October 31, 2009: Fixed Rate Capital Securities: An Interesting Alternative For Income Oriented Investors

In the early 1990s, a product called a fixed rate capital security(FRCS) was introduced to meet the needs of income-oriented investors and provide a cost efficient source of capital for issuers.

These securities combine the features of corporate debt securities and preferred stock:generous yields compared with other investment vehicles, regular income disbursement, predictable investment time frames, liquidity and investment grade quality(in almost every case).

Like corporate debt securities, fixed rate capital securities rank senior to common and preferred shares and have a stated maturity date. Like preferred stock, they have a $25.00 liquidation value (generally) and trade on a major securities exchange.

Unlike preferred stock, fixed rate capital securities offer no tax benefit to corporate investors, carry a "call" risk, the possibility of deferred payments and an "extension" risk which may allow the issuer to extend the time frame for redemption.

Factors that affect the price of fixed rate capital securities include: interest rate risks (inflation, deflation, etc.), credit risk of the issuer, purchasing power risk due to inflation of devaluing of the dollar and price risk. Investors should also be aware of peculiar characteristics of the security they are purchasing, if any.

I prefer to purchase securities with a modest (2-4 year) maturity and also trade at a discount from their $25.00 liquidation price. Assessing the company's prospects to make payments and eventually redeem the security should rank at the top of any investor's benchmarks to purchase.

Here are a few securities, some having all of the characteristics above, you may want to explore:

MetLife (METpfB): $21.75, 7.47% yield, call date 9/15/2010
Gabelli Equity Trust (GAB pf): $25.00. 6.20% yield, call date 11/10/2011
PPL 6.85% Senior Notes (PLV): $24.70, 6.93% yield, call date 07/01/2012
National Bank of Greece (NBGpA): $24.69, 9.19% yield, call date 06/06/2013
General Electric Credit (GEG): $23.85, 6.34% yield, call date 02/06/2012
Deutsche Bank Cap. Funding Trust X (DCE): $22.63, 8.12% yield, call date 12/15/2012
Deutcshe Bank Cap. Funding Trust IX (DTT): $20.96, 7.90% yield, call date 8/20/2012
Comcast 6.625% Notes (CCS): $22.95, 7.22% yield, call date 05/15/2012
Barclays Bank (BCSpA): $21.44, 8.28% yield, call date 12/15/2012
Archer Daniels Midland (ADMpA): $42.68, yield 7.32%, call date 06/01/2011 ($50)
Alabama Power 5.875 Senior Note (ALM): $25.03, yield 5.87%, call date 04/01/2012
National City (PNCpA): $21.19, yield 7.82%, call date 11/15/2011

The author owns ADMpfA, GEG and PNCpfA.