Learn About Exchange Traded Debt or ETDs

You want to learn bonds?  Today we’re going to learn about an investment that are bonds, but trade just like stocks.  No, I’m not talking about preferred stocks, but another high yield investment that’s even safer than preferred stock.

These securities are called exchange traded debt or ETDs.  They are bonds but they trade on the stock exchange, which is nice because trading individual bonds can be difficult, especially since they can be illiquid.

Exchange traded debt is a bit like preferred stock, because they trade in a very narrow range like preferreds, and they also have dividend yields that are close to preferred stock. .However, there is a big difference in that they are higher in the capital stack than preferred stock  in the event of a bankruptcy.

ETDs distribute income quarterly, but these distributions are not classified as dividend income.  They are classified as interest, and therefore are taxed as ordinary income.  That’s the price you pay for that additional security, because your normal dividend stock is often taxed at the qualified dividend rate of 20%.

Therefore, the best place to hold an ETD is in a retirement account, where those taxes are deferred.

Just like bonds, ETDs have call dates as near as ten years and as far out as 30 years. Most are issued at $25 per share and callable at that same price.  Preferred stock call dates tend to be just a few years out, so call dates are generally not paid much attention with ETDs.

Let me give you an example of what can happen with an ETD.  They can get called.  Just recently, Weingarten Realty 8.1% Notes is a REIT focusing on shopping centers in the southeast, southwest and west.  Their centers are usually anchored by a well-known supermarket or retailer, and also owns undeveloped land.  Now, the common stock pays 4.8% and until mid-September, the BBB-rated ETDs paid 7.79% and trade at $20.80, only 4% over its $20 issue price.  Weingarten called the note, as it matured 9/15/14.  So if you held it, you got paid $20 per share.

Here are two ETDs worth looking at.

General Electric Capital 4.875% Notes (NYSE:GEH) is the most conservative choice, as it trades the debt of GE Capital, the c finance arm of the famous company.  GE Capital is in very solid shape financially, so it is no surprise the ETD is rated AA+ by S&P, thereby saying it has “very strong capacity to meet financial commitments”.

I think you get a bargain by scooping it up at only $24.47, about 2% below par issue of $25.  Because it trades below par, the yield is 4.99%.  As price declines away from par, yield climbs, and vice-versa. 

Duke Energy 5.125% Junior Subordinated Debentures (NYSE:DUKH) is a slightly different beast, in that “junior subordinated” means it essentially rests third in line in the debt stack.  First in line are Senior Notes, then Senior Subordinated Notes, and then comes Junior Subordinated Notes.

The yield here is 5.37% and it trades at $23.86, or about 4.5% below par.  It is BBB- rated, meaning it is “considered the lowest investment grade by market participants”.  Translated, this means that the market is generally favorable about the debt because Duke Energy is a solid company.  However, the market has more doubt and concern than it would about a BBB rated firm.

Lawrence Meyers does not own shares in any security mentioned.

About Lawrence Meyers
 lawrence meyersLarry is regarded as one of the nation’s experts on alternative consumer finance. He consults for hedge funds and private equity via his Council Member status at Gerson Lehman Group, and as a member of Coleman Research Group’s Executive Forum. He also consults for Credit Access Businesses and Credit Services Organizations in Texas. His Op-Eds and Letters to the Editor have appeared in over two dozen major newspapers. He also brokers financing, strategic investments, and distressed asset purchases between private equity firms and businesses of all stripes. You can reach him at [email protected]

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