A few weeks ago, I came across a security listed on the New York Stock Exchange for which I found no information, no home page, no market cap, no filings listed with the Securities and Exchange Commission, no employees, no offices, and no listing in any phone book anywhere in the country. And yet it trades several thousand shares a day, offers a 6% dividend yield, and owns several properties in Philadelphia. Dozens of readers helped me sleuth out its origin, and so did a good man named Paul Deegan.
A day or two after the article came out, Deegan gave me a call here at Fool HQ. It turns out that the Philadelphia Authority (PAID) is an authority created by the City of Philadelphia and is managed by the Philadelphia Industrial Development Corporation (PIDC), a non-profit corporation created by Philly to promote economic development in the city, and Deegan's employer.
Deegan explained that PAID serves the purpose of selling bonds and other types of public financing to raise money for industrial and developmental projects in Philadelphia, and also serves as a holding company for real estate. Essentially, whenever Philadelphia wants to do something like finance a new stadium, it uses PAID as the vehicle.
Deegan, a senior vice president for PIDC, said that my article created a bit of confusion there as well. It turns out that folks at PDIC didn't even know that PAID was public. No wonder information on PAID is so tough to come by. And as it turns out, even though the security listed under ticker "POB" is called the Philadelphia Authority for Industrial Development, it does not offer any ownership at all in PAID, but rather in a bond issue managed by PAID.
Bonds that trade like stocks
What is publicly traded is what's known as a derivative, or hybrid security. In 1999, Philadelphia floated a pension bond issue to cover unfunded pension obligations, with a principal amount of $225 million. Embedded in the bond issue are some option provisions, which the bond underwriter chose to list on the stock exchange. The terms of the option are such that, after Jan. 15, 2004, PAID will have a call provision on the bonds entitling it to purchase them at a rate no lower than 100% of face value. In the meantime, and as long as PAID does not call the bonds, public holders of each "share" of POB are entitled to the regular distributions made under the bond issue's covenants. Another publicly run entity that has similar traded securities is the Tennessee Valley Authority (NYSE: TVC ) .
For a shelf corporation (Deegan said that its filing was likely "sitting in a desk drawer somewhere"), PAID has been in the news quite a bit recently. The Philadelphia Eagles' brand-new football stadium, called Lincoln Financial Field, opens up this fall, replacing the decrepit old Veteran's Stadium. Temple University's football team also signed a contract to play games at Lincoln, with part of its rent payable to PAID, which floated the bonds for construction of the stadium. The terms of the agreement got muddled, accusations flew, and Temple had the distinct possibility of beginning the football season homeless. Cooler heads prevailed, and Temple will open its season this Saturday at Lincoln Financial Field.
More jumbled than the Schuylkill Expressway
Why do entities like PAID exist? It's pretty simple, really. There is a limit to the types of activities that government can participate in. An instrument such as PAID, and PIDC, allows the government a separate entity to engage in more commercial practices. As one reader described to me, Philadelphia set up these entities to engage in commercial activities to attract businesses to the city. PAID created all sorts of incentives to attract AkerKvaerner (Pink Sheets: KVNRY) to the Naval Yards, keeping jobs in the city and bringing out the potential for higher tax revenues.
Information on PIDC can be found on its website. Keep in mind that this is the entity that controls and runs PAID. Investors, though, should remember that an investment in PAID's publicly traded security under ticker POB does not have a proportionate right to all of the revenues generated by the entity -- ownership of this security only yields them payments made under the terms of the city of Philadelphia's Pension Retirement System Pension Funding Bonds, Series 1999C.
That means that as long as the bonds remain outstanding, the investor will receive $0.41 per share per quarter, and should PAID call the bonds, the investor will receive face value as payment. Given the call provision, the return for shareholders is essentially capped, save the potential for continued payments beyond January 2004.
All of this is great information on how a fairly bizarre security works. What no one really had an answer for, though, was why these instruments were listed in the first place.
Bill Mann, TMFOtter on the Fool Discussion Boards
Bill Mann's next trick will be to explain the attraction to Big Brother 4. He owns none of the securities mentioned in this article. PAID offers a substantial dividend, which incidentally is the goal of the Motley Fool's newest newsletter,Mathew Emmert's Income Investor. The Motley Fool is investors writing for investors.