Said to be a source of better interest

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Said to be a source of better interest

Postby communipaw » Thu Jun 14, 2012 7:03 pm

I saw an ad for this today but have bot looked at it closely: duke energy premier notes

http://www.duke-energy.com/investors/in ... stions.asp
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Postby Taylor Larimore » Thu Jun 14, 2012 7:54 pm

communipaw wrote:I saw an ad for this today but have not looked at it closely: duke energy premier notes

http://www.duke-energy.com/investors/in ... stions.asp


communipaw:

The ad tells you the good stuff. This is some of the bad stuff (in the Prospectus).
Key risk factors to consider before investing include:

• An investment in the Notes does not create a bank account or depositor relationship between you
and Duke Energy or The Northern Trust Company, as the agent bank.
• The Notes are not equivalent to a deposit or other bank account and are not subject to the protection
of Federal Deposit Insurance Corporation (FDIC) regulation or insurance or any other insurance.
4• All of the money you invest will be used to purchase Notes for you. All interest earned on your
Notes will be reinvested monthly in additional Notes for your investment. The Notes are not a
money market fund, which is typically a diversified fund consisting of short-term debt of many
issuers. The Notes are not subject to regulation under the Investment Company Act of 1940, as
amended. Consequently, you will not have the benefit of federal laws and regulations designed to
help maintain liquidity and a stable share price and set standards for credit quality, diversification
and for maturity of individual securities and the overall portfolio.
• The Notes are not subject to the requirements of the Employee Retirement Income Security Act of
1974, as amended.
• The Notes are not a brokerage account with Georgeson Securities Corporation or any other brokerdealer and are not protected by the Securities Investor Protection Corporation under the Securities
Investor Protection Act of 1970.
• Duke Energy has not requested, and does not anticipate receiving, a rating for the Notes from any
rating agency.
• The interest rate paid on investments in the Notes may not provide a basis for comparison with
bank deposits or money market funds, which may use a different method of calculating yield, or
other investments which pay a fixed yield for a stated period of time. The interest rate also does not
necessarily bear any relation to the risks associated with or changes in our creditworthiness, credit
rating or financial condition and may not compensate you for any increase in credit risk of
investment in Notes.
• Although you may redeem your investment in the Notes at any time in whole or in part, in the
manner explained in this prospectus, you are not able to transfer your investment in the Notes to
someone else. The Notes are not listed on any securities exchange, and no secondary market for the
Notes currently exists nor will one develop in the future. Consequently, there is no public market
valuation of the Notes to assist you in evaluating the Notes or the yield earned.
• The Notes are unsecured debt obligations of Duke Energy Corporation. Only the assets of Duke
Energy Corporation are available to pay the principal and interest on the Notes.
• Duke Energy Corporation is a holding company, and we operate our businesses through our
subsidiaries. Thus, our ability to meet our obligations under the Notes is dependent on the earnings
and cash flows of those subsidiaries and the ability of those subsidiaries to pay dividends or to
advance or repay funds to Duke Energy. In addition, the rights that Duke Energy and its creditors
would have to participate in the assets of any such subsidiary upon the subsidiary’s liquidation or
recapitalization will be subject to the prior claims of the subsidiary’s creditors. Certain subsidiaries
of Duke Energy have incurred substantial amounts of debt in the operation and expansion of their
businesses, and Duke Energy anticipates that certain of its subsidiaries will do so in the future.
5• Holders of Notes will generally have a junior position to claims of creditors of our subsidiaries,
including trade creditors, debt holders, secured creditors, taxing authorities, guarantee holders and any
holders of preferred stock. In addition to trade debt, certain of our operating subsidiaries have ongoing
corporate debt programs used to finance their business activities. As of December 31, 2010, on a
consolidated basis (including securities due within one year), we had approximately $18.4 billion of
outstanding debt, of which approximately $15.1 billion was subsidiary debt. Approximately
$2.0 billion of such subsidiary debt was guaranteed by Duke Energy as of December 31, 2010.
• The Notes are not guaranteed, endorsed or insured by any of our subsidiaries or any financial
institution or government entity. Duke Energy does not maintain reserves for its obligations under
the Notes. There is a risk that Duke Energy will be unable to meet interest payments or repay
principal on the Notes. You may lose all or part of your investment, including accrued interest, if
Duke Energy is unable to pay its debts, enters bankruptcy or seeks protection from its creditors.
• You will not be able to exchange your Notes for any other securities of Duke Energy.
• Other risk factors we list in our annual reports on Form 10-K, quarterly reports on Form 10-Q and
other reports that are incorporated by reference into this prospectus.

http://www.duke-energy.com/pdfs/PN_prospectus.pdf

Someone once said, "There is more money lost by investors seeking higher yield than has been lost at the point of a gun."

Be careful and best wishes
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
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Re: Said to be a source of better interest

Postby fareastwarriors » Mon Jun 18, 2012 12:28 pm

Duke and a few other companies have similar programs like GE, Caterpillar. Check out this article. http://www.businessweek.com/news/2012-0 ... oney-funds

Perhaps a small investment spread among the different companies can a few basis points of yield.
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Re: Said to be a source of better interest

Postby nisiprius » Mon Jun 18, 2012 12:54 pm

I was going to look up what the default rate for corporate bonds with a certain rating by the ratings agencies--the NRSRO's, A. M. Best, Fitch, Moody's, S&P--but when I looked at the FAQ, I didn't see any reference to financial strength ratings at all, not as assessed by a disinterested party. Just a lot of blarney about "the strength and stability of Duke Energy Corporation... Fortune 500 company... proud history... one of the largest electric power holding companies in the United States... benefit from this proven, long term financial strength and stability." Huh. Almost the same thing could have been said about Enron, or Insull Utilities Investments, for that matter (the giant electric holding company that collapsed in a shower of sparks in the 1930s).

I don't want to know what they think of their own financial strength, if I were going to invest in this thing I'd want to know what Moody's thinks of their financial strength. Since I've never invested in anything of this sort, I don't know whether it would customary to provide such ratings or not, but certainly for a brokerage purchase of ordinary bonds the brokerage would provide it. I think the absence here is a big red flag.

I find it disturbing that "The notes are not subject to regulation under the Investment Act of 1940." Every mutual fund and money market fund is.

Back in 2007 and 2008, there were quite a lot of investors who got burned, and badly burned, by investments that they thought were basically cash investments like a money market fund, but with higher yield: auction rate securities, the GE "enhanced cash" fund, the Schwab "yield plus" fund.

I personally wouldn't touch it with a ten foot pole, not for serious money, anyway. I want my safe investments to be safe. My higher-yielding investments can be risky. I want to be sure I know what the risk is. What's troubling about this one is that you can be sure there is extra risk, but it's not at all clear where it is or exactly where it is or how much it is.

[Added] According to the article cited by fareastwarrior, GE is offering these things too. The same company that offered that "enhanced cash" mutual fund, though maybe not the same division. That article also says that "Duke Energy’s [short-term debt] is rated (DUK) P-2 by Moody’s and A-2 by S&P." I'm not familiar with short-term debt ratings but that obviously isn't the very highest rating. Maybe it's not a bad rating, but why didn't Duke step forward and disclose it right on their marketing material?

[Added]Why didn't I read the fine print Taylor supplied? "Duke Energy has not requested, and does not anticipate receiving, a rating for the Notes from any rating agency."

Make that a twenty-foot pole. I wouldn't invest in this thing unless I felt I was personally capable of reading Duke's reports and balance sheets and doing the sort of analysis that a ratings agency would do.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
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Re: Said to be a source of better interest

Postby nisiprius » Mon Jun 18, 2012 1:16 pm

The Prospectus says the notes
  • will rank equally and ratably with all other unsecured and non-subordinated indebtedness of Duke Energy, of which approximately $3.3 billion was outstanding at December 31, 2010
  • are structurally subordinated to the indebtedness and other liabilities of Duke Energy’s subsidiaries. As of December 31, 2010, there were $15.1 billion of indebtedness and other liabilities of Duke Energy’s subsidiaries
What does this mean? Does this mean that investors in the notes are treated equally with investors in Duke's corporate bonds? Or does it mean the bondholders have priority over holders of these notes?

Where do these notes fit in the hierarchy of bonds, preferred stock, common stock?

I notice Wikipedia says "subordinated debt (also known as subordinated loan, subordinated bond, subordinated debenture or junior debt) is debt which ranks after other debts should a company fall into liquidation or bankruptcy."
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
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Re: Said to be a source of better interest

Postby tetractys » Mon Jun 18, 2012 2:05 pm

Well I guess this is a private loan based on an honor system that can be liquidated. How much is the "floating" interest it pays? -- Tet
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Re: Said to be a source of better interest

Postby nisiprius » Mon Jun 18, 2012 4:35 pm

tetractys wrote:Well I guess this is a private loan based on an honor system that can be liquidated. How much is the "floating" interest it pays? -- Tet

Image
My impression is that they've taken a sophisticated financial instrument and packaged it up to look and feel like just like a familiar money market deposit account.

It's probably not very risky, but it would take expertise, well "above my pay grade," to make any informed judgement of whether the extra return is enough to justify the extra risk. But they don't want you to judge or evaluate it, they want the familiar presentation to lull you into thinking of it as a bank account.

There's no way to compare this to, say, a Vanguard short-term bond index fund with checkwriting feature.

Clearly these this is putting all your eggs in one basket, and this basket doesn't have any safety net under it.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
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Re: Said to be a source of better interest

Postby Toons » Mon Jun 18, 2012 4:58 pm

Vanguard Short Term Bond Or Vanguard Short Term Investment grade both with checkwriting,,take your pick ,I prefer short term investment grade :happy :happy
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Re: Said to be a source of better interest

Postby huntertheory » Mon Jun 18, 2012 5:00 pm

nisiprius wrote:The Prospectus says the notes
  • will rank equally and ratably with all other unsecured and non-subordinated indebtedness of Duke Energy, of which approximately $3.3 billion was outstanding at December 31, 2010
  • are structurally subordinated to the indebtedness and other liabilities of Duke Energy’s subsidiaries. As of December 31, 2010, there were $15.1 billion of indebtedness and other liabilities of Duke Energy’s subsidiaries
What does this mean? Does this mean that investors in the notes are treated equally with investors in Duke's corporate bonds? Or does it mean the bondholders have priority over holders of these notes?

Where do these notes fit in the hierarchy of bonds, preferred stock, common stock?

I notice Wikipedia says "subordinated debt (also known as subordinated loan, subordinated bond, subordinated debenture or junior debt) is debt which ranks after other debts should a company fall into liquidation or bankruptcy."


These are essentially corporate bonds. The first bullet tells you that they are senior unsecured obligations of Duke Energy, which is the parent/holding company. This means that it ranks the same as any loan, bond, or other debt obligation to that entity -- i.e. ahead of equity and preferred stock.

What the second bullet tells you is some semi-sophisticated corporate finance/corporate structuring. Although the bonds are "senior" obligations of Duke Energy, they are *structurally* subordinated to debt or other obligations at Duke Energy's subsidiaries. This is very common for a corporate bond. The idea is that Duke Energy Inc. or whatnot likely does not own any assets other than the stock of its "operating subsidiaries". The operating subsidiaries themselves own things like plants, machines, equipment, and so on. So if there is any debt of, say, Duke Energy Carolinas, an operating subsidiary of Duke Energy, and the whole shebang goes bankrupt, the people who lent money to Duke Energy Carolinas will get paid before you get paid anything as a lender to Duke Energy.

The reason is again the only thing Duke Energy likely owns is the stock of its subsidiaries, so it can only pay you out of the residual value of those operating subsidiaries. Although this is somewhat complicated this is exactly how essentially every corporate bond in existence works, so if you own any IBM bonds or Total Bond Market, pretty much all of your bond holdings work that way.

To do some overkill, most companies have both unsecured bonds and a secured credit facility. They are both "senior" obligations, usually of the parent holding company entity (like Duke Energy), but the secured credit facility loaned by a bank or banking syndicate takes as collateral the assets (and stock) of all of those operating subsidiaries as well as guarantees from those entities, which are senior obligations of *those operating subsidiaries*. Below is an image I pulled from google:

Image

It's not a great image, but in it the lender to Company A is structurally subordinated to the lender to Company B, because the lender to Company B will be paid off before any proceeds are distributed upstream to Company A. (Ignore the "intercompany loan" part of the diagram.)

Finally, regarding the point about credit ratings, I know nisi you're upset about them not disclosing the rating but it's actually become a pretty big issue. Someone can correct me if I am wrong but the SEC had a ruling I believe that said you needed consent from the rating agency to disclose your credit rating, and those credit rating agencies almost never provide consent because they are worried about liability. So it's my understanding -- and it's been a couple of years since I did a securities offering -- but I don't think anyone puts their rating in their offering documents anymore. (Also, there is no way these notes would be registered under the 1940 Act, and that would be a huge issue for Duke Energy.)

However, you can find the credit ratings for Duke Energy on their website, here (go figure):

http://www.duke-energy.com/investors/fi ... atings.asp

Consistent with what I said above, the operating subsidiaries carry higher credit ratings than the parent company, Duke Energy. BB+ and lower are considered junk bonds; BBB+, the rating for Duke Energy, is considered "investment grade," FWIW.

The upshot is that I think you picked a couple of points that aren't as negative as you are making them, at least if you consider these things corporate bonds which is what they look, smell, and taste like. But I will wholeheartedly agree with you here:

My impression is that they've taken a sophisticated financial instrument and packaged it up to look and feel like just like a familiar money market deposit account.


And that is always a good reason to be wary.
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Re: Said to be a source of better interest

Postby SSSS » Mon Jun 18, 2012 6:38 pm

Since there are still FDIC-insured savings accounts at about 1%, I don't see anything too enticing about this.

And they only accept investment via paper check? Is this 1996 again?
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Re: Said to be a source of better interest

Postby nisiprius » Mon Jun 18, 2012 7:37 pm

huntertheory wrote:These are essentially corporate bonds....

...you can find the credit ratings for Duke Energy on their website, here (go figure):

http://www.duke-energy.com/investors/fi ... atings.asp

Consistent with what I said above, the operating subsidiaries carry higher credit ratings than the parent company, Duke Energy. BB+ and lower are considered junk bonds; BBB+, the rating for Duke Energy, is considered "investment grade," FWIW.

The upshot is that I think you picked a couple of points that aren't as negative as you are making them, at least if you consider these things corporate bonds which is what they look, smell, and taste like. But I will wholeheartedly agree with you here:
My impression is that they've taken a sophisticated financial instrument and packaged it up to look and feel like just like a familiar money market deposit account.
And that is always a good reason to be wary.
Thank you.

My take on what you said, and the ratings, is that they are investment grade corporate bonds, but somewhat at the low end of the credit quality scale as such bonds go. By the way, it's not just that they don't mention the ratings, the Prospectus says "Duke Energy has not requested, and does not anticipate receiving, a rating for the Notes from any rating agency." What's that about? I guess it's a reasonable supposition if the structure is as you say that they're about as safe as their other corporate bonds, but...

If you don't already have some individual Baa2 (Moody's) or BBB+ (S&P) bonds in your portfolio, i.e. you're not accustomed to buying bonds of this kind, it seems to me you shouldn't be buying them in this guise. And I don't know, but I think someone who buys individual bonds in this category would probably be buying a bunch of different ones and trying to diversify among companies. I believe that once you get down out of the A's, even Baa/BBB+ you're looking at, Google, click click, yeah, here, like maybe a 4% default rate. Higher than the chance of rolling snakeeyes.

Let's say people aren't going to lose their life savings in these things. But suppose the holders of these instruments got spooked and all tried to withdraw at the same time, could you get into a Reserve Prime kind of situation, where redemptions get suspended for a while and people got >99% of their money back but it took them over a year to get it? Or does Duke have a big enough pool of ready cash that that couldn't happen?
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
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Re: Said to be a source of better interest

Postby huntertheory » Mon Jun 18, 2012 8:21 pm

I will say that I was just basing the above on just a little bit of surface level disclosure. There could be other risks here as well that I'm not seeing. I could see these things being subject to a type of bank run/illiquidity situation.

Big companies like this do funky financial stuff all the time. You'd be shocked at how many otherwise normal looking companies enter into securitizations, packaged instruments, factoring and other receivables or even weirder financings, all in the name of raising cash -- and many of the ultimate instruments, passed through banks and other institutions, wind up in your money market and bond market funds -- but selling this stuff directly is a bit *bizarre*. I won't be using it.
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