| UNITED STATES | |
| SECURITIES AND EXCHANGE COMMISSION | |
| Washington, D.C. 20549 | |
| FORM N-Q | |
| QUARTERLY SCHEDULE OF PORTFOLIO HOLDINGS OF REGISTERED | |
| MANAGEMENT INVESTMENT COMPANIES | |
| Investment Company Act file number 811- 21202 | |
| John Hancock Preferred Income Fund II | |
| (Exact name of registrant as specified in charter) | |
| 601 Congress Street, Boston, Massachusetts 02210 | |
| (Address of principal executive offices) (Zip code) | |
| Salvatore Schiavone, Treasurer | |
| 601 Congress Street | |
| Boston, Massachusetts 02210 | |
| (Name and address of agent for service) | |
| Registrant's telephone number, including area code: 617-663-4497 | |
| Date of fiscal year end: | July 31 |
| Date of reporting period: | April 30, 2012 |
ITEM 1. SCHEDULE OF INVESTMENTS
John Hancock Preferred Income Fund II
As of 4-30-12 (Unaudited)
| Shares | Value | |
| Preferred Securities 142.8% (a) (95.2% of Total Investments) | $644,318,979 | |
|
| ||
| (Cost $639,475,918) | ||
| Consumer Discretionary 0.6% | 2,728,775 | |
|
| ||
| Media 0.6% | ||
| Comcast Corp., 6.625% (Z) | 108,500 | 2,728,775 |
| Consumer Staples 3.2% | 14,330,000 | |
|
| ||
| Food & Staples Retailing 3.2% | ||
| Ocean Spray Cranberries, Inc., Series A, 6.250% (S) | 160,000 | 14,330,000 |
| Energy 8.1% | 36,347,954 | |
|
| ||
| Oil, Gas & Consumable Fuels 8.1% | ||
| Apache Corp., Series D, 6.000% | 159,000 | 8,446,080 |
| Nexen, Inc., 7.350% (Z) | 1,101,100 | 27,901,874 |
| Financials 82.9% | 374,303,630 | |
|
| ||
| Capital Markets 10.6% | ||
| Credit Suisse Guernsey, 7.900% (L)(Z) | 322,000 | 8,452,500 |
| Lehman Brothers Holdings Capital Trust III, Series K, 6.375% (I) | 177,000 | 17,700 |
| Lehman Brothers Holdings Capital Trust V, Series M, 6.000% (I) | 46,600 | 75 |
| Lehman Brothers Holdings, Inc., Depositary Shares, Series C, | ||
| 5.940% (I) | 145,200 | 1,452 |
| Morgan Stanley Capital Trust III, 6.250% (Z) | 294,000 | 7,188,300 |
| Morgan Stanley Capital Trust IV, 6.250% (Z) | 170,000 | 4,156,500 |
| Morgan Stanley Capital Trust V, 5.750% (Z) | 355,000 | 8,527,100 |
| Morgan Stanley Capital Trust VI, 6.600% | 9,600 | 234,624 |
| Morgan Stanley Capital Trust VII, 6.600% | 52,400 | 1,283,800 |
| The Goldman Sachs Group, Inc., 6.125% (L)(Z) | 655,200 | 16,386,552 |
| The Goldman Sachs Group, Inc., Series B, 6.200% | 68,500 | 1,717,295 |
| Commercial Banks 18.1% | ||
| Barclays Bank PLC, Series 3, 7.100% (L)(Z) | 375,000 | 9,277,500 |
| Barclays Bank PLC, Series 5, 8.125% (Z) | 330,000 | 8,428,200 |
| HSBC USA, Inc., 6.500% | 50,000 | 1,250,500 |
| PNC Financial Services Group, Inc. (6.125% to 05/01/2022, then 3 | ||
| month LIBOR + 4.067%) (Q) | 145,000 | 3,668,500 |
| Royal Bank of Scotland Group PLC, Series L, 5.750% (Z) | 480,000 | 9,072,000 |
| Santander Finance Preferred SA Unipersonal, Series 10, 10.500% | ||
| (Z) | 329,000 | 8,606,640 |
| Santander Holdings USA, Inc., Series C, 7.300% | 166,800 | 4,170,000 |
| U.S. Bancorp (6.000% to 04/15/2017, then 3 month LIBOR + | ||
| 4.861%) | 200,000 | 5,160,000 |
| U.S. Bancorp (6.500% to 01/15/2022, then 3 month LIBOR + | ||
| 4.468%) (L)(Z) | 570,000 | 15,424,200 |
| Wells Fargo & Company, 8.000% (L)(Z) | 560,000 | 16,542,400 |
| Consumer Finance 4.3% | ||
| HSBC Finance Corp., Depositary Shares, Series B, 6.360% (Z) | 488,000 | 12,058,480 |
| SLM Corp., 6.000% (Z) | 198,000 | 4,282,740 |
| SLM Corp., Series A, 6.970% (Z) | 64,000 | 2,878,720 |
| Diversified Financial Services 24.8% | ||
| Citigroup Capital VIII, 6.950% (L)(Z) | 660,000 | 16,414,200 |
| 1 |
John Hancock Preferred Income Fund II
As of 4-30-12 (Unaudited)
| Shares | Value | |
| Financials (continued) | ||
|
| ||
| Citigroup Capital XIII (7.875% to 10/30/2015, then 3 month LIBOR + | ||
| 6.370%) | 19,000 | $505,970 |
| Corporate Backed Trust Certificates, Series HSBC, 6.250% (L)(Z) | 45,400 | 1,141,810 |
| Deutsche Bank Capital Funding Trust X, 7.350% | 155,722 | 3,917,966 |
| Deutsche Bank Contingent Capital Trust II, 6.550% (Z) | 167,500 | 4,076,950 |
| Deutsche Bank Contingent Capital Trust III, 7.600% (L)(Z) | 392,500 | 10,091,175 |
| Fleet Capital Trust VIII, 7.200% | 320,000 | 7,984,000 |
| General Electric Capital Corp., 6.000% | 35,000 | 883,050 |
| General Electric Capital Corp., 6.050% | 32,000 | 817,280 |
| General Electric Capital Corp., 6.100% | 18,000 | 463,320 |
| ING Groep NV, 7.050% (L)(Z) | 775,700 | 18,058,296 |
| JPMorgan Chase Capital XXIX, 6.700% (L)(Z) | 757,500 | 19,664,700 |
| Merrill Lynch Preferred Capital Trust III, 7.000% | 358,000 | 8,856,920 |
| Merrill Lynch Preferred Capital Trust IV, 7.120% | 190,000 | 4,729,100 |
| Merrill Lynch Preferred Capital Trust V, 7.280% | 270,000 | 6,687,900 |
| RBS Capital Funding Trust V, 5.900% | 398,000 | 5,655,580 |
| RBS Capital Funding Trust VII, 6.080% | 145,000 | 2,066,250 |
| Insurance 12.6% | ||
| Aegon NV, 6.375% (L)(Z) | 402,000 | 9,487,200 |
| Aegon NV, 6.500% | 75,000 | 1,758,750 |
| American Financial Group, Inc., 7.000% (Z) | 274,000 | 7,124,000 |
| MetLife, Inc., Series B, 6.500% (L)(Z) | 792,000 | 20,037,600 |
| Phoenix Companies, Inc., 7.450% | 229,050 | 5,167,368 |
| PLC Capital Trust IV, 7.250% (Z) | 390,500 | 9,887,460 |
| Prudential PLC, 6.500% (Z) | 103,000 | 2,613,110 |
| RenaissanceRe Holdings Ltd., Series C, 6.080% (Z) | 32,500 | 815,425 |
| Real Estate Investment Trusts 12.5% | ||
| Duke Realty Corp., Depositary Shares, Series J, 6.625% (Z) | 449,400 | 11,279,940 |
| Duke Realty Corp., Depositary Shares, Series K, 6.500% (Z) | 110,000 | 2,752,200 |
| Duke Realty Corp., Depositary Shares, Series L, 6.600% (Z) | 109,840 | 2,762,476 |
| Kimco Realty Corp., 6.000% | 680,000 | 17,020,400 |
| Public Storage, Inc., 5.750% | 300,000 | 7,608,000 |
| Public Storage, Inc., 6.350% | 163,000 | 4,456,420 |
| Public Storage, Inc., Depositary Shares, Series Q, 6.500% | 135,800 | 3,737,216 |
| Public Storage, Inc., Depositary Shares, Series X, 6.450% (Z) | 35,000 | 883,750 |
| Public Storage, Inc., Series P, 6.500% | 56,000 | 1,513,120 |
| Wachovia Preferred Funding Corp., Series A, 7.250% (Z) | 170,000 | 4,506,700 |
| Thrifts & Mortgage Finance 0.0% | ||
| Federal National Mortgage Association, Series S, 8.250% (I) | 75,000 | 92,250 |
| Telecommunication Services 11.9% | 53,667,459 | |
|
| ||
| Diversified Telecommunication Services 4.3% | ||
| Qwest Corp., 7.000% | 42,500 | 1,083,325 |
| Qwest Corp., 7.375% (Z) | 530,000 | 13,822,400 |
| Qwest Corp., 7.500% | 167,200 | 4,382,312 |
| Wireless Telecommunication Services 7.6% | ||
| Telephone & Data Systems, Inc., 6.625% (Z) | 161,300 | 4,079,277 |
| Telephone & Data Systems, Inc., 6.875% | 85,000 | 2,292,450 |
| Telephone & Data Systems, Inc., 7.000% (Z) | 283,000 | 7,652,320 |
| United States Cellular Corp., 6.950% (L)(Z) | 772,500 | 20,355,375 |
| 2 |
John Hancock Preferred Income Fund II
As of 4-30-12 (Unaudited)
| Shares | Value | |||
| Utilities 36.1% | $162,941,161 | |||
|
| ||||
| Electric Utilities 20.7% | ||||
| Duquesne Light Company, 6.500% (Z) | 98,450 | 4,885,581 | ||
| Entergy Arkansas, Inc., 5.750% | 66,400 | 1,782,840 | ||
| Entergy Louisiana LLC, 5.875% | 186,750 | 5,081,468 | ||
| Entergy Louisiana LLC, 6.000% | 185,000 | 5,124,500 | ||
| Entergy Mississippi, Inc., 6.000% | 182,025 | 5,009,328 | ||
| Entergy Mississippi, Inc., 6.200% | 97,500 | 2,712,450 | ||
| Entergy Texas, Inc., 7.875% | 37,400 | 1,060,290 | ||
| FPC Capital I, Series A, 7.100% (Z) | 368,000 | 9,435,520 | ||
| FPL Group Capital Trust I, 5.875% (L)(Z) | 267,800 | 6,911,917 | ||
| Gulf Power Co., 5.750% | 138,800 | 3,950,248 | ||
| HECO Capital Trust III, 6.500% (Z) | 187,750 | 4,795,135 | ||
| NextEra Energy Capital Holdings, Inc., 5.700% | 626,000 | 16,150,737 | ||
| NSTAR Electric Company, 4.780% (Z) | 15,143 | 1,522,818 | ||
| PPL Corp., 9.500% (Z) | 305,600 | 16,315,984 | ||
| PPL Electric Utilities Corp., Depositary Shares, 6.250% | 54,000 | 1,348,380 | ||
| Southern California Edison Company, Series C, 6.000% (Z) | 75,000 | 7,497,660 | ||
| Multi-Utilities 15.4% | ||||
| Baltimore Gas & Electric Company, Series 1995, 6.990% (Z) | 39,870 | 4,063,004 | ||
| BGE Capital Trust II, 6.200% (L)(Z) | 488,000 | 12,282,960 | ||
| DTE Energy Company, 6.500% | 220,000 | 6,058,800 | ||
| Interstate Power & Light Company, Series B, 8.375% (L)(Z) | 699,350 | 20,232,196 | ||
| SCANA Corp., 7.700% (Z) | 538,900 | 15,116,145 | ||
| Xcel Energy, Inc., 7.600% (L)(Z) | 448,000 | 11,603,200 | ||
| Maturity | Par value | |||
| Rate (%) | date | Value | ||
| Capital Preferred Securities 3.1% (b) (2.0% of Total Investments) | $13,863,966 | |||
|
| ||||
| (Cost $14,688,460) | ||||
| Utilities 3.1% | 13,863,966 | |||
|
| ||||
| Multi-Utilities 3.1% | ||||
| Dominion Resources Capital Trust I (L)(Z) | 7.830 | 12-1-27 | $8,450,000 | 8,663,996 |
| Dominion Resources Capital Trust III (L)(Z) | 8.400 | 1-15-31 | 5,000,000 | 5,199,970 |
| Shares | Value | |||
| Common Stocks 0.1% (0.1% of Total Investments) | $655,600 | |||
|
| ||||
| (Cost $627,382) | ||||
| Utilities 0.1% | 655,600 | |||
|
| ||||
| Electric Utilities 0.1% | ||||
| Entergy Corp. | 10,000 | 655,600 | ||
| Maturity | Par value | |||
| Rate (%) | date | Value | ||
| Corporate Bonds 3.8% (2.6% of Total Investments) | $17,250,523 | |||
|
| ||||
| (Cost $18,544,326) | ||||
| Energy 2.0% | 8,901,563 | |||
|
| ||||
| Oil, Gas & Consumable Fuels 2.0% | ||||
| Southern Union Company (L)(P)(Z) | 3.483 | 11-1-66 | $10,550,000 | 8,901,563 |
| 3 |
John Hancock Preferred Income Fund II
As of 4-30-12 (Unaudited)
| Maturity | ||||
| Rate (%) | date | Par value | Value | |
| Utilities 1.8% | $8,348,960 | |||
|
| ||||
| Electric Utilities 1.8% | ||||
| Southern California Edison Company (6.250% to 02/01/2022, | ||||
| then 3 month LIBOR + 4.199%) (Q) | 6.250 | 2-1-22 | $8,000,000 | 8,348,960 |
| Par value | ||||
| Value | ||||
| Short-Term Investments 0.1% (0.1% of Total Investments) | $513,000 | |||
|
| ||||
| (Cost $513,000) | ||||
| Repurchase Agreement 0.1% | 513,000 | |||
|
| ||||
| Repurchase Agreement with State Street Corp. dated 4-30- | ||||
| 12 at 0.010% to be repurchased at $513,000 on 5-1-12, | ||||
| collateralized by $520,000 Federal National Mortgage | ||||
| Association, 2.700% due 3-28-22 (valued at $524,550, | ||||
| including interest). | 513,000 | 513,000 | ||
| Total investments (Cost $673,849,086)† 149.9% | $676,602,068 | |||
|
| ||||
| Other assets and liabilities, net (49.9%) | ($225,334,121) | |||
|
| ||||
| Total net assets 100.0% | $451,267,947 | |||
|
| ||||
The percentage shown for each investment category is the total value of that category as a percentage of the net assets of the Fund.
LIBOR London Interbank Offered Rate
(a) Includes preferred stocks and hybrid securities with characteristics of both equity and debt that pay dividends on a periodic basis.
(b) Includes hybrid securities with characteristics of both equity and debt that trade with, and pay, interest income.
(I) Non-income producing security.
(L) All or a portion of this security is a Lent Security as of 4-30-12, and is part of segregated collateral pursuant to the Committed Facility Agreement. Total value of Lent Securities at 4-30-12 was $188,112,826.
(P) Variable rate obligation. The coupon rate shown represents the rate at period end.
(Q) Perpetual bonds have no stated maturity date. Date shown is next call date.
(S) This security is exempt from registration under Rule 144A of the Securities Act of 1933. Such a security may be resold, normally to qualified institutional buyers, in transactions exempt from registration.
(Z) All or a portion of this security is segregated as collateral pursuant to the Committed Facility Agreement. Total collateral value at 4-30-12 was $375,536,385.
† At 4-30-12, the aggregate cost of investment securities for federal income tax purposes was $674,108,368. Net unrealized appreciation aggregated $2,493,700, of which $32,015,060 related to appreciated investment securities and $29,521,360 related to depreciated investment securities.
The Fund had the following country concentration as a percentage of total investments on 4-30-12:
| United States | 85.8% | ||
| United Kingdom | 4.4% | ||
| Netherlands | 4.3% | ||
| Canada | 4.1% | ||
| Switzerland | 1.3% | ||
| Bermuda | 0.1% |
| 4 |
John Hancock Preferred Income Fund II
Notes to Schedule of Investments (Unaudited)
Security valuation. Investments are stated at value as of the close of regular trading on the New York Stock Exchange (NYSE), normally at 4:00 P.M., Eastern Time. In order to value the securities, the Fund uses the following valuation techniques. Equity securities held by the Fund are valued at the last sale price or official closing price on the principal securities exchange on which they trade. In the event there were no sales during the day or closing prices are not available, then securities are valued using the last quoted bid or evaluated price. Debt obligations are valued based on the evaluated prices provided by an independent pricing service, which utilizes both dealer-supplied and electronic data processing techniques, taking into account factors such as institutional-size trading in similar groups of securities, yield, quality, coupon rate, maturity, type of issue, trading characteristics and other market data. Swaps are marked-to-market daily based upon values from third party vendors or broker quotations. Foreign securities and currencies are valued in U.S. dollars, based on foreign currency exchange rates supplied by an independent pricing service. Certain securities traded only in the over-the-counter market are valued at the last bid price quoted by brokers making markets in the securities at the close of trading. Certain short-term securities are valued at amortized cost.
Other portfolio securities and assets, where market quotations are not readily available, are valued at fair value, as determined in good faith by the Fund’s Pricing Committee, following procedures established by the Board of Trustees. Generally, trading in non-U.S. securities is substantially completed each day at various times prior to the close of trading on the NYSE. Significant market events that affect the values of non-U.S. securities may occur between the time when the valuation of the securities is generally determined and the close of the NYSE. During significant market events, these securities will be valued at fair value, as determined in good faith, following procedures established by the Board of Trustees. The Fund may use a fair valuation model to value non-U.S. securities in order to adjust for events which may occur between the close of foreign exchanges and the close of the NYSE.
The Fund uses a three-tier hierarchy to prioritize the pricing assumptions, referred to as inputs, used in valuation techniques to measure fair value. Level 1 includes securities valued using quoted prices in active markets for identical securities. Level 2 includes securities valued using significant observable inputs. Observable inputs may include quoted prices for similar securities, interest rates, prepayment speeds and credit risk. Prices for securities valued using these inputs are received from independent pricing vendors and brokers and are based on an evaluation of the inputs described. Level 3 includes securities valued using significant unobservable inputs when market prices are not readily available or reliable, including the Fund’s own assumptions in determining the fair value of investments. Factors used in determining value may include market or issuer specific events, changes in interest rates and credit quality. The inputs or methodology used for valuing securities are not necessarily an indication of the risks associated with investing in those securities. Changes in valuation techniques may result in transfers into or out of an assigned level within the disclosure hierarchy.
| 5 |
The following is a summary of the values by input classification of the Fund’s investments as of April 30, 2012, by major security category or type:
| Level 2 | Level 3 | |||||||
| Total Market | Significant | Significant | ||||||
| Value at | Level 1 Quoted | Observable | Unobservable | |||||
| 04/30/12 | Price | Inputs | Inputs | |||||
|
| ||||||||
| Preferred Securities | ||||||||
| Consumer Discretionary | $2,728,775 | $2,728,775 | — | — | ||||
| Consumer Staples | 14,330,000 | — | $14,330,000 | — | ||||
| Energy | 36,347,954 | 36,347,954 | — | — | ||||
| Financials | 374,303,630 | 369,124,478 | 5,179,152 | — | ||||
| Telecommunication Services | 53,667,459 | 52,584,134 | 1,083,325 | — | ||||
| Utilities | 162,941,161 | 122,762,561 | 40,178,600 | — | ||||
| Capital Preferred Securities | ||||||||
| Utilities | 13,863,966 | — | 13,863,966 | — | ||||
| Common Stocks | ||||||||
| Utilities | 655,600 | 655,600 | — | — | ||||
| Corporate Bonds | ||||||||
| Energy | 8,901,563 | — | 8,901,563 | — | ||||
| Utilities | 8,348,960 | — | 8,348,960 | — | ||||
| Short-Term Investments | 513,000 | — | 513,000 | — | ||||
|
| ||||||||
| Total investments in Securities | $676,602,068 | $584,203,502 | $92,398,566 | — | ||||
| Other Financial Instruments | ||||||||
| Interest Rate Swaps | ($1,257,418) | — | ($1,257,418) | — | ||||
Repurchase agreements. The Fund may enter into repurchase agreements. When the Fund enters into a repurchase agreement, it receives collateral which is held in a segregated account by the Fund’s custodian. The collateral amount is marked-to-market and monitored on a daily basis to ensure that the collateral held is in an amount not less than the principal amount of the repurchase agreement plus any accrued interest. In the event of a default by the counterparty, realization of the collateral proceeds could be delayed, during which time the collateral value may decline.
Real estate investment trusts. The Fund may invest in real estate investment trusts (REITs) and, as a result, will estimate the components of distributions from these securities. Such estimates are revised when actual components of distributions are known. Distributions from REITs received in excess of income may be recorded as a reduction of cost of investments and/or as a realized gain.
Interest rate swaps. Interest rate swaps represent an agreement between a Fund and counterparty to exchange cash flows based on the difference between two interest rates applied to a notional amount. The payment flows are usually netted against each other, with the difference being paid by one party to the other. The Fund settles accrued net interest receivable or payable under the swap contracts at specified, future intervals. Upfront payments made/received by the Fund are amortized/accreted for financial reporting purposes. Swaps are marked-to-market daily and the change in value is recorded as unrealized appreciation/depreciation of swap contracts. A termination payment by the counterparty or the Fund is recorded as realized gain or loss, as well as the net periodic payments received or paid by the Fund.
| 6 |
During the period ended April 30, 2012, the Fund used interest rate swaps to manage anticipated interest rate changes. The following table summarizes the interest rate swap contracts held as of April 30, 2012.
| USD | PAYMENTS | ||||
| NOTIONAL | PAYMENTS | RECEIVED BY | MATURITY | MARKET | |
| COUNTERPARTY | AMOUNT | MADE BY FUND | FUND | DATE | VALUE |
|
| |||||
| Morgan Stanley | |||||
| Capital Services | $56,000,000 | Fixed 1.4625% | 3 Month LIBOR (a) | Aug 2016 | ($1,257,418) |
(a) At 4-30-12, the 3 Month LIBOR rate was 0.4659%.
Interest rate swap positions at April 30, 2012 were entered into on August 5, 2011. No other interest rate swap activity occurred during the period ended April 30, 2012.
Fair value of derivative instruments by risk category
The table below summarizes the fair value of derivatives held by the Fund at April 30, 2012 by risk category:
| FINANCIAL | ASSET | LIABILITY | |||
| RISK | INSTRUMENTS | DERIVATIVE | DERIVATIVES | ||
| LOCATION | FAIR VALUE | FAIR VALUE | |||
|
|
|||||
| Interest rate | Interest rate swaps | — | $1,257,418 | ||
| contracts | |||||
For additional information on the Fund's significant accounting policies, please refer to the Fund's most recent semiannual or annual shareholder report.
| 7 |
ITEM 2. CONTROLS AND PROCEDURES.
(a) Based upon their evaluation of the registrant's disclosure controls and procedures as conducted within 90 days of the filing date of this Form N-Q, the registrant's principal executive officer and principal accounting officer have concluded that those disclosure controls and procedures provide reasonable assurance that the material information required to be disclosed by the registrant on this report is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms.
(b) There were no changes in the registrant's internal control over financial reporting that occurred during the registrant's last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting.
ITEM 3. EXHIBITS.
Separate certifications for the registrant's principal executive officer and principal accounting officer, as required by Rule 30a-2(a) under the Investment Company Act of 1940, are attached.
| SIGNATURES |
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
John Hancock Preferred Income Fund II
By: /s/ Keith F. Hartstein
Keith F. Hartstein
President and Chief Executive Officer
Date: June 26, 2012
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By: /s/ Keith F. Hartstein
Keith F. Hartstein
President and Chief Executive Officer
Date: June 26, 2012
By: /s/ Charles A. Rizzo
Charles A. Rizzo
Chief Financial Officer
Date: June 26, 2012