Capital Securities: Redeemed Issues

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Introduction

There is no incredible value created by the series of articles covering fixed income products whose Call Option was finally, or perhaps timely, exercised by the issuing company. However, it turns out that not all of us have the resources and time to keep track of their portfolio, thus we are continuing our coverage of these events.

HSBC Holdings – HSEA & HSEB

…that it will exercise its option to redeem all of the outstanding Capital Securities on 4 June 2018 (the “Redemption Date”) at a price equal to US$25 per US$25 in aggregate principal of Capital Security, together with any accrued and unpaid interest to the Redemption Date and any outstanding Deferred Coupon Payment…

Source: SEC.gov – Form 6-K by HSBC Holdings

I believe that we have got the hang of why HSEA’s Call Option was finally exercised by HSBC Holdings (HSBC), but before we attempt to shed some light on the matter, let us take a look at how it traded over the last year and go through the other redeemed issue – HSEB – as well.

Source: Barchart.com – HSEA Daily Chart (1 year)

There is nothing special about this chart, except the fact that one could potentially see a pattern form: the market was slowly pricing in the redemption. What this means is that while we are not acquainted with Basel, there are many out there who might have anticipated this event. And last but not least, you can clearly notice the slight uptrend preceding most ex-dividend dates (where HSEA essentially opens with a ‘gap down’ on the chart), as market participants were willing to take on more risk in order to add this one to their portfolio.

Now, on to the next one:

that it will exercise its option to redeem all of the outstanding Capital Securities on 4 June 2018 (the “Redemption Date”) at a price equal to US$25 per US$25 in aggregate principal of Capital Security, together with any accrued and unpaid interest to the Redemption Date and any outstanding Deferred Coupon Payments

Source: SEC.gov – Form 6-K by HSBC Holdings

There is no real difference between the two products in terms of catalyst for the redemption or behavior in terms of price action. The chart below should provide confirmation:

Source: Barchart.com – HSEB Daily Chart (1 year)

Indeed, the picture above resembles what we observed on HSEA’s chart.

Now to briefly comment on what triggered the Call Option exercise by HSBC, we have not dug deep in the bank’s filings with the SEC, but we did stumble upon one particular piece which was related to the reclassification of certain securities in relation to the Capital Ratio requirements (read: Basel).

HSBC has today changed how some of its capital securities are recognised for consolidated regulatory capital purposes.

The securities were previously partially recognised by HSBC Holdings plc in its consolidated capital as tier 2 capital under transitional arrangements (so-called ‘grandfathering’) provided in the Capital Requirements Regulation (Regulation (NYSEARCA:EU) No 648/2012). The securities will now be recognised as fully eligible tier 2 instruments.

Source: SEC.gov – Form 6-K by HSBC Holdings

Those who want a better look should follow the Source link provided and inspect the document in its original form, but we will attach a table where ‘affected’ securities can be seen as provided by HSBC:

Source: SEC.gov – Form 6-K by HSBC Holdings

Clearly this change in recognition might be the legitimate trigger for HSEA and HSEB’s redemption, at least in our view. And there is some financial logic to it from this perspective as the products listed have a lower coupon.

All in all, in the preferred stock universe, which happens to be the home of other financial instruments as well, having specialized knowledge can pay off greatly as happens to be the case with Basel-related capital securities.

After these two have been thrown off-board, we are left with the following products of interest issued by HSBC:

– HSBC Holdings plc, 6.20% Dep Shares, Non-Cumul Preference Shares, Series A ADR (HSBC.PA)

Definitely not a whole lot. And we already saw some redemptions of products whose coupon is around this mark. Further discussion on the matter will be offered in a follow-up article where we will review the remainder of the big banks’ outstanding issues.

Bank of America – MER-P & CFC-B

On April 30, 2018, Bank of America Corporation (the “Corporation”) issued a news release announcing that it has submitted redemption notices for eleven series of trust preferred securities, which will result in the redemption of such trust preferred securities, along with the trust common securities (held by the Corporation or its affiliates), on June 6, 2018. The Corporation has received all necessary approvals for these redemptions.

Source: SEC.gov – Form 8-K by Bank of America

It is almost safe to assume that the there is something similar going on in Bank of America (BAC) like in HSBC, because these redemptions are stacked in terms of timeline. That being said, there is no real value in digging to figure out whether this is the case.

Below you can see a chart of MER-P’s last days on the NYSE:

Source: Barchart.com – MER-P Daily Chart (1 year)

This one actually seems a lot weirder chart-wise than HSEA and HSEB, and we tremble while hovering over the insane move from January this year.

The second issue of interest whose Call Option was exercised by BAC is CFC-B:

Basically the Form 8-K provides a redemption notice for both products, therefore we have hit two birds with one shot with the quotation above.

Here is how CFC-B spent its last days on the exchange:

Source: Barchart.com – CFC-B Daily Chart (1 year)

The same reoccurring pattern over the last one year and in the same price range – market participants have been willing to pay a premium equal to one dividend payment in order to acquire this one for their portfolio. And, of course, the January madness can be observed here as well.

Now, after these two issues have bitten the dust thanks to a probable change in Basel which has allowed banks to reclassify some of their obligations, we are left with the following preferreds and trust preferred stocks related to Bank of America:

– Bank of America Corp., 6.00% Dep Shares Non-Cumulative Preferred Stock Series GG (BAC.PB)

– Bank of America, 6.00% Dep Shares Non-Cumulative Preferred Stock Series EE (BAC.PA)

– Bank of America, 6.20% Dep Shares Non-Cumulative Preferred Stock Series CC (BAC.PC)

– Bank of America, 6.204% Dep Shares Non-Cumulative Preferred Stock, Series D (BAC.PD) /Partial Redemption/

– Bank of America, 6.375% Dep Shares Non-cumul Preferred Stock, Series 3 (BML.PI)

– Bank of America, 6.50% Dep Shares Non-Cumulative Preferred Stock Series Y (BAC.PY)

– Bank of America, 6.625% Dep Shares Non-Cumulative Preferred Stock Series W (BAC.PW)

– Bank of America, 7.25% Non-Cumulative Convertible Preferred Stock, Series L (BAC.PL)

– Bank of America, Floating Rate Dep Shares Non-cumul Pfd Stock Series 1 (BML.PG)

– Bank of America, Floating Rate Dep Shares Non-cumul Pfd Stock Series 2 (BML.PH)

– Bank of America, Floating Rate Dep Shares Non-cumul Pfd Stock Series 4 (BML.PJ)

– Bank of America, Floating Rate Dep Shares Non-cumul Pfd Stock Series 5 (BML.PL)

– Bank of America, Floating Rate Dep Shares Non-cumul Preferred Stock, Series E (BAC.PE)

– ML Depositor 6.0518% IndexPlus Trust Series 2003-1 due 5/15/2033 (IPB)

– Merrill Lynch Capital Trust I, 6.45% Trust Preferred Securities (MER.PK)

As noted, BAC-D has been partially redeemed, while BAC-I is not part of the list but will be covered in our next article as it is a much more recent redemption.

Conclusion

Over time we have looked at the products mentioned in the article over and over wondering when and why exactly will the big banks finally get rid of them. It seems like the time has come and the only thing we can say is that we never truly did our homework to figure out when exactly regulations would allow them to do so.

However, there are still other issues out there which are related to Basel and we will at least provide you with a summary of them and how much “premium” the market is currently willing to pay (over Par Value and Accrued Dividends), in order to have them in one’s portfolio.

Note: This article was originally published for our subscribers on 5/20/2018 and some figures and charts may not be entirely up to date.

Trade With Beta

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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