MERRILL LYNCH DEPOSITOR INC INDEXPLUS TRUST SERIES 2003-1 (IPB) stock intrinsic value fair value estimate & owner earnings analysis

What this is. IPB is not an operating company. It is INDEXPLUS Trust Series 2003-1, a trust that Merrill Lynch Depositor, Inc. (now part of Bank of America) set up in December 2003. It issued 1,500,000 certificates at $25 each, $37.5 million in total, and used the money to buy a fixed basket of 16 bonds: $2,213,000 each of 15 corporate bonds plus $4,305,000 of zero-coupon US Treasury STRIPS due 2030. The corporate bonds are Boeing 6.125% due 2033, Citigroup 5.875% subordinated notes due 2033, Credit Suisse (USA) 7.125% due 2032 (now guaranteed by UBS Group), Daimler Finance North America 8.50% due 2031, Ford 7.45% due 2031, General Electric Capital 6.75% due 2032, Ally Financial (formerly GMAC) 8% due 2031, Goldman Sachs 6.125% due 2033, Johnson & Johnson 4.95% due 2033, Macy's Retail Holdings (formerly May Department Stores) 6.90% due 2032, Time Warner (now Warner Media) 6.625% due 2029, Valero 7.50% due 2032, Verizon 7.75% due 2032, CBS (now Paramount Global) 5.50% due 2033 and Weyerhaeuser 7.375% due 2032. Nobody manages the basket. The trustee (The Bank of New York Mellon) collects the interest and principal and passes all of it to holders. The trust pays no expenses of its own; the trustee's fees are paid by the depositor. What an owner gets is a claim on these bonds' contractual payments, so we value it as a bond claim, discounted at 6%. What it has been paying. The trustee's reports show exactly $1,134,712.50 of interest received and paid out in June 2012, December 2025 and June 2026. That is $0.7565 per certificate every June 20 and December 20, or about $1.513 a year, a 6.05% rate on $25. The certificate principal balance is still the full $37.5 million: in more than 22 years no bond in the basket has defaulted, been sold or been called. That includes GMAC, now Ally, through the 2008 crisis and Credit Suisse through its takeover by UBS. How holders get their $25 back. There is no single maturity. As each bond matures, holders receive their share of its principal. Time Warner repays in 2029, the Treasury STRIPS in 2030, Daimler, Ford and Ally in 2031, six bonds in 2032 and the last five in 2033. The offering document puts the maturities between May 15, 2029 and May 15, 2033. We could not confirm the exact month for each bond from the trust's filings, so we assume each repays in the middle of its maturity year. Moving any single date by a few months changes the value by only a few cents. The income falls as the basket shrinks, and the trust ends when the last bonds mature in 2033. The trust has no borrowings, so no debt comes out of any case. Credit quality. At issue the certificates were rated A- by Fitch and A3 by Moody's. The latest trustee report shows a wider spread today. Johnson & Johnson is rated Aaa/AAA, and most of the other issuers range from single A to BBB. Macy's (Ba2/BB+), Ford (Ba1/BBB-), Time Warner (Ba1/BBB-) and CBS (Baa3/BB+) each carry at least one rating below investment grade. If an issuer defaults, the trust must sell that bond 30 to 45 days later through a market agent, even into a weak market, and pay holders the proceeds. Holders then lose whatever part of that bond's face value the sale fails to recover. Base case, $25.71 per certificate. Every issuer pays every coupon and repays at maturity, as all of them have since 2003. Because the basket pays slightly more than our 6% rate, the certificate is worth a little more than $25. The figure includes the interest already building up toward the December 20, 2026 payment. Bear case, $23.84. We built the bear case from the weakest named credits in the basket. Macy's and Warner Media, the two issuers with the lowest Moody's ratings, both default in 2027. Their bonds are sold, and the forced sale recovers 40% of face value. Everything else pays as scheduled. The 40% recovery is our own judgement. A 30% recovery would give about $23.56, and a third default (CBS/Paramount) would take the value to about $23. Losses stay limited because no single bond is more than 6% of the basket, apart from the Treasury STRIPS at about 11%, which carry no credit risk. We did not model broad defaults across the investment-grade names, because nothing in the issuers' records points to that within a 1-in-10 outcome. Bull case, $25.71. Nothing can pay more than the contract. The certificates cannot be called by the trust, and they have no share in any issuer's growth. Some of the underlying bonds can be redeemed early by their issuers, but the trust's filings do not give the terms, so we give no value to a possible redemption premium. The best evidenced outcome is full payment, the same as the base case. What the certificates appear to be worth. About $24 to $26, with a narrow range because the payments are fixed, the basket is diversified and the life is short. The return implied from any price is essentially the yield at that price. From the margin-of-safety price of $20, the yield to 2033 implied is about 12% if everything pays and about 10% in the bear case. A 20% annual rate would be implied only from a price reached during a period of stress followed by a recovery toward $25. The trust is small, at $37.5 million, so trading may be thin. What would make this wrong. Several defaults among the lower-rated issuers, especially if they all fall in a weak market for forced sales. Early redemption of the higher-coupon bonds, which would cut income and hand principal back early. Daimler Finance and its parent no longer file reports with the SEC; if its bond ever grew to 10% of the basket, the trust would have to sell it, although on the current maturity schedule that does not happen. Our earlier write-up gave no value because the trust has no operating business. The trustee's distribution reports and the original offering terms do set out the full contractual payments, so we now value the certificates as the bond claim they are.