Delisted Legg Mason Baby Bonds to Trade OTC

Legg Mason, which was recently acquired by Franklin Resources (BEN), had 2 baby bond issues outstanding at the time of merger, which had previously been announced that they were to be delisted from the NYSE on 8/20/2020. These baby bonds were delisted.

Today it was announced that these issues would begin to trade on the OTC market–I would expect maybe tomorrow or Wednesday.

The ticker for the Legg Mason 6.375% Junior Subordinated Notes will be LMICL while the 5.45% Junior Subordinated Notes will trade under ticker LMIBL.

I now have these in the database as Franklin Resource (BEN) issues and they can be seen here.

EarlyBird noted the new tickers at 2:30 pm today.

32 thoughts on “Delisted Legg Mason Baby Bonds to Trade OTC”

  1. When issues are close to their call date I stop using IRR based methods to calculate YTC. They become inaccurate.

    Instead, I look at total remaining dividends relative to price paid and time to call. LMICL at 25.65 close yesterday has exactly 3 divi payments of 40 cents or $1.20 remaining remaining. Thus, if called, you collect a total of 26.20 on your purchase price of 25.65. 0.55/25.65=2.14% for a 6.5 month hold. Call it 4% annualized.

    Not great; not horrible, but purchase at 25.65 is really a bet against a timely call. Unless the world changes I would give a call a high probability.

    1. Bob,
      In your example, I come up with the same YTC using XIRR. I don’t think it’s that the IRR methods are inaccurate, but they’re more time-consuming and cumbersome than your method, without any real substantive improvement to accuracy. Same thing pretty much comparing XIRR to the stripped price method.

    2. I noticed that LMICL traded as high as 27.00. If called on 1st opportunity, you collect 26.20, including the 3 remaining dividends.

      The conclusion is either some buyers just don’t get bond math or they have a strong conviction that a 6.375% bond won’t be redeemed. Anyone make that argument?

      1. I have a minor in mathematics, and I can tell you the average person struggles with things like this. Balancing a budget for example is like a bucketlist item that many shoot for in their lifetime.

        That is why we have a great site like this to post thoughts and reflections for those that can’t do this. 🙂

    1. Most likely.
      The 6.375% trading at $25.70 has YTC of 0.76%
      The 5.45% trading at $25.70 has YTC of 2.60%

      1. Chris – I don’t think you’re taking into account stripped prices when coming up with those YTC yields..

          1. dogbite, you may want to check here:
            https://gpi.fidelity.com/ftgw/interfaces/pyc/
            To find the YTC for 6.375% trading at $25.70, the aim is to get 25.70 as the Invoice Price on top right. Hence, once one figures the accrued interest on a first trial ($0.32 today), one would have to try a second time, entering 25.38 for Purchase Price. But I will defer to 2WR as he is the genuine authority in these matters.
            Best regards, No. 12

          2. Dog – You’re asking for an explanation of the concept of stripped prices? I’ll give it a shot using LMHA (aka LMIBL) 6.375% due 3/15/56, callable 3/15/21 as an example. It’s next quarterly coupon payment is on 9/15 for a total of $0.39844, however that’s an amount that includes accruals daily from 6/15. Therefore, anyone buying today has theoretically already earned the lion’s share of that accrued amount (.3187) and it’s embedded in the price you pay for LMHA today. That amount is calculable and should be deducted from the actual price you pay when calculating your true yield…. So if you bot LMHA today at 25.70 and were calculating YTC, a calculator would most likely tell you you are getting a YTC of 1.25% to 3/15/21. However, it will also tell you that you have accumulated accrued of .3187 (using 8/27 settlement date) and that amount should be deducted when calculating what your actual YTC would be. Therefore, deducting .319 from 25.70 gives you 25.381 to use for a more accurate number and that shows you you’re getting 3.56% actual YTC. I used Fidelity’s bond calculator to come up with these numbers – see https://gpi.fidelity.com/ftgw/interfaces/pyc/

            1. Not familiar with the Fidelity bond calculator.
              What I do when I’m looking for as an accurate YTC as I can get is to take the actual dates and amounts of coupon payments and principal and then find, by trial and error, the discount rate that equates the present value of that cash flow to the current market price. Shouldn’t matter whether it’s preferred or BB.
              Used that method for the MVCD that 2WR so graciously shared recently (required an assumption as to call date). With a short time to call, even small changes in price can have a significant effect on the calculated YTC.

              1. Don’t most bond calculators assume accrued interest, whereas Preferreds and BB’s trade flat, and the price does not reflect the interest that has accrued. (they also adjust in price on x-div)
                I would be thinking that IRR/XIRR in excel would be more accurate.

                1. I agree. XIRR seems the most exacting way to go. I hope to build it into Google Sheets on my tablet. But sure is easier to use a web calculator, even if less exact.

                  1. And I think that the stripped price method is going to give you a very close approximation to the xirr, except when you are dealing with a short time to call, say less than 6 months. And even then, what might seem like a large discrepancy in the annualized YTC will really be pretty small in actual dollar terms.

              2. I agree with you nhc – small changes in price can have significant effect on calculating YTC in these instances…. In fact, I’ve taken to using purchase date, not settlement date when calculating ytc on called issues because from the point of view of the purchaser, I’m committing to buying on that day, not the settlement day and the minor changes in numbers can make a significant change to assumptions…

                Incidentally I’m surprised to see to see Fidelity beat TDA to the punch in an ability to trade under the new LMIBL symbol for LMHA today…. that’s not usually the case for Nanny F.

  2. first time posting. Long time reader. Love your site!

    thanks for the excellent work Tim.

    I need these bonds to crash, so I can load up.

    1. James–thank you. I own a little of the 6.375–if it crashed a bit I would be plenty happy to buy more.

    2. They already did crash a couple weeks ago because of uncertainty. Climbed back. Probably won’t crash again without a reason.

          1. page S2
            https://www.ishares.com/us/library/stream-document?stream=reg&product=IUS-PFF&shareClass=NA&documentId=926053%7E925994%7E926348%7E1255431%7E1192006&iframeUrlOverride=%2Fus%2Fliterature%2Fprospectus%2Fp-ishares-us-preferred-stock-etf-3-31.pdf

            “The Underlying Index uses a market
            capitalization weighted methodology
            subject to certain constraints and is
            rebalanced monthly”

            so watch for selling either this Friday, or next Monday because one of the constraints is No OTC IIRC.

            1. I believe PFF will be selling starting from next week through end of September. We should see lower prices coming for these issues if we are patient.

            2. “so watch for selling either this Friday, or next Monday because one of the constraints is No OTC IIRC.”
              —–
              Justin,

              Have a look at column N in the PFF .csv file that is updated each day. Here’s what you’ll find:
              NYSE
              NASDAQ
              Non-Nms Quotation Service (Nnqs)
              Nyse Mkt Llc
              – (not specified)
              —–
              I don’t think there’s any hard and fast rule that PFF can’t own issues that trade on the OTC markets. Likewise I don’t think there’s any rule that PHGY (the ICE Index that PFF follows) can’t own OTC issues. If you have information to the contrary, I’d love to see it – thank you.
              —–
              Interestingly, PHGY recently announced in a rule change that it would not allow convertible securities with underlying equity that is listed on the OTC market to be included in the Convertible Index family:
              “Question: Should convertible securities with underlying equity that is listed on the U.S. OTC Markets’ platforms be excluded from the Convertible Index family?
              Rule decision
              Change adopted.
              A strong majority of respondents agreed with the proposal to exclude securities from the convertible indices if the underlying equity is de-listed from a stock exchange and begins trading on an OTC Markets platform. The rule change that will go into effect at the September rebalancing will exclude any security that has an underlying equity that trades only on an OTC trading platform.
              Impact
              As of 7/31/2020, there are four securities, listed in Table 3, whose underlying equity trades on an OTC trading platform and that will no longer qualify for inclusion in the Global Convertible Index (CONV).”
              —–
              These firms are Kempharm, Luckin Coffee, Intu (Jersey) II Ltd., and NMC Health (Jersey) Ltd.

              1. I checked that field. It appears wrong in every case with a – or a non-nms setting.
                e.g. see these two examples, but it applies to the rest.
                US8545028461 is SWT, which trades on the NYSE, but is listed with a non-nms list.
                Same with Broadcom. US11135F2002, it is a “-”
                We intend to apply to have the Mandatory Convertible Preferred Stock listed on The Nasdaq Global Select Market under the symbol “AVGOP”. Neither of these markets are considered OTC.
                The only OTC I found was the bankrupt Chesapeake Preferred that they had back in June and sold off prior to the July month end holdings.

                1. Justin,

                  Thanks for your fast response. When Ladenburg Thalmann Series A 8% preferred shares ($LTSA or LTS-A, an OTC issue since March, 2020) was still held by PFF, it was listed as “Nyse Mkt Llc” – I’m not sure if that’s helpful. And it’s too tedious to try to check them one by one. FWIW, column N “Exchange” first appeared in their daily .csv file on July 1, 2020, so perhaps it’s a work in progress (?).

                  At any rate, PFF is hardly a paragon of virtue in terms of the accuracy of their published spreadsheets. Last week, for example, on Friday August 21st it showed they bought hundreds of thousands of shares in virtually every holding, only to reverse those numbers the following Monday.

                  1. I already have access to a security master database, so checking all 512 took only a few seconds.

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