Some of the junk that comes across my desk is really mind altering. Today a solicitation from Duke Energy for Duke PremierNotes ℠ these are subordinated notes which the average owner of Duke Energy Stock can “Invest your hard earned money prudently”. After reading the prospectus one learns that these financial instruments are sort of kind of regulated (the prospectus was filed with SEC), since they will not be traded, and there will be no market. (The SEC cannot really help you in this one, because they really only deal with instruments that are traded on open markets).
It is only when you take time to read the prospectus that you learn just how screwed one would be if one were foolish enough to "Invest".
One also learns that Duke Energy does not want these instruments rated and will not pay to have these instruments rated, by an outside agency.
Given that they are not rated mean, that most if not all mutual funds cannot invest in this instrument. That should be the first warning of an up coming screw job.
This instrument is subordinated, meaning that in the case that Duke Energy were to declare bankruptcy these instruments are just above the stock in terms of receiving and principal payout, in all probability you do not get you money back. (Second sign of a screwing)
The interest rate is variable. It could go up or it could go down. The "Duke committee" will decide. (Third sign of a screwing)
The prospectus states that members of the committee “may for time to time have potential conflicts of interest from the point of view of the investor in the note.” This is a really nice way of saying they are not looking out for the investors, the committee and it its member’s fiduciary responsibility is to Duke Energy. So let that be your Fourth warning that you are just a mark, and that they are out to screw you.
Duke Energy will set the rate, and as stated in the prospectus the rate will have no relationship to the actual risk of the investment. (Fifth warning that you are going to get screwed) Duke is intentionally vague on how they will set the rate, and how often they intend to adjust the rate. (Sixth warning that you are going to get screwed) But you can rest assured that the rate will quickly follow drops in the commercial paper market, and will serious lag increases in the commercial paper market.
Currently Duke Energy unsecured paper that has been evaluated has been given a credit quality rating of Baa2 (Moderate), just two levels above the beginning of junk status (Ba1). This score indicates that Moody thinks the risk is moderate, but Moody does not have any skin in the game, however this would not be the case for you if you put money into this instrument.
Since the instruments are backed by nothing more than a promise that you might get some of your funds back after all the secured creditors in front of you are paid off in the case of default. (Seventh warning that you are going to get screwed)
For Duke it is a great source of funds, in that commercial paper is costing them somewhere between 4 and 6 percent. So if they can find some unsophisticated investors who are willing to dump their life savings into this pit for 1.3 to 1.7, they are making money.
What do they want to do with this money? Back to the Prospectus we go and we find the following statement “We will use the net proceeds from the sales of the Notes for general corporate purposes, which may include repayment of debt, capital expenditures, investments in our regulated utility subsidiaries or our unregulated businesses, and working capital.”
With 17,935,000,000 Dollars of Long Term Debt (17.9 Trillion), that is costing them on average about 5.5 percent, I expect them to accelerate the pay down some this expensive debt with cheap debt. It is really good for them, in that much of the Long Term Debt was secured debt, now the can remonetize those capital assets (Issue new secured corporate bonds at with a lower interest rate, ie add more debt to the balance sheet).
On the other hand you can go out place nearly the same bet that is in my opinion just as risky, with the same guarantee that if the company implodes you get bupkis that yields 5.4 percent. That path is to purchase the stock, with all of its explicit and implicit risks.
I decided to throw the solicitation for the Duke PremierNotes ℠ into trash. (Seven warning is more than enough for me, although at warning number one I was already out of the game)
I do own stock in Duke Energy, and I do reinvest the dividends. But I have not added to my position in this company in any serious way for sometime (Think some where near the bottom of the market). My current dividend yield on my holding is above 7.0 percent. To date I have recovered all of my initial investment in the company. All of the money in this account are the returns that were paid to me by Duke Energy, so I am playing with their money now.
If you really must have your money safe, and insured by the FDIC, then this is not an investment for you, and for me there are different reasons for I would not invest in this crap. I can get a better deal somewhere else where the return and risk are more in my favor.