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An In Depth Look Into Bank Of America Corp Preferred Trusts And Their Wacky Yields And Spreads

By Perry Rod, Published: February 21st, 2009 5:07 PM CST

In my last installment, I showed that Bank Of America (NYSE: BAC) preferred trusts are trading at yields that are completely arbitrary when compared to their own nearly identical trusts.  I further pointed out that the Merrill Lynch Trusts, which are basically the same trusts with the exact same terms, trade at an even greater discrepancy.

Let's get into further details.  The below chart shows the ticker, the annual dividend, the Friday closing price, the resulting yield and the resulting "strip yield."  Strip yield is just a more accurate yield for comparison purposes, taking into account accrued dividends based on each dividend's payout settlement date.

They have different tickers, different dividend payout dates, and in the case of Merrill, a different name.  But they are all basically the same intertwined combined company and each prospectus is nearly identical.  All of these are senior to the government's debt which makes them especially attractive.

But what I am focusing your attention on is the dramatic difference in yields based on current closing prices, in order to show just how amazingly inefficient the current market really is:


MER-K   1.613  7.05  22.88%  12/15 (71)  23.95%
MER-M   1.613  6.85  23.55%  12/15 (71)  24.66%
MER-D   1.75   6.50  26.92%  12/30 (56)  28.09%
MER-E   1.78   6.72  26.49%  12/30 (56)  27.63%
MER-F   1.82   6.93  26.26%  12/30 (56)  27.37%
MER-P   1.844  7.80  23.64%  12/15 (71)  24.78%

BAC-U   1.469  9.50  15.58%  02/02 (22)  15.61%
BAC-Y   1.5    8.51  17.86%  02/05 (19)  17.80%
BAC-Z   1.5    8.70  17.47%  02/25 (00)  17.47%
BAC-B   1.563  8.58  18.18%  12/30 (56)  18.74%
BAC-C   1.719  8.65  19.88%  02/02 (22)  20.11%
BAC-V   1.75   9.50  18.53%  02/02 (22)  18.63%
BAC-W   1.75   9.00  19.56%  12/15 (71)  20.21%

Notice first of all the most obvious discrepancy, BAC-C and BAC-V.  They have the exact same settlement date, the exact same name, but their yields are about 150 basis points apart.

Then, notice BAC-U vs. BAC-W.  460 basis points apart!  Again, it even has the same name.

But the real shocker is how apart Merrill's Capital Trusts are when there is no possible scenario anybody can reasonably come up with where these trusts should be considered different than Bank of America trusts at this point.  In fact, analysts David Spring and  Sharon Haas of Fitch recently downgraded all of the trusts altogether with the same rating and analysts have been consistently doing so, because of course, they are essentially the same.  Yet, look at the strip yield of MER-D versus BAC-U.  That's a 12.48% difference, or put it another way - an 80% spread between the two!

The Merrills trade at an enormous discount to the BAC's.  Of these senior preferreds, the average Merrill Trust trades at a 26.08% yield while the average Bank of America Trust trades at a 18.37% yield.  The spread ought to be inconsequential.  Instead, it is a 42% difference and presents yet another special opportunity in this wildly inefficient market we find ourselves in.

In buying Bank of America prefferreds (which includes Merrill, Countrywide, etc.), do yourself a favor and go for the best yield.  There is absolutely no reason someone should be buying BAC-U at that closing price over any of those other trusts.  That is not an opinion, in this case.  It is a mathematical fact.

Related: BAC

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