BAC vs CFC Preferred Shares

[mcs23]

New to forum so not sure if this has been discussed before, but here’s my long-winded question:

Following BofA’s earnings last week, BofA announced that it had ring-fenced a bunch of old Countrywide debt for the purposes of gaining some leverage over ongoing lawsuits by having the ability to declare bankruptcy and walk-away from the CFC obligations should the trial lawyers involved pursue unreasonable demands. This structure also gave BofA some options should existing mortgage pools deteriorate further. This of course has created an overhang on Countrywide’s outstanding debt which continues to trade at levels below that of the new parent company.

In early July, CFC common stock was absorbed by BofA and via the share conversion process former CFC shareholders would no longer be directly affected by a CFC debt default, but of course could still be in-directly effected as BofA shareholders.

This brings me to CFC preferred shares - CFC.PR.B in particular. These preferred shares have a $1.75 annual dividend and were issued several years ago at $25 per share. They are callable in 2011 at this same $25 price, which at issue gave them an effective yield of 7%. These shares were NOT converted at the time of the merger and continue to trade at a current price of $16.00 per share with an effective yield of ~11%. Following the merger, Fitch increased the credit rating on these preferred shares to “A”, which is the exact same rating as they gave similar BofA preferred shares (see BAC.PR.J) that currently trade at $23.12 and at a much lower yield ~7.84%. These BofA shares also have a $25 callable price and thus are trading much closer to their callable level than the CFC pref despite the same credit rating.

For shares with the exact same credit rating, similar payouts, issue, and callable features, there is clearly a perceived difference in the credit rating by the market as a whole and this was certainly understandable pre-merger, but not really sure why these shares continue to trade at a discount post-merger – even with the threat of bankruptcy on the old CFC debt. As I understand it, these preferred shares (CFC.PR.B) are general claims on the overall company at one tier above the common (i.e. – they do not appear to be tied to any specific dept, division, mortgage pool or other asset that can be isolated in a post merger environment). As such, and given that BofA has already been integrating and assimilating much of CFC’s general assets into its overall organization (they’ve already moved employees, desks, computers, whole departments and various divisions between locations, buildings, etc), I would think that if BofA would ever try to declare bankruptcy on the remaining CFC debt and also include these CFC preferred shares in that equation, that it would create claims of “cherry picking” assets and leaving existing preferred shareholders with no assets or operations to liquidate. It would also seem that with no ties to specific assets or mortgage pools trying to include the preferred shares in any post merger bankruptcy would be similar to going back to the former CFC common shareholders and saying they too are now going to be subject to the default risks despite their conversion to BofA shares.

I’m no lawyer, and certainly don’t have enough knowledge of the intricacies of bankruptcy, liquidation and securities law to know the real risks here, but something does appear a miss. Either these CFC preferred shares are a great value (as valued against BofA preferred – not necessarily the market as a whole), or the current yield reflects the real risk that these shares could be subject to a future bankruptcy situation. With a potential $9 upside to the callable price and a great yield, I’ve been slowly buying shares in hopes that the market is just mispricing these securities in the short-term, but would love to get the feedback from someone with more knowledge of these situations. Please advise if you’ve got any insight. Thanks!

[rffrydr]

[rffrydr]

Last May I was picking up the BAC-L about 10% below it's current trade. Now with much lower equity values, the utility bank model is taking shape.
_________________
Today is the Tomorrow you worried about Yesterday!

[rffrydr]

As mentioned here this last two weeks BAC can get legal too. There's a reason why they put it in Red Oak Corp. There it is down below in this thread.

They risk their "reputation"?! JPM now taking the hit for CDO packaging. They're gonna march right down the line. I'd say BK'ing Countrywide is a bigger than "slim" possibility at this a
_________________
Today is the Tomorrow you worried about Yesterday!

[rffrydr]

We are back!

http://finance.yahoo.com/q/bc?s=CFC-PA&t=2y

Not a time to hop aboard.
_________________
Today is the Tomorrow you worried about Yesterday!

[rffrydr]

That's my trade too. You can read about it below, Countrywide, BAC, "Man With the Tan." And that about says it, these instruments carry a taint.

And the risks are exactly as you laid out--now that Bill Miller et. al. have gone quietly into the night and with the threat of BAC pulling back from debt obligations (thorugh its Holding Company, Red Oak). These also suffer from your observed "illiquidity" discount. I was in at 15; they just got dumped down to 11 in March and I doubled into a more realistic position and plan to hold until parity with BAC Preferreds.

Bear in mind, in these conditions it's not about yield. You buy the financials who are going to survive and you triple your speculative capital. If they go bust, the Preferreds go bust with 'em. Upside? See above.
_________________
Today is the Tomorrow you worried about Yesterday!