N-Q 1 d297466.htm N-Q


Washington, D.C. 20549



Investment Company Act file number 811- 21287

John Hancock Preferred Income Fund III
(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: October 31, 2015






John Hancock

Preferred Income Fund III

Quarterly portfolio holdings 10/31/15


Fund's investments Preferred Income Fund III

  As of 10-31-15 (unaudited)  
              Shares     Value  
  Preferred securities 145.8% (96.9% of Total investments)     $884,121,526  
  (Cost $841,091,732)  
  Consumer staples 2.0%     12,285,000  
  Food and staples retailing 2.0%  
  Ocean Spray Cranberries, Inc., Series A, 6.250% (S) (Z)           135,000     12,285,000  
  Energy 3.4%     20,710,200  
  Oil, gas and consumable fuels 3.4%  
  Kinder Morgan, Inc., 9.750% (I)           420,000     20,710,200  
  Financials 90.1%     546,506,261  
  Banks 44.1%  
  Bank of America Corp., 6.500%           89,000     2,342,480  
  Bank of America Corp., 6.625%           30,000     796,200  
  Barclays Bank PLC, Series 3, 7.100% (Z)           355,000     9,208,700  
  Barclays Bank PLC, Series 5, 8.125% (Z)           515,000     13,534,200  
  BB&T Corp., 5.200%           680,000     16,904,800  
  BB&T Corp., 5.625% (Z)           210,000     5,409,600  
  Citigroup Capital XIII (7.875% to 10-30-15, then 3 month LIBOR + 6.370%)           17,000     431,800  
  Citigroup, Inc., 5.800%           85,000     2,132,650  
  Citigroup, Inc., 6.875%           25,000     669,750  
  Citigroup, Inc., 7.125%           20,000     551,400  
  Citigroup, Inc. (6.875% to 11-15-23, then 3 month LIBOR + 4.130%)           436,650     12,025,341  
  First Republic Bank, 7.000%           95,000     2,603,000  
  HSBC Holdings PLC, 8.000% (Z)           63,500     1,651,000  
  HSBC USA, Inc., 6.500% (Z)           135,000     3,458,700  
  ING Groep NV, 7.050% (Z)           445,000     11,712,400  
  ING Groep NV, 7.200%           765,000     20,073,600  
  JPMorgan Chase & Co., 5.500% (Z)           120,000     2,962,800  
  JPMorgan Chase & Co., 6.100%           105,000     2,657,550  
  JPMorgan Chase & Co., 6.125%           1,030,000     26,110,500  
  JPMorgan Chase & Co., 6.300%           125,000     3,256,250  
  JPMorgan Chase & Co., 6.700%           30,000     810,000  
  RBS Capital Funding Trust V, 5.900% (Z)           719,900     17,745,535  
  RBS Capital Funding Trust VI, 6.250% (Z)           320,000     8,073,600  
  Regions Financial Corp., 6.375% (Z)           83,505     2,171,130  
  Royal Bank of Scotland Group PLC, Series L, 5.750% (Z)           901,000     22,245,690  
  Santander Holdings USA, Inc., Series C, 7.300% (Z)           463,000     11,945,400  
  The PNC Financial Services Group, Inc., 5.375%           40,000     1,014,800  
  The PNC Financial Services Group, Inc. (6.125% to 5-1-22, then 3 month LIBOR + 4.067%)           210,000     5,848,500  
  U.S. Bancorp (6.000% to 4-15-17, then 3 month LIBOR + 4.861%) (Z)           160,000     4,288,000  
  U.S. Bancorp (6.500% to 1-15-22, then 3 month LIBOR + 4.468%) (Z)           888,000     25,734,240  
  Wells Fargo & Company, 6.000%           650,000     16,874,000  
  Wells Fargo & Company, 8.000% (Z)           374,000     10,490,700  
  Wells Fargo & Company (6.625% to 3-15-24, then 3 month LIBOR + 3.690%) (Z)           50,000     1,407,000  
  Capital markets 18.8%  
  Deutsche Bank Contingent Capital Trust II, 6.550% (Z)           396,500     10,237,630  
  Deutsche Bank Contingent Capital Trust III, 7.600% (Z)           311,000     8,316,140  
  Merrill Lynch Preferred Capital Trust III, 7.000% (Z)           475,000     12,297,750  
  Merrill Lynch Preferred Capital Trust IV, 7.120% (Z)           415,000     10,777,550  
  Merrill Lynch Preferred Capital Trust V, 7.280% (Z)           430,000     11,210,100  
  Morgan Stanley, 6.625%           170,000     4,549,200  


Preferred Income Fund III

              Shares     Value  
  Financials  (continued)        
  Capital markets  (continued)  
  Morgan Stanley (6.375% to 10-15-24, then 3 month LIBOR + 3.708%)           95,000     $2,460,500  
  Morgan Stanley Capital Trust III, 6.250%           160,000     4,144,000  
  Morgan Stanley Capital Trust IV, 6.250% (Z)           845,000     21,758,750  
  Morgan Stanley Capital Trust V, 5.750%           95,000     2,418,700  
  State Street Corp., 5.250% (Z)           65,000     1,662,700  
  State Street Corp., 6.000% (Z)           795,000     20,550,750  
  The Bank of New York Mellon Corp., 5.200%           43,000     1,104,670  
  The Goldman Sachs Group, Inc., 5.950% (Z)           60,000     1,534,800  
  The Goldman Sachs Group, Inc., 6.125%           37,000     924,260  
  Consumer finance 4.5%  
  Capital One Financial Corp., 6.200%           289,250     7,477,113  
  Capital One Financial Corp., 6.700%           40,000     1,088,400  
  HSBC Finance Corp., Depositary Shares, Series B, 6.360%           635,000     16,103,600  
  Navient Corp., 6.000% (Z)           50,000     932,500  
  SLM Corp., Series A, 6.970% (Z)           44,899     1,957,596  
  Insurance 9.5%  
  Aegon NV, 6.375% (Z)           355,492     9,100,595  
  Aegon NV, 6.500% (Z)           330,000     8,593,200  
  Prudential Financial, Inc., 5.750% (Z)           150,000     3,897,000  
  Prudential PLC, 6.500% (Z)           130,700     3,467,471  
  RenaissanceRe Holdings, Ltd., Series C, 6.080%           15,000     380,850  
  The Phoenix Companies, Inc., 7.450%           574,500     12,334,515  
  W.R. Berkley Corp., 5.625% (Z)           805,000     20,060,600  
  Real estate investment trusts 13.1%  
  Kimco Realty Corp., 6.000% (Z)           955,000     24,639,000  
  Public Storage, 5.200%           255,000     6,301,050  
  Public Storage, 5.750%           439,500     11,299,545  
  Public Storage, 5.875%           30,000     781,800  
  Public Storage, 6.350% (Z)           220,000     5,702,400  
  Public Storage, Depositary Shares, Series Q, 6.500%           142,000     3,633,780  
  Senior Housing Properties Trust, 5.625% (Z)           875,000     21,603,750  
  Ventas Realty LP, 5.450%           215,000     5,684,600  
  Thrifts and mortgage finance 0.1%  
  Federal National Mortgage Association, Series S, 8.250% (I)           80,000     378,080  
  Industrials 2.3%     13,697,250  
  Machinery 2.3%  
  Stanley Black & Decker, Inc., 5.750% (Z)           525,000     13,697,250  
  Telecommunication services 12.2%     73,989,675  
  Diversified telecommunication services 5.3%  
  Qwest Corp., 6.125%           20,000     497,600  
  Qwest Corp., 6.875% (Z)           65,000     1,677,000  
  Qwest Corp., 7.000% (Z)           60,000     1,567,200  
  Qwest Corp., 7.375% (Z)           777,500     20,067,275  
  Qwest Corp., 7.500%           174,500     4,571,900  
  Verizon Communications, Inc., 5.900% (Z)           148,000     3,966,400  
  Wireless telecommunication services 6.9%  
  Telephone & Data Systems, Inc., 6.875%           473,000     12,089,880  
  Telephone & Data Systems, Inc., 7.000%           415,000     10,624,000  


Preferred Income Fund III

              Shares     Value  
  Telecommunication services  (continued)        
  Wireless telecommunication services  (continued)  
  United States Cellular Corp., 6.950% (Z)           742,000     $18,928,420  
  Utilities 35.8%     216,933,140  
  Electric utilities 26.9%  
  Duke Energy Corp., 5.125% (Z)           960,000     24,268,800  
  Entergy Arkansas, Inc., 5.750% (Z)           105,100     2,653,775  
  Entergy Louisiana LLC, 5.250% (Z)           240,000     6,122,400  
  Entergy Louisiana LLC, 5.875% (Z)           312,625     7,918,791  
  Entergy Louisiana LLC, 6.000% (Z)           242,038     6,157,689  
  Entergy Mississippi, Inc., 6.000% (Z)           112,500     2,880,000  
  Entergy Mississippi, Inc., 6.200% (Z)           156,706     4,022,643  
  FPL Group Capital Trust I, 5.875% (Z)           295,000     7,608,050  
  Gulf Power Company, 5.750% (Z)           140,000     3,610,600  
  HECO Capital Trust III, 6.500%           228,100     5,841,641  
  Interstate Power & Light Company, 5.100% (Z)           202,470     5,213,603  
  NextEra Energy Capital Holdings, Inc., 5.125%           200,000     4,890,000  
  NextEra Energy Capital Holdings, Inc., 5.700% (Z)           745,000     19,250,800  
  PPL Capital Funding, Inc., 5.900%           1,124,024     28,482,768  
  SCE Trust I, 5.625%           210,000     5,388,600  
  SCE Trust II, 5.100% (Z)           636,000     15,575,640  
  SCE Trust III (5.750% to 3-15-24, then 3 month LIBOR + 2.990%) (Z)           120,000     3,342,000  
  The Southern Company, 6.250%           380,000     10,032,000  
  Multi-utilities 8.9%  
  BGE Capital Trust II, 6.200% (Z)           762,000     19,598,640  
  DTE Energy Company, 5.250% (Z)           647,000     15,890,320  
  DTE Energy Company, 6.500% (Z)           405,000     10,862,100  
  Integrys Holding, Inc. (6.000% to 8-1-23, then 3 month LIBOR + 3.220%) (Z)           287,500     7,322,280  
  Common stocks 1.5% (1.0% of Total investments)     $9,231,300  
  (Cost $10,233,523)  
  Energy 1.1%     6,819,800  
  Oil, gas and consumable fuels 1.1%  
  Royal Dutch Shell PLC, ADR, Class A           130,000     6,819,800  
  Utilities 0.4%     2,411,500  
  Multi-utilities 0.4%  
  CenterPoint Energy, Inc.     130,000     2,411,500  
        Rate (% )    Maturity date     Par value^     Value  
  Corporate bonds 2.6% (1.7% of Total investments)     $15,408,000  
  (Cost $17,629,189)  
  Energy 1.5%     8,965,500  
  Oil, gas and consumable fuels 1.5%  
  Energy Transfer Partners LP (P)     3.318     11-01-66           12,900,000     8,965,500  
  Utilities 1.1%     6,442,500  
  Electric utilities 0.6%  
  Southern California Edison Company (6.250% to 2-1-22, then 3 month LIBOR + 4.199%) (Q) (Z)     6.250     02-01-22           3,000,000     3,337,500  
  Multi-utilities 0.5%  
  Dominion Resources, Inc. (5.750% to 10-1-24, then 3 month LIBOR + 3.057%)     5.750     10-01-54           3,000,000     3,105,000  


Preferred Income Fund III

              Par value     Value  
  Short-term investments 0.7% (0.4% of Total investments)     $4,099,000  
  (Cost $4,099,000)  
  Repurchase agreement 0.7%     4,099,000  
  Repurchase Agreement with State Street Corp. dated 10-30-15 at 0.000% to be repurchased at $4,099,000 on 11-2-15, collateralized by $4,165,000 U.S. Treasury Notes, 0.875% due 8-15-17 (valued at $4,185,825, including interest)           4,099,000     4,099,000  
  Total investments (Cost $873,053,444)† 150.6%     $912,859,826  
  Other assets and liabilities, net (50.6%)     ($306,566,591 )
  Total net assets 100.0%     $606,293,235  

  The percentage shown for each investment category is the total value of the category as a percentage of the net assets of the fund.  
  ^All par values are denominated in U.S. dollars unless otherwise indicated.  
  Key to Security Abbreviations and Legend  
  ADR     American Depositary Receipts  
  LIBOR     London Interbank Offered Rate  
  (I)     Non-income producing security.  
  (P)     Variable rate obligation. The coupon rate shown represents the rate at period end.  
  (Q)     Perpetual bonds have no stated maturity date. Date shown as maturity date is next call date.  
  (S)     These securities are exempt from registration under Rule 144A of the Securities Act of 1933. Such securities may be resold, normally to qualified institutional buyers, in transactions exempt from registration.  
  (Z)     All or a portion of this security is pledged as collateral pursuant to the Credit Facility Agreement. Total collateral value at 10-31-15 was $503,164,310.  
      At 10-31-15, the aggregate cost of investment securities for federal income tax purposes was $873,073,351. Net unrealized appreciation aggregated $39,786,475, of which $48,742,076 related to appreciated investment securities and $8,955,601 related to depreciated investment securities.  

The fund had the following country composition as a percentage of net assets on 10-31-15:

  United States     88.3%  
  Netherlands     6.2%  
  United Kingdom     5.5%  
  Total     100.0%  


Notes to Fund's 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 exchange where the security was acquired or most likely will be sold. In the event there were no sales during the day or closing prices are not available, the securities are valued using the last available bid price. Debt obligations are valued based on the evaluated prices provided by an independent pricing vendor or from broker-dealers. Independent pricing vendors utilize matrix pricing which takes 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, as well as broker supplied prices. Swaps are valued using evaluated prices obtained from an independent pricing vendor. Futures contracts are valued at settlement prices, which are the official closing prices published by the exchange on which they trade. Foreign securities and currencies are valued in U.S. dollars, based on foreign currency exchange rates supplied by an independent pricing vendor. Securities that trade only in the over-the-counter (OTC) market are valued using bid prices. Other portfolio securities and assets, for which reliable 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. The frequency with which these fair valuation procedures are used cannot be predicted and fair value of securities may differ significantly from the value that would have been used had a ready market for such securities existed.

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 other 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 or trends, 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 and related inputs may result in transfers into or out of an assigned level within the disclosure hierarchy.

The following is a summary of the values by input classification of the fund's investments as of October 31, 2015, by major security category or type:

value at
    Level 1
quoted price
    Level 2
    Level 3
  Preferred securities                          
        Consumer staples     $12,285,000         $12,285,000      
        Energy     20,710,200     $20,710,200          
        Financials     546,506,261     546,506,261          
        Industrials     13,697,250     13,697,250          
        Telecommunication services     73,989,675     70,023,275     3,966,400      
        Utilities     216,933,140     209,610,860     7,322,280      
  Common stocks     9,231,300     9,231,300          
  Corporate bonds     15,408,000         15,408,000      
  Short-term investments     4,099,000         4,099,000      
  Total investments in securities     $912,859,826     $869,779,146     $43,080,680      
  Other financial instruments:                          
  Futures     ($118,351 )   ($118,351 )        
  Interest rate swaps     ($1,047,141 )       ($1,047,141 )    

Securities with market value of approximately $7,943,625 at the beginning of the year were transferred from Level 1 to Level 2 during the period since quoted prices in active markets for identical securities were no longer available and securities were valued using other significant observable inputs.

Repurchase agreements. The fund may enter into repurchase agreements. When the fund enters into a repurchase agreement, it receives collateral that 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. Collateral received by the fund for repurchase agreements is disclosed in the Fund's investments as part of the caption related to the repurchase agreement.

Repurchase agreements are typically governed by the terms and conditions of the Master Repurchase Agreement and/or Global Master Repurchase Agreement (collectively, MRA). Upon an event of default, the non-defaulting party may close out all transactions traded under the MRA and net amounts owed. Absent an event of default, assets and liabilities resulting from repurchase agreements are not offset. 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 or the counterparty may have insufficient assets to pay back claims resulting from close-out of the transactions.

Derivative instruments. The fund may invest in derivatives in order to meet its investment objectives. Derivatives include a variety of different instruments that may be traded in the OTC market, on a regulated exchange or through a clearing facility. The risks in using derivatives vary depending upon the structure of the instruments,


including the use of leverage, optionality, the liquidity or lack of liquidity of the contract, the creditworthiness of the counterparty or clearing organization and the volatility of the position. Some derivatives involve risks that are potentially greater than the risks associated with investing directly in the referenced securities or other referenced underlying instrument. Specifically, the fund is exposed to the risk that the counterparty to an OTC derivatives contract will be unable or unwilling to make timely settlement payments or otherwise honor its obligations. OTC derivatives transactions typically can only be closed out with the other party to the transaction.

Futures. A futures contract is a contractual agreement to buy or sell a particular currency or financial instrument at a pre-determined price in the future. Risks related to the use of futures contracts include possible illiquidity of the futures markets and contract prices that can be highly volatile and imperfectly correlated to movements in the underlying financial instrument. Use of long futures contracts subjects the funds to the risk of loss up to the notional value of the futures contracts. Use of short futures contracts subjects the funds to unlimited risk of loss.

During the period ended October 31, 2015, the fund used futures contracts to manage against anticipated interest rate changes. The following table summarizes the contracts held at October 31, 2015.

  Open Contracts     Number of
    Position     Expiration
  10-Year U.S. Treasury Note Futures     680     Short     Dec 2015     ($86,709,149 )   ($86,827,500 )   ($118,351 )
                                      ($118,351 )

Notional basis refers to the contractual amount agreed upon at inception of open contracts; notional value represents the current value of the open contract.

Interest rate swaps. Interest rate swaps represent an agreement between the fund and a 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. Swap agreements are privately negotiated in the OTC market or may be executed on a registered commodities exchange (centrally cleared swaps). 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. The value of the swap will typically impose collateral posting obligations on the party that is considered out-of-the-money on the swap.

During the period ended October 31, 2015, the fund used interest rate swaps to manage against anticipated rate changes. The following table summarizes the interest rate swap contracts held as of October 31, 2015.

  Counterparty     Notional Amount     Payments
Made by Fund
Received by Fund
    Market Value  
  Morgan Stanley Capital Services     $72,000,000     Fixed 1.4625%     3 Month LIBOR (a)     Aug 2016     ($728,962 )
  Morgan Stanley Capital Services     72,000,000     Fixed 0.8750%     3 Month LIBOR (a)     Jul 2017     (318,179 )
        $144,000,000                       ($1,047,141 )

(a) At 10-31-15, the 3-month LIBOR rate was 0.3341%

For additional information on the fund's significant accounting policies, please refer to the fund's most recent semiannual or annual shareholder report.


More information

How to contact us
Internet www.jhinvestments.com  
Mail Computershare
P.O. Box 30170
College Station, TX 77842-3170
Phone Customer service representatives
Portfolio commentary
24-hour automated information
TDD line

  P12Q1 10/15
This report is for the information of the shareholders of John Hancock Preferred Income Fund III.   12/15




(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.



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.






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 III



By: /s/ Andrew Arnott
  Andrew Arnott
Date: December 17, 2015



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/ Andrew Arnott
  Andrew Arnott
Date: December 17, 2015



By: /s/ Charles A. Rizzo
  Charles A. Rizzo
Chief Financial Officer
Date: December 17, 2015