has a make whole call. For additional call features on this note, please contact your broker. Moody’s currently rates the note Baa2; S&P rates it BBB+. It was originally offered at a price of 99.977 on May 7, 2008.

Bear Stearns’ (JPM) senior unsecured note (CUSIP: 073902PR3) maturing 10/2/2017 has a coupon of 6.40% and is asking 110.437 cents on the dollar (4.349% yield-to-maturity before commissions). It is non-callable and pays interest semi-annually. Moody’s currently rates the note Aa3; S&P rates it A. It was originally offered at a price of 99.708 on September 27, 2007.

Bear Stearns’ (JPM) subordinated note (CUSIP: 073902PN2) maturing 1/22/2017 has a coupon of 5.55% and is asking 105.937 cents on the dollar (4.247% yield-to-maturity before commissions). It is non-callable and pays interest semi-annually. Moody’s currently rates the note A1; S&P rates it A-. It was originally offered at a price of 99.602 on November 15, 2006.

Countrywide Financial’s (BAC) senior unsecured note (CUSIP: 22238HGQ7) maturing 6/7/2012 has a coupon of 5.80% and is asking 100.65 cents on the dollar (4.471% yield-to-maturity before commissions). It is non-callable and pays interest semi-annually. Moody’s currently rates the note Baa1; S&P rates it A-. It was originally offered at a price of 99.807 on June 4, 2007.

Countrywide Financial’s (BAC) subordinated note (CUSIP: 222372AJ3) maturing 5/15/2016 has a coupon of 6.25% and is asking 94.95 cents on the dollar (7.61% yield-to-maturity before commissions). It is non-callable and pays interest semi-annually. Moody’s currently rates the note Baa2; S&P rates it BBB+. It was originally offered at a price of 99.729 on May 11, 2006.

Please be aware that prices in the over-the-counter U.S. bond market may vary depending on the broker you use. The current prices may also differ greatly from those listed at the time this article was written.

Also, please do your own due diligence on the financial profiles of the companies mentioned in this article. Only you can determine if taking the counterparty risk of purchasing individual bonds is suitable for you.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I am long CUSIP 929903AM4 (Wachovia - WFC).