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Update For Exchange Traded Bond And Preferred Stock Basket Strategy As Of April 1, 2016

|Includes: Dominion Energy, Inc. (D), EMRAF, ENB, EPR, FRFHF

This topic was last updated here:Update For Exchange Traded Bond And Preferred Stock Basket Strategy As Of 3/28/16 - South Gent | Seeking Alpha

Given their current values, and the issuers optional call right, capital appreciation for the total basket is expected to be minimal at best going forward, but may improve depending on the severity of future declines and whether I play them successfully.

I have received pops in recently purchased Canadian preferred stocks that were bought near 50% discounts to their C$25 par values.

This basket is now being managed with the objective of harvesting the income without suffering a net loss on the shares. I expect to have losers, which is one reason for a basket strategy.

I do believe that the Bond Ghouls are seriously mispricing inflation risk now.

Exchange traded bonds and preferred stocks have what I call asymmetric interest risk between the owner and the issuer that clearly favors the issuer.

I discuss the asymmetric interest rate risk of exchange traded fixed coupon securities here: Update For Bond And Preferred Stock Basket Strategy As Of 9/10/15 - South Gent | Seeking Alpha

I discussed the interest rate risk and other material topics here: Update On Bond And Equity Preferred Stock Basket Strategy As Of 8/14/15 - South Gent | Seeking Alpha (scroll to following titles in the Appendix section: Interest Rate and Lost Opportunity Risks for Fixed Rate Coupon Equity Preferred Stocks; Credit Risks; Volatility Risk for Equity Preferred Stocks)

The following table includes only exchange traded securities. I do not have a table showing my existing $1,000 par value bonds bought in the bond mark:


Canadian Preferred Stocks:

Another source for Canadian Preferred stocks is this blog: PrefBlog

I have now taken my first profit in a recently purchased Canadian preferred stock (see item # 5 below)


Tilting Toward Floating Rate Preferred Stocks:

I would add that the tilt is relatively minor for me. The market is pricing a number of floating rate securities at large discounts to par value. This is due IMO to a belief that short term rates are not likely to rise much and that inflation will remain tamed and subdued at abnormally low levels. The later consensus opinion is gradually being undermined by the fact of inflation and the build-up of inflationary pressures.

The extremely dovish Federal Reserve will most likely label any acceleration of inflation as temporary. While it is possible that opinion is formulated in good faith, it does dovetail nicely with a reluctance to raise the FF rate that will push the USD up in value as other CBs maintain a negative interest rate policy.


1. Bought 100 FFHPRF at C$12.36:

Quote: Fairfax Financial Holdings Cumulative Preferred Series F Floating Rate Stock (FFH.PR.F:TOR)

Trade Snapshot ($1 Commission):

Security Description: This security is similar to the one issued by Fortis and discussed in my last update: Scroll to 6. Bought 100 FTSPRI AT C$10.46: Update For Exchange Traded Bond And Preferred Stock Basket Strategy As Of 3/28/16 - South Gent | Seeking Alpha

The Fairfax Financial Holdings Ltd. Cumulative Series F Floating Rate Preferred Stock (FFH.PR.F:TOR) is an equity preferred stock issued by the Canadian company Fairfax Financial Holdings Ltd. (FFH:TOR) that pays cumulative quarterly dividends at a 2.16% spread to the 3 month Canadian Treasury Bill on a C$25 par value. There is an option to convert to a 5 year reset on 3/31/2020 and on 3/31 every five years thereafter that has a 2.16% spread to the five year Canadian government bond:

This security became somewhat interesting to me due to its greater than 50% discount to par value.

The 3 month Canadian T Bill is hovering currently in the .4% to .5% range.

At .5%, the coupon becomes 2.66% which produces a current yield of 5.38% at a total cost of $12.36. While that is mildly interesting, the real interest is what happens to the price and yield when and if the Canadian T Bill returns to >4%, which is where it was prior to the Near Depression. A 4% T Bill would result in a 6.16% coupon and a current yield of 12.46%. The price will not be $12.36 when and if that occurs.

2. Bought 100 EMAPRB at C$11.4:

Quote: Emera Inc. Cumulative Reset Preferred Series B Floating Rate Stock (EMA.PR.B:TOR)

EMAPRB is another preferred stock whose coupon floats at a spread to the 3 month Canadian T Bill.

Trade Snapshot ($1 Commission):

Security Description: EMAPRB is an equity preferred stock that pays quarterly and cumulative dividends at a 1.84% spread to the 3 month Canadian T Bill on a $25 par value.

As with other Canadian preferred stocks whose coupons float over the 3 month T Bill rate, there is an option to convert into a preferred stock that floats at the same percentage over the 5 year Canadian government bond which is exercisable at five year intervals.

The automatic conversion deals with the situation when there are less than 1 million Series B shares outstanding on the conversion date. Then the remaining Series B shares will be automatically converted into A shares:

The issuer is Emera (EMA:TOR), a large utility company based in Canada that is in the process of acquiring Teco Electric in the U.S.: Emera to Acquire TECO Energy in US$10.4 Billion Transaction That purchase price included the assumption of approximately $3.9B in debt.

The Federal Energy Regulatory Commission approved the merge last January. Emera Acquisition of TECO Energy Approved by FERC

Website: Home | Emera

Emera Inc. Affiliate Companies | Emera

EMA Map Operations

Last Earnings Report:

Emera Reports 2015 Earnings

I believe that Emera's preferred stocks are rated by DBRS at PFD-3H which would be equivalent to S & P's BB+.

S & P rates its senior unsecured bonds at BBB. Credit Ratings | Emera

The acquisition of TECO may impact those ratings: EMA Outlook-Negative by S&P; Review-Developing by DBRS « PrefBlog

3. Sold 50 EPRPRC at $25.45-Roth IRA Account: I sold on the ex-dividend date.

Quote: EPR Properties 5.75% Cumulative Convertible Preferred Series C Stock (EPR.PC:NYSE)

Trade Snapshot:

Profit Snapshot: +$160.48

This security has a relatively low coupon so I harvested my profit after collecting three quarterly dividend payments.

This one does have a conversion to common stock feature:

Prospectus "The conversion rate will initially be 0.3504 common shares per $25.00 liquidation preference, which is equivalent to an initial conversion price of $71.34 per common share," subject to mostly incomprehensible to me adjustments described starting at page S-25, with Item # 5 at page S-27 being potentially interesting to anyone willing to do the computation: " 5. cash distributions by us to all or substantially all holders of our common shares in excess of $0.6875, or the Initial Distribution Threshold, during any fiscal quarter other than distributions described in paragraph 6, based on the following formula: . . " The EPR current monthly dividend rate is $.32 per share or $.96 per quarter. The company was paying a quarterly rate until April 2013)

EPR Closing Price 3/30/16: EPR: $66.12 -0.41 (-0.62%)

4. Bought Back 50 GJP at $20: This security is traded by appointment. There is typically a large bid/ask spread.

I used a GTC limit order that was filled about two weeks or so after I entered it. I was simply not willing to pay a penny over $20.

Trade Snapshot ($1 Commission):

Some sellers emerged in this thinly traded security on 3/30, possibly due to Yellin's extreme reluctance to raise the FF rate that has and will have a direct impact on the 3 month treasury bill rate.

Closing Price 3/30/16: GJP: $19.98 -0.51 (-2.48%)(52 week range $18.24 to $22.95)

GJP Stock Chart

Security Description: The Synthetic Fixed-Income Securities Inc. for Dominion Resources Inc. Securities Series 2005-6 Floating Rate STRATS (GJP:NYSE) is a Synthetic Floater in the Trust Certificate form of legal ownership that makes interest payments at the greater of 3% or 1.15% over the U.S. 3 month T Bill rate on a $25 par value. This security has a maximum coupon of 8%.

Interest payments are made monthly.


I will try to explain this security now.

Wachovia (now part of Wells Fargo) bought a 5.95% Dominion Resource (NYSE:D) senior unsecured bond maturing in 2035. That bond is currently rated at Baa2 and BBB+ according to FINRA. This Dominion bond closed at $114.62 on 3/29/16, creating at that time a yield-to-maturity of 4.778% and a current yield of 5.191%.

Dominion is a large electric utility company "with a portfolio of approximately 24,300 megawatts of generation, 12,200 miles of natural gas transmission, gathering and storage pipeline, and 6,500 miles of electric transmission lines." Company Profile

Wachovia then created a Grantor Trust which sold trust certificates to the public at $25 per certificate. The trust then bought the bonds from Wachovia and currently owns those bonds. The owners of GJP have an undivided ownership interest in those bonds owned by the Trust administered by an independent trustee.

Assuming Dominion survives to pay off the bonds at maturity, the trustee will distribute the redemption proceeds to the owners of GJP which would equal $25 per share. So, the underlying bonds owned by the Trust and the GJP trust certificates would mature simultaneously. I would consequently receive on or about 6/15/2035 a profit of $5 per certificate or $250 or a 25% gain, assuming that Dominion makes the principal payment on the bonds and I still own GJP which is not going to happen.

The Trustee then entered into a "swap agreement" with Wachovia, whereby the trust would swap the interest payments received from Dominion for the floating rate described above. In the event the bond is called by Dominion, Wachovia is entitled to a swap termination fee.

Dominion is unlikely to call this bond due to a make whole provision found in the prospectus:

To redeem a 5.95% coupon bond early, Dominion would have to pay the present values of all remaining interest payments to the June 2035 maturity date and the principal amount ($1,000 per bond). So all of those amounts are aggregated and then discounted to present value using the treasury rate for a similar security plus a measly .15%. This present value formula results in premium penalty for an early redemption.

In the unlikely event Dominion does exercise its optional redemption right, then Wells Fargo would take all of the make whole payment as a swap termination fee. The swap termination fee would be calculated in a similar manner and could conceivably be greater than the make whole payment.

The owners of a synthetic floater formerly traded under the symbol GJN found out the hard way about the swap termination fee. That was another Wachovia creation. A Wells Fargo Security Goes Wrong for Investors - The underlying security in GJN was a trust preferred issued by J.P. Morgan that had a make whole provision in the prospectus. However, there was an escape hatch that allowed JPM, when and if properly and timely exercised, to avoid the make whole provision for what is known as a Capital Treatment Event. That Event did happen when Congress passed the Dodd-Frank law that phased out the use of trust preferred securities as Tier 1 capital.

{While it is not material here, I thought there was a decent argument that JPM failed to timely exercise its right to avoid the make whole payment: Stocks, Bonds & Politics: District Court Decision in Turkle Trust v. Wells Fargo (N.D. Cal)/Summary of Argument: JPM Potential Obligation to Pay Make Whole for its Recent 2035 TP Redemption/Other JPM Capital Trust Preferred Securities: Language on Make Whole Payment and Capital Treatment Event. Class action lawyers are generally very lazy and consequently unwilling to do anything that requires thought and research as opposed to regurgitating in a Complaint some error discussed in a company's press release}

GJP is different in that Dominion can not avoid the make whole payment for an optional redemption.

The owner of GJP is subject to Dominion's credit risk. Wachovia does not bear any of that risk. So only bad things will happen to the GJP owners when and if Dominion ever defaults.

The primary advantages of this security are the investment grade quality of the Dominion bonds owned by the trust; GJP's current discount to its $25 par value that enhances the current yield and creates a profit opportunity on the shares; the monthly interest payments; and the 1.15% floating rate over the three month treasury bill which is likely to rise.

Trading History: I started to buy this synthetic floater back in 2009.

Bought GJP at $17.5 (April 4, 2009 Post)

Sold 100 GJP at $22.42 February 2010Bought 100 GJP at $18.97 October 2009

Sold: 50 GJP at $23.31 October 2010-Bought 50 GJP at $20.55 July 2010

Item # 1 Sold 100 of the Synthetic Floater GJP at $23.2: ROTH IRA (12/5/11 Post)-Bought Back Synthetic Floater GJP at 22.25-ROTH IRA March 2011

Item # 5 Sold 100 GJP @ $23.52 (2/4/11 Post)-Bought 100 GJP at $21.95

Trading Profits By Year:

2009: +$24.95

2010: +$450.86

2011: +$233.91

Total Trading Profits: $709.72

See Also Item # 2 Some Criteria for Reassessments of Synthetic Floaters (8/16/12 Post)

Given the small coupon payments, trading was the only way to generate a meaningful total return.

I am trying to catch a wave of increases in the 3 month treasury bill that hopefully will take the yields back to somewhere close to normal. Each increase by the FED in the FF rate will result in a similar increase in the 3 month T Bill.

There is not much of a wave to catch now.

The 3 month bill is hovering mostly in the .4% to .5% range: Daily Treasury Yield Curve Rates Yellin's talk on 3/29 caused the 3 month bill to decline from .45% to .39%.

If I assumed a .4% rate during the applicable computation period, the GJP coupon would be 1.55% and the measly yield at a total cost of $20 per share would be about 1.94%.

At the maximum 8% coupon, the current yield would be 10%. The maximum coupon would be hit with a 6.85% or higher 3 month T Bill.

If I assumed an average annual 3 month T Bill of 2%, below the historical average, then the average annual yield would be about 3.94% and the YTM would be higher at 4.83%, using the Morningstar Bond Calculator.

This is a very low expectation security that is bought primarily as a trade and as a hedge against unanticipated and problematic inflation that drives up short term interest rates faster than the FED and investors view as likely now.

5. Sold 100 ENBPRF at C$14.56:

Trade Snapshot ($1 Commission):

Profit Snapshot IN CADs:

Scroll to 2. Bought 100 ENBPRF at C$12.58: Update For Exchange Traded Bond And Preferred Stock Basket Strategy As Of 2/29/16 - South Gent | Seeking Alpha

This is the first Canadian stock priced in CADs that I have bought and sold in my IB account. IB apparently does not provide the taxable profit in USDs until it prepares the 1099. There would then be a worksheet that shows how the cost and proceeds were converted into USDs for tax reporting purposes. Tax Information and Reporting | Interactive Brokers My rough calculation is that the USD profit will be about $204 based on the rise in the CAD/USD from the 2/19 purchase (.7279) to the 4/1 sell (.7685). CAD/USD Interactive Chart So my USD gain will be larger than my realized gain in CADs (and note that C$196 would be about USD150+ using the CAD/USD exchange value as of 4/1/16).

This result is the reverse of what happened when I sold 300 Artis back in 2014, where the decline in CAD/USD took my CAD profit of C$367 to a reportable taxable profit in USDs of $6.92. Item # 1 300 AX-UN:CA at C$15.71.

The Enbridge Inc. Cumulative Preferred Series F (ENB.PR.F:TOR) has a 4% initiial fixed rate coupon, paid on a $25 par value to 6/1/2018. Starting on 6/1/2018 and for every five year period thereafter, the coupon will reset at a 2.51% spread to the 5 year Canadian government bond.

I still own 300 shares of the Enbridge Inc. 4% Preferred Series P (ENB.PR.P:TOR) that pays initially a 4% coupon on a $25 par value. I bought those shares at a total cost of C$12.39. Effective 3/1/19, the coupon will reset at a 2.5% spread to the 5 year Canadian government bond. The reset rate would remain in effect for five years whereupon it would be reset again. On 3/1/2019 and on March 1 "in every fifth year thereafter", Enbridge may redeem for $25 per share.


Estimated USD Reportable Profit for 100 ENBPRF:



USD Cost 100 Shares= $916.44

USD Proceeds 100 Shares= $1,120.81

USD Tax Reportable Profit (without factoring in commissions and assuming YF has the correct conversion numbers) About $204.37

+ ++++++++++++


I have snapshots of net trading gains for the following exchange traded bonds and preferred stock categories:

Trust Certificates = $28,971.16

Advantages and Disadvantages of Equity Preferred Floating Rate Securities= +$13,773.45

Baby Bonds - South Gent | Seeking Alpha = +$7,115.15

REIT Cumulative Equity Preferred Stocks = +$6,222.19

Aegon Hybrids: Gateway Post = +$4,512.81

TRUST PREFERRED SECURITIES - South Gent | Seeking Alpha = +$4,136.47

ING Hybrids = +$2,117.96

Non-REIT Fixed Coupon Equity Preferred Stocks = +$2,185.95 (snapshots now at the end of REIT Cumulative Equity Preferred Stocks Post linked above)

Synthetic Floater transactions are included in the Trust Certificate category.

Exchange Traded Bonds: New Gateway Post

ING Hybrids: Links in one Post

Trust Preferred Securities: Links in One Post

Baby Bonds - South Gent | Seeking Alpha


Examples of Exchange Traded Bond and Equity Preferred Stock Categories:

Senior Unsecured Baby Bonds:

Kennedy-Wilson Holdings Inc. 7.75% Senior Notes due 2042 (KWN:NYSE

Banc of California Inc. 7.5% Senior Notes due 2020 (BOCA:NYSE)

Argo Group International Holdings Ltd. 6.5% Senior Notes Due 2042 (AGIIL:NASDAQ)

TravelCenters of America LLC 8% Senior Notes (TANP)

TravelCenters of America LLC 8% Senior Notes 12/15/29 (TANO)

THL Credit Inc. 6.75% Notes Maturing 12/30/22 (TCRZ:NYSE)

Prospect Capital Corp. 6.25% Notes Due 2024 (PBB:NYSE)

Hercules Technology Growth Capital Inc. 7% Sr. Notes due 2019 (HTGZ:NYSE)

Junior Baby Bonds:

AmTrust Financial Services Inc. 7.25% Subordinated Notes due 2055 (AFSS:NYSE)

National General Holdings Corp. 7.625% Subordinated Notes (NGHCZ:NASDAQ)

Global Indemnity PLC 7.75% Subordinated Notes Due 2045 (GBLIZ)

Texas Capital Bancshares Inc. 6.5% Subordinated Notes due 2042 (TCBIL:NASDAQ)

Hanover Insurance Group Inc. 6.35% Subordinated Debentures due 2053 (THGA:NYSE)

First Mortgage Bonds:

Entergy Mississippi Inc. 6.20% Series First Mortgage Bonds due 2040 (EFM)

Entergy Louisiana LLC First Mortgage Bonds 6.00% Series 2040 Stock Price Today (ELB:NYSE)

Entergy Louisiana LLC 5.875% 1ST Mtg Bond Series 2041 (ELA:NYSE)

Trust Certificate-Junior Bond

Structured Products Corp. 8.205% Credit-Enhanced CorTS (KTN:NYSE)

Trust Certificate-Synthetic Floaters with Minimum Guarantees

Corporate Asset Backed Corp. CABCO Series 2004-101 Trust Goldman Sachs Capital I Floating Rate Certficates (GYB:NYSE)

Corporate Asset Backed Corp. CABCO Series 2004-102 Trust SBC Communication Inc Floting Rate Certificates (GYC:NYSE)

Trust Certificate-Synthetic Floaters with No Minimum Coupon

Synthetic Fixed-Income Securities Inc. Fltg Rate STRATS Series 2006-1 for Procter & Gamble Secs. Seies 2006-1 (GJR:NYSE)

Synthetic Fixed-Income Securities Inc. STRATS Trust for Allstate Corp. Securities, Series 2006-(GJT:NYSE)

Synthetic Fixed-Income Securities Inc. Floating Rate STRATS Series 2006-2 for Goldman Sachs Group Secs (GJS:NYSE)

Fixed Coupon Equity Preferred Stock: Non-Cumulative

TCF Financial Corp. 6.45% Preferred Stock (TCB.PC:NYSE)

National General Holdings Corp. 7.5% Preferred Stock Series A (NGHCP:NASDAQ)

JPMorgan Chase & Co. 6.15% Preferred Series BB (JPM.PH:NYSE)

EverBank Financial 6.75% Non-Cumulative Preferred Series A (EVER.PA:NYSE)

Discover Financial Services 6.5% Non-Cumulative Preferred Series B (DFS.PB:NYSE)

Banc of California Non-Cumulative 7% Preferred Series E (BANC.PE:NYSE)

Fixed Coupon Equity Preferred Stock: Cumulative

Digital Realty Trust Inc. 6.35% Cumulative Preferred Series I (DLR.PI:NYSE)

Bluerock Residential Growth REIT Inc. 8.25% Series A Preferred Stock (BRG.PA:NYSE)

Fixed Coupon MREIT Preferred Stock: Cumulative

Annaly Capital Management Inc. 7.5% Pfd. Series D (NLY.PD:NYSE)

CYS Investments Inc. 7.75% Cumulative Preferred Series A (CYS.PA:NYSE)

Fixed Coupon Equity Preferred: Cumulative and Convertible

EPR Properties 5.75% Cum. Conv. Pfd. Series C (EPR.PC:NYSE)

Floating Rate Equity Preferred Stock with Minimum Guarantees: Non-Cumulative (both of the following have 4% minimums)

Goldman Sachs Group Series D Preferred Stock (GS.PD:NYSE)

Morgan Stanley Non-Cumulative Preferred Series (MS.PA:NYSE)

Fixed to Floating Rate Equity Preferred Stock: Non-Cumulative

Goldman Sachs Group Series J Fixed-to-Floating Rate Preferred Stock Price Today (GS.PJ:NYSE)

IBERIABANK Corp. 6.625% Series B Preferred Stock (IBKCP:NASDAQ)

Aspen Insurance Holdings Ltd. 7.401% Non-Cumulative Preferred Stock (AHL.PA:NYSE)

Regions Financial Non-Cumulative 6.375% Preferred Series B (RF.PB:NYSE)

Canadian Cumulative Equity Preferred Fixed-to-Floating (floats at a spread above the 5 year Canadian Goverment Bond)

Enbridge Inc. 4% Cumulative Series P Preferred Stock (ENB.PR.P:TOR)

Enbridge Inc. Cumulative. Preferred Series F (ENB.PR.F:TOR)

Canadian Cumulative Float Over Canadian 3 Month T Bill:

Fortis Inc. Cumulative Preferred Series I (FTS.PR.I:TOR)

Fairfax Financial Holdings Ltd. Cumulative Series F Floating Rate Preferred Stock (FFH.PR.F:TOR)

Emera Inc. Cum. Reset Preferred Series B Floating Rate Stock (EMA.PR.B:TOR)

Disclaimer: I am not a financial advisor but simply an individual investor who has been managing my own money since I was a teenager. In this post, I am acting solely as a financial journalist focusing on my own investments. The information contained in this post is not intended to be a complete description or summary of all available data relevant to making an investment decision. Instead, I am merely expressing some of the reasons underlying the purchase or sell of securities. Nothing in this post is intended to constitute investment or legal advice or a recommendation to buy or to sell. All investors need to perform their own due diligence before making any financial decision which requires at a minimum reading original source material available at the SEC and elsewhere. A failure to perform due diligence only increases what I call "error creep". Stocks, Bonds & Politics:ERROR CREEP and the INVESTING PROCESS. Each investor needs to assess a potential investment taking into account their personal risk tolerances, goals and situational risks. I can only make that kind of assessment for myself and family members.