a_preferredincomeii.htm
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, 2014 

 

ITEM 1. SCHEDULE OF INVESTMENTS





John Hancock Preferred Income Fund II
As of 4-30-14 (Unaudited)

  Shares  Value 
 
Preferred Securities (a) 145.8% (95.7% of Total Investments)    $660,308,912 

(Cost $646,390,524)     
 
Consumer Discretionary 0.1%    558,675 

 
Media 0.1%     
Comcast Corp., 5.000%  22,500  558,675 
 
Consumer Staples 3.2%    14,250,000 

 
Food & Staples Retailing 3.2%     
Ocean Spray Cranberries, Inc., Series A, 6.250% (S)  160,000  14,250,000 
 
Financials 89.7%    406,505,938 

 
Banks 21.7%     
Barclays Bank PLC, Series 3, 7.100%  345,000  8,856,150 
Barclays Bank PLC, Series 5, 8.125% (Z)  330,000  8,550,300 
BB&T Corp., 5.200% (Z)  320,000  7,040,000 
BB&T Corp., 5.625% (Z)  410,000  9,573,500 
HSBC USA, Inc., 6.500% (Z)  50,000  1,274,500 
PNC Financial Services Group, Inc., 5.375%  70,000  1,587,600 
PNC Financial Services Group, Inc. (6.125% to 5-1-22, then 3     
month LIBOR + 4.067%)  145,000  3,894,700 
Royal Bank of Scotland Group PLC, Series L, 5.750%  480,000  10,675,200 
Santander Finance Preferred SA Unipersonal, Series 10, 10.500%  329,000  8,613,220 
U.S. Bancorp (6.000% to 4-15-17, then 3 month LIBOR + 4.861%)     
(Z)  200,000  5,540,000 
U.S. Bancorp (6.500% to 1-15-22, then 3 month LIBOR + 4.468%)     
(Z)  570,000  16,444,500 
Wells Fargo & Company, 8.000% (Z)  560,000  16,536,800 
 
Capital Markets 8.5%     
Morgan Stanley Capital Trust III, 6.250% (Z)  272,000  6,908,800 
Morgan Stanley Capital Trust IV, 6.250% (Z)  155,000  3,919,950 
Morgan Stanley Capital Trust V, 5.750% (Z)  290,000  7,296,400 
Morgan Stanley Capital Trust VII, 6.600%  52,400  1,324,148 
State Street Corp., 5.250%  80,000  1,884,000 
The Bank of New York Mellon Corp., 5.200%  20,000  469,600 
The Goldman Sachs Group, Inc., 6.125% (Z)  660,000  16,988,400 
 
Consumer Finance 5.6%     
HSBC Finance Corp., Depositary Shares, Series B, 6.360% (Z)  725,000  18,117,750 
SLM Corp., 6.000% (Z)  177,500  3,979,550 
SLM Corp., Series A, 6.970%  64,000  3,162,880 
 
Diversified Financial Services 21.3%     
Deutsche Bank Contingent Capital Trust II, 6.550%  167,500  4,405,250 
Deutsche Bank Contingent Capital Trust III, 7.600% (Z)  392,500  10,793,750 
General Electric Capital Corp., 4.700% (Z)  395,000  9,002,050 
ING Groep NV, 7.050% (Z)  775,700  19,966,518 
JPMorgan Chase Capital XXIX, 6.700% (Z)  795,000  20,733,600 
Merrill Lynch Preferred Capital Trust III, 7.000%  322,000  8,233,540 
Merrill Lynch Preferred Capital Trust IV, 7.120%  180,000  4,599,000 
Merrill Lynch Preferred Capital Trust V, 7.280%  250,000  6,410,000 
RBS Capital Funding Trust V, 5.900%  398,000  9,066,440 
RBS Capital Funding Trust VII, 6.080%  145,000  3,333,550 

 

1

 



John Hancock Preferred Income Fund II
As of 4-30-14 (Unaudited)

  Shares  Value 
 
Financials (continued)     

 
Insurance 15.9%     
Aegon NV, 6.375% (Z)  420,000  $10,865,400 
Aegon NV, 6.500%  205,000  5,215,200 
American Financial Group, Inc., 7.000% (Z)  282,056  7,308,071 
MetLife, Inc., Series B, 6.500% (Z)  790,000  20,081,800 
Phoenix Companies, Inc., 7.450%  216,500  5,196,000 
Prudential Financial, Inc., 5.750%  145,000  3,564,100 
Prudential PLC, 6.500% (Z)  103,000  2,655,340 
RenaissanceRe Holdings, Ltd., Series C, 6.080%  16,250  399,750 
W.R. Berkley Corp., 5.625%  740,000  16,687,000 
 
Real Estate Investment Trusts 16.5%     
Duke Realty Corp., Depositary Shares, Series J, 6.625% (Z)  449,400  11,302,410 
Duke Realty Corp., Depositary Shares, Series K, 6.500% (Z)  110,000  2,750,000 
Duke Realty Corp., Depositary Shares, Series L, 6.600% (Z)  109,840  2,738,311 
Kimco Realty Corp., 6.000% (Z)  720,000  17,416,800 
Public Storage, Inc., 5.200%  255,000  5,610,000 
Public Storage, Inc., 5.750%  335,000  8,076,850 
Public Storage, Inc., 6.350% (Z)  175,000  4,455,500 
Public Storage, Inc., Depositary Shares, Series Q, 6.500%  122,000  3,185,420 
Public Storage, Inc., Series P, 6.500%  56,000  1,444,240 
Senior Housing Properties Trust, 5.625% (Z)  550,000  12,463,000 
Ventas Realty LP, 5.450%  210,000  5,136,600 
 
Thrifts & Mortgage Finance 0.2%     
Federal National Mortgage Association, Series S, 8.250% (I)  75,000  772,500 
 
Industrials 1.8%    8,069,750 

 
Machinery 1.8%     
Stanley Black & Decker, Inc., 5.750% (Z)  325,000  8,069,750 
 
Telecommunication Services 13.2%    59,664,241 

 
Diversified Telecommunication Services 5.9%     
Qwest Corp., 6.125%  30,000  688,800 
Qwest Corp., 7.000%  60,000  1,568,400 
Qwest Corp., 7.375% (Z)  567,500  15,157,925 
Qwest Corp., 7.500%  172,500  4,602,300 
Verizon Communications, Inc., 5.900% (Z)  185,000  4,645,350 
 
Wireless Telecommunication Services 7.3%     
Telephone & Data Systems, Inc., 6.625% (Z)  161,300  4,011,531 
Telephone & Data Systems, Inc., 6.875%  85,000  2,141,150 
Telephone & Data Systems, Inc., 7.000%  283,000  7,250,460 
United States Cellular Corp., 6.950% (Z)  772,500  19,598,325 
 
Utilities 37.8%    171,260,308 

 
Electric Utilities 26.6%     
Baltimore Gas & Electric Company, Series 1995, 6.990% (Z)  39,870  4,020,642 
Duke Energy Corp., 5.125%  720,000  17,049,600 
Duquesne Light Company, 6.500%  98,450  4,897,888 
Entergy Arkansas, Inc., 5.750% (Z)  66,400  1,703,160 
Entergy Louisiana LLC, 5.250%  220,000  5,392,200 
Entergy Louisiana LLC, 5.875% (Z)  186,750  4,691,160 
Entergy Louisiana LLC, 6.000% (Z)  186,438  4,789,592 

 

2

 



John Hancock Preferred Income Fund II
As of 4-30-14 (Unaudited)

      Shares  Value 
 
Utilities (continued)         

Entergy Mississippi, Inc., 6.000%      187,025  $4,722,381 
Entergy Mississippi, Inc., 6.200%      103,294  2,617,470 
Entergy Texas, Inc., 7.875%      37,400  954,074 
FPL Group Capital Trust I, 5.875% (Z)      267,800  6,807,476 
Gulf Power Company, 5.750% (Z)      146,000  3,863,160 
HECO Capital Trust III, 6.500% (Z)      187,750  5,022,313 
Interstate Power & Light Company, 5.100%      55,000  1,327,700 
NextEra Energy Capital Holdings, Inc., 5.125%      90,000  2,006,100 
NextEra Energy Capital Holdings, Inc., 5.700% (Z)      665,000  16,372,300 
NSTAR Electric Company, 4.780%      15,143  1,506,256 
PPL Capital Funding, Inc., 5.900% (Z)      855,000  20,605,500 
SCE Trust I, 5.625%      100,000  2,367,000 
SCE Trust II, 5.100% (Z)      420,000  9,143,400 
SCE Trust III, 5.750%      20,000  516,200 
 
Multi-Utilities 11.2%         
BGE Capital Trust II, 6.200% (Z)      535,000  13,476,650 
DTE Energy Company, 5.250%      384,000  8,947,200 
DTE Energy Company, 6.500%      339,500  8,779,470 
Integrys Energy Group, Inc., 6.000%      220,500  5,567,625 
SCANA Corp., 7.700% (Z)      538,900  14,113,791 
  
Common Stocks 1.0% (0.6% of Total Investments)        $4,320,000 

(Cost $5,474,110)         
 
Utilities 1.0%        4,320,000 

 
Electric Utilities 1.0%         
FirstEnergy Corp. (Z)      128,000  4,320,000 
 
    Maturity     
  Rate (%)  date  Par value  Value 
Capital Preferred Securities (b) 1.3% (0.9% of Total Investments)      $6,127,485 

(Cost $5,574,000)         
 
Utilities 1.3%        6,127,485 

 
Multi-Utilities 1.3%         
Dominion Resources Capital Trust III (Z)  8.400  01/15/31  $5,000,000  6,127,485 
  
Corporate Bonds 4.0% (2.7% of Total Investments)        $18,266,000 

(Cost $17,391,083)         
 
Energy 2.1%        9,706,000 

 
Oil, Gas & Consumable Fuels 2.1%         
Energy Transfer Partners LP (P)  3.243  11/01/66  10,550,000  9,706,000 
 
Utilities 1.9%        8,560,000 

 
Electric Utilities 1.9%         
Southern California Edison Company (6.250% to 2-1-22,         
then 3 month LIBOR + 4.199%) (Q) (Z)  6.250  02/01/22  8,000,000  8,560,000 

 

3

 



John Hancock Preferred Income Fund II
As of 4-30-14 (Unaudited)

  Par value  Value 
Short-Term Investments 0.2% (0.1% of Total Investments)    $994,000 

(Cost $994,000)     
 
Repurchase Agreement 0.2%    994,000 

Repurchase Agreement with State Street Corp. dated 4-30-14 at     
0.000% to be repurchased at $994,000 on 5-1-14, collateralized by     
$1,025,000 U.S. Treasury Note, 1.375% due 12-31-18 (valued at     
$1,017,313, including interest)  $994,000  994,000 
 
Total investments (Cost $675,823,717)† 152.3%    $690,016,397 

Other assets and liabilities, net (52.3%)    ($237,028,446) 

Total net assets 100.0%    $452,987,951 

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.

(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 4-30-14 was $395,013,382.

† At 4-30-14, the aggregate cost of investment securities for federal income tax purposes was $675,933,156. Net unrealized appreciation aggregated $14,083,241, of which $27,628,867 related to appreciated investment securities and $13,545,626 related to depreciated investment securities.

The fund had the following country concentration as a percentage of total investments on 4-30-14:

United States  89.0% 
Netherlands  5.2% 
United Kingdom  4.5% 
Spain  1.2% 
Bermuda  0.1% 
 
Total  100.0% 

 

4

 



John Hancock Preferred Income Fund II
As of 4-30-14 (Unaudited)

Notes to Portfolio of Investments

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. 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. Certain short-term securities with maturities of 60 days or less at the time of purchase are valued at amortized cost. 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 may result in transfers into or out of an assigned level within the disclosure hierarchy.

Securities with market value of approximately $4,665,948 at the beginning of the year were transferred from Level 2 to 1 during the period since quoted prices in active markets for identical securities became available.

5

 



John Hancock Preferred Income Fund II
As of 4-30-14 (Unaudited)

The following is a summary of the values by input classification of the fund’s investments as of April 30, 2014, by major security category or type:

      Level 2  Level 3 
  Total Market  Level 1  Significant  Significant 
  Value at  Quoted  Observable  Unobservable 
  4-30-14  Price  Inputs  Inputs 
Preferred Securities         
Consumer Discretionary  $558,675  $558,675     
Consumer Staples  14,250,000    $14,250,000   
Financials  406,505,938  406,505,938     
Industrials  8,069,750  8,069,750     
Telecommunication Services  59,664,241  55,018,891  4,645,350   
Utilities  171,260,308  165,733,410  5,526,898   
Common Stocks         
Utilities  4,320,000  4,320,000     
Capital Preferred Securities         
Utilities  6,127,485    6,127,485   
Corporate Bonds         
Energy  9,706,000    9,706,000   
Utilities  8,560,000    8,560,000   
Short-Term Investments  994,000    994,000   
 
Total Investments in Securities  $690,016,397  $640,206,664  $49,809,733   
Other Financial Instruments:         
Interest Rate Swaps  ($1,000,449)    ($1,000,449)   

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.

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, the MRA does not result in an offset of the net amounts owed. 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. Collateral received by the fund for repurchase agreements is disclosed in the Portfolio of investments as part of the caption related to the repurchase agreement.

Real estate investment trusts. The fund may invest in real estate investment trusts (REITs). Distributions from REITs may be recorded as income and subsequently characterized by the REIT at the end of the fiscal year as a reduction of cost of investments and/or as a realized gain. As a result, the fund will estimate the components of distributions from these securities. Such estimates are revised when the actual components of the distributions are known.

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.

6 

 



John Hancock Preferred Income Fund II
As of 4-30-14 (Unaudited)

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 April 30, 2014, the fund used interest rate swaps in anticipation of rising interest rates. The following table summarizes the interest rate swap contracts held as of April 30, 2014.

  USD  PAYMENTS  PAYMENTS     
  NOTIONAL  MADE BY  RECEIVED BY  MATURITY  MARKET 
COUNTERPARTY  AMOUNT  FUND  FUND  DATE  VALUE 

Morgan Stanley Capital           
Services  $56,000,000  Fixed 1.4625%  3-month LIBOR (a)  Aug 2016  ($1,191,864) 
Morgan Stanley Capital           
Services  56,000,000  Fixed 0.8750%  3-month LIBOR (a)  Jul 2017  191,415 
  $112,000,000        ($1,000,449) 

(a) At 4-30-14, the 3-month LIBOR rate was 0.2234%

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/ Andrew Arnott 
  Andrew Arnott 
  President 
 
 
Date:  June 5, 2014 

 

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 
  President 
 
 
Date:  June 5, 2014 
 
 
By:  /s/ Charles A. Rizzo 
  Charles A. Rizzo 
  Chief Financial Officer 
 
 
Date:  June 5, 2014