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Countrywide Capital V (New) 7.0 Message Board

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  • cololamahahual cololamahahual Feb 23, 2012 2:58 PM Flag

    Pulled the Trigger Today -Out Here

    Did anything trigger your feeling that they may suspend ? A suspension of interest would have major implications,

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    • lovecoalsmellinmorning lovecoalsmellinmorning Feb 24, 2012 10:14 AM Flag

      What spooked me finally was the Euro debt problems on top of all the bank losses world wide. Besides, if you read the prospectus for all trust preferred shares, they are required by the Fed to be suspendable for up to 5 years with no interest paid, unlike debt. I also suspect that the remaining mortgage operations of CountryWide, under BAC, are doing badly during the extended real estate collasp. Plus, my gut feeling to run away from CFC-pb as soon as a decent price allowed. I'm gone!!!

      • 1 Reply to lovecoalsmellinmorning
      • lovecoalsmellinmorning,

        So part of the reason you bailed is because of the structure of Trust Preferreds? This isn't something new.

        Actually in my estimation, on average any unsecured bank debt will have an almost 0% recovery rate in bankruptcy. That's just a function of how our regulated banking system works in the US. Once a regulator puts a bank into receivership, the receiver (usually FDIC) sells all the assets at a fire-sale. This usually results in making the secured creditors and depositors (possibly with some FDIC funds) whole, but the unsecured creditors usually get the shaft. (This is why bank debt should always offer a higher yield than just about any other type of issuer.)

        So the fact that Trust Preferreds are junior debt, is actually a benefit in my view because I'm being paid more for a perceived risk - not an actual one. (I get a better yield on a debt that really has only a little more risk than a senior subordinate bond from the same issuer.)

        The suspension you mention is also a real concern - and really the only serious additional risk assumed by preferred shareholders. And in fact if a bank suspends a Trust preferred, flip a coin - heads you hang on and pray, tails you head for the exits. Because historically the odds are pretty poor that the bank will ever recover enough to resume dividends. But then again, once the dividend has been suspended, everyone is heading for the exits and the only thing you'll get is what the speculators will pay you...

        On the other hand, actually buying a suspended issue can be a seriously lucrative speculative play ... if the issue is trading at a sufficient discount. That's because if the issuer does recover, the current holder of record gets ALL the accrued dividends (and eventually the par value) even if he didn't hold the preferred through the entire crisis.

        As for me, I think CFC-PB is now fairly valued. At today's price, it has a YTM of 7.28%. That's actually one of my worst yielding holdings today. And since its finally back above my target price of $24/share, I may lighten up shortly. I've just not decided if I'm going to cash in any of the CFC-PB in my taxable account yet. If I do, I'm probably going to get hit for some serious capital gains this year... Not that I'm likely to get out completely while it's still under par.

        And of course I'm still trying to decide what to buy as a replacement...

        - Joel

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