In my first installment of this issue on February 20th, I highlighted an unusually enormous spread between the yields of nearly identical Merrill Lynch and Bank of America preferred trusts. In particular, MER-C on that Friday closed with a yield of 26.79% while BAC-U closed with a yield of 15.58%. It turns out that on that particular day two weeks ago, the spread between the two sets of trusts were never any more extreme. That was the panic day when the market feared Bank of America was about to be nationalized.
In my second installment , I laid out a more detailed list along with a value comparison, showing how they all closed on that Friday and highlighting the incredible value of the Merrill Lynch preferred trusts.
Since then, the spread has slightly improved but is still far from rational. Today, MER-M closed at a strip yield of 24.25% while BAC-C closed at a strip yield of 17.71% - that is still a remarkable spread for two trusts that are nearly identical.
I spoke with an investor relations representative at Bank of America who was quick to point out that Bank of America's formal assumption of Merrill's debt is a formality that is going through the arduous legal process. I was also supplied with a long list of trusts that are related and nearly identical to Bank of America's trusts. We will throw in three new entries into the mix: Fleet, MBNA and Countrywide. All were acquired by Bank of America, all of their debt was assumed, all are nearly identical and all have been suddenly trading with nonsensical divergent yields.
| TICKER |
PRICE |
DIV |
YLD |
DATE |
DAYS |
STRIP YIELD |
| MER-K |
7.19 |
1.613 |
22.43 |
15-Dec |
79.00 |
23.57 |
| MER-M |
7.00 |
1.60 |
23.04 |
15-Dec |
79.00 |
24.25 ! |
| MER-D |
7.66 |
1.75 |
22.85 |
30-Dec |
64.00 |
23.79 |
| MER-E |
7.88 |
1.78 |
22.59 |
30-Dec |
64.00 |
23.52 |
| MER-F |
8.02 |
1.82 |
22.69 |
30-Dec |
64.00 |
23.63 |
| MER-P |
8.47 |
1.844 |
21.77 |
15-Dec |
79.00 |
22.84 |
| BAC-U |
8.17 |
1.469 |
17.98 |
2-Feb |
30.00 |
18.25 |
| BAC-Y |
8.00 |
1.50 |
18.75 |
5-Feb |
27.00 |
19.01 |
| BAC-Z |
8.30 |
1.50 |
18.07 |
23-Feb |
9.00 |
18.15 |
| BAC-B |
9.00 |
1.563 |
17.36 |
30-Dec |
64.00 |
17.91 |
| BAC-C |
9.85 |
1.719 |
17.45 |
2-Feb |
30.00 |
17.70 ! |
| BAC-V |
9.45 |
1.75 |
18.52 |
2-Feb |
30.00 |
18.80 |
| BAC-W |
9.70 |
1.75 |
18.04 |
15-Dec |
79.00 |
18.77 |
| FBF-M |
8.16 |
1.80 |
22.06 |
15-Dec |
79.00 |
23.16 |
| FBF-N |
7.38 |
1.52 |
20.56 |
2-Feb |
30.00 |
20.92 |
| KRB-D |
8.12 |
2.03125 |
25.01 |
3-Jan |
60.00 |
26.08 ! |
| KRB-E |
8.05 |
2.03125 |
25.23 |
15-Feb |
17.00 |
25.53 ! |
| CFC-A |
8.50 |
1.6875 |
19.852 |
3-Jan 4 |
60.00 |
20.52 |
It's important to keep in mind that every single one of these was trading at yields of between 8.5% and 10% in early January of this year. The divergence happened recently with the chaotic trading in Bank of America common stock. The above list highlights that there is no particular fear that Merrill Lynch debt will not be assumed, given that MBNA's preferreds are now trading at an even higher yield and their debt was assumed two years ago. Take a look at MBNA's KRB-D, with a strip yield of 26.08 and compare that to the lower yielding Bank of America trusts. It makes no logical or mathematical sense that these yields should be so different. Yet, they are clearly trading with different yields.
Will this craziness correct itself or will it just continue? What I can tell you is that Bank of America has confirmed that these are nearly identical trusts. The recent trading is likely more a reflection of the state of the U.S. stock market above anything else.
