| 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: | October 31, 2009 |
ITEM 1. SCHEDULE OF INVESTMENTS
John Hancock Preferred Income Fund II
Securities owned by the Fund on
October 31, 2009 (Unaudited)
| Maturity | ||||
| Rate | date | Par value | Value | |
| Corporate Bonds 14.49% | $51,338,867 | |||
| (Cost $53,750,501) | ||||
| Energy 2.44% | 8,651,000 | |||
| Oil, Gas & Consumable Fuels 2.44 % | ||||
| Southern Union Co., | ||||
| Jr Sub Note, Ser A (7.200% to 11-01-11 then variable - LIBOR +30) (Z) | 7.200% | 11/01/66 | 10,550,000 | 8,651,000 |
| Financials 0.86% | 3,040,000 | |||
| Commercial Banks 0.86 % | ||||
| Lloyds TSB Bank PLC, | ||||
| Sub Note | 6.900 | 11/22/49 | 4,000,000 | 3,040,000 |
| Utilities 11.19% | 39,647,867 | |||
| Electric Utilities 8.80 % | ||||
| Dominion Resources Capital Trust III, | ||||
| Gtd Jr Sub Bond (Z) | 8.400 | 01/15/31 | 5,000,000 | 5,085,600 |
| DPL Capital Trust II, | ||||
| Gtd Sub Bond | 8.125 | 09/01/31 | 22,150,000 | 21,209,200 |
| Entergy Gulf States, Inc., | ||||
| 1st Mtg Bond (Z) | 6.200 | 07/01/33 | 5,000,000 | 4,884,410 |
| Multi-Utilities 2.39 % | ||||
| Dominion Resources Capital Trust I, | ||||
| Gtd Jr Sub Bond (Z) | 7.830 | 12/01/27 | 8,450,000 | 8,468,657 |
| Shares | Value | |
| Common Stocks 1.92% | $6,801,200 | |
| (Cost $6,648,705) | ||
| Energy 0.21% | 757,400 | |
| Oil, Gas & Consumable Fuels 0.21 % | ||
| BP PLC | 10,000 | 566,200 |
| Spectra Energy Corp. (Z) | 10,000 | 191,200 |
| Telecommunication Services 1.55% | 5,486,800 | |
| Diversified Telecommunication Services 1.55 % | ||
| AT&T, Inc. | 110,000 | 2,823,700 |
| Verizon Communications, Inc. | 90,000 | 2,663,100 |
| Utilities 0.16% | 557,000 | |
| Gas Utilities 0.16 % | ||
| Atmos Energy Corp. | 20,000 | 557,000 |
| Shares | Value | |
| Preferred Stocks 135.35% | $479,442,024 | |
| (Cost $558,214,657) | ||
| Consumer Discretionary 11.79% | 41,759,435 | |
| Media 11.79 % | ||
| CBS Corp., 6.750% (Z) | 171,000 | 3,553,380 |
| CBS Corp., 7.250% | 67,000 | 1,440,500 |
| Page 1 |
John Hancock Preferred Income Fund II
Securities owned by the Fund on
October 31, 2009 (Unaudited)
| Shares | Value | |
| Consumer Discretionary (continued) | ||
| Comcast Corp., 6.625% (Z) | 118,500 | 2,719,575 |
| Comcast Corp., 7.000%, Ser B (Z) | 610,000 | 14,908,400 |
| Viacom, Inc., 6.850% (Z) | 834,245 | 19,137,580 |
| Consumer Staples 2.87% | 10,160,000 | |
| Food & Staples Retailing 2.87 % | ||
| Ocean Spray Cranberries, Inc., 6.250%, Ser A (S)(Z) | 160,000 | 10,160,000 |
| Energy 8.24% | 29,193,148 | |
| Oil, Gas & Consumable Fuels 8.24 % | ||
| Nexen, Inc., 7.350% (Z) | 1,151,100 | 26,912,718 |
| Southern Union Co., 7.550%, Ser A | 91,400 | 2,280,430 |
| Financials 72.54% | 256,955,117 | |
| Capital Markets 9.65 % | ||
| Credit Suisse Guernsey, 7.900% | 127,000 | 3,143,250 |
| Lehman Brothers Holdings Capital Trust III, 6.375%, Ser K (I) | 177,000 | 67,260 |
| Lehman Brothers Holdings Capital Trust V, 6.000%, Ser M (I) | 46,600 | 20,923 |
| Lehman Brothers Holdings, Inc., 5.940%, Depositary Shares, Ser C (I) | 145,200 | 30,492 |
| Merrill Lynch Preferred Capital Trust III, 7.000% (Z) | 360,400 | 6,923,284 |
| Merrill Lynch Preferred Capital Trust IV, 7.120% (Z) | 172,200 | 3,361,344 |
| Merrill Lynch Preferred Capital Trust V, 7.280% (Z) | 275,000 | 5,535,750 |
| Morgan Stanley Capital Trust III, 6.250% (Z) | 286,779 | 6,053,905 |
| Morgan Stanley Capital Trust IV, 6.250% (Z) | 105,000 | 2,172,450 |
| Morgan Stanley Capital Trust V, 5.750% (Z) | 352,500 | 6,873,750 |
| Commercial Banks 21.60 % | ||
| Barclays Bank PLC, 7.100%, Ser 3 (Z) | 375,000 | 8,040,000 |
| Barclays Bank PLC, 8.125%, Ser 5 | 225,000 | 5,298,750 |
| Fleet Capital Trust VIII, 7.200% (Z) | 332,000 | 6,749,560 |
| PFGI Capital Corp., 7.750% (Z) | 686,000 | 16,797,109 |
| Republic New York Corp., 6.250%, Ser HSBC (Z) | 45,400 | 872,134 |
| Royal Bank of Scotland Group PLC, 5.750%, Ser L (Z) | 482,733 | 5,411,437 |
| Royal Bank of Scotland Group PLC, 7.250%, Ser T (Z) | 26,000 | 305,240 |
| Santander Finance Preferred SA, 10.500% | 245,000 | 6,703,200 |
| Sovereign Bancorp, Inc., 7.300%, Depositary Shares, Ser C (Z) | 105,567 | 2,649,732 |
| USB Capital VIII, 6.350%, Ser 1 (Z) | 225,000 | 4,907,250 |
| USB Capital X, 6.500% | 22,500 | 506,475 |
| USB Capital XI, 6.600% | 145,000 | 3,279,900 |
| Wells Fargo & Co., 8.000% (Z) | 485,000 | 11,858,250 |
| Wells Fargo Capital Trust IV, 7.000% (Z) | 130,000 | 3,135,600 |
| Consumer Finance 6.28 % | ||
| HSBC Finance Corp., 6.000% (Z) | 72,200 | 1,581,902 |
| HSBC Finance Corp., 6.360%, Depositary Shares, Ser B (Z) | 143,200 | 2,735,120 |
| HSBC Finance Corp., 6.875% (Z) | 310,900 | 7,303,041 |
| HSBC Holdings PLC, 6.200%, Ser A (Z) | 254,600 | 5,468,808 |
| SLM Corp., 6.000% (Z) | 196,800 | 3,058,272 |
| SLM Corp., 6.970%, Ser A (Z) | 64,000 | 2,092,800 |
| Diversified Financial Services 17.59 % | ||
| Bank of America Corp. Capital Trust II, 7.000% (Z) | 22,400 | 455,840 |
| CIT Group, Inc., 6.350%, Ser A (Z) | 100,000 | 52,000 |
| Page 2 |
John Hancock Preferred Income Fund II
Securities owned by the Fund on
October 31, 2009 (Unaudited)
| Shares | Value | |
| Financials (continued) | ||
| Citigroup Capital VIII, 6.950% | 660,000 | 12,487,200 |
| Deutsche Bank Capital Funding Trust X, 7.350% | 125,000 | 2,820,000 |
| Deutsche Bank Contingent Capital Trust II, 6.550% | 160,000 | 3,265,600 |
| Deutsche Bank Contingent Capital Trust III, 7.600% | 330,000 | 7,609,800 |
| General Electric Capital Corp., 6.000% | 20,000 | 464,200 |
| General Electric Capital Corp., 6.050% | 19,000 | 453,150 |
| ING Groep NV, 7.050% (Z) | 775,700 | 13,303,255 |
| JPMorgan Chase & Co., 6.150%, Ser E (Z) | 292,600 | 13,778,534 |
| RBS Capital Funding Trust V, 5.900% (Z) | 399,500 | 3,927,085 |
| RBS Capital Funding Trust VII, 6.080% (Z) | 145,000 | 1,454,350 |
| Repsol International Capital Ltd., 7.450%, Ser A (Z) | 90,000 | 2,250,000 |
| Insurance 10.63 % | ||
| Aegon NV, 6.375% (Z) | 355,000 | 5,893,000 |
| MetLife, Inc., 6.500%, Ser B (Z) | 770,000 | 16,732,100 |
| Phoenix Cos., Inc., 7.450% (Z) | 229,300 | 4,131,986 |
| PLC Capital Trust IV, 7.250% (Z) | 389,500 | 8,144,445 |
| Prudential PLC, 6.500% (Z) | 103,000 | 2,152,700 |
| RenaissanceRe Holdings Ltd., 6.080%, Ser C (Z) | 32,500 | 608,400 |
| Real Estate Investment Trusts 5.20 % | ||
| Duke Realty Corp., 6.500%, Depositary Shares, Ser K (Z) | 110,000 | 1,947,000 |
| Duke Realty Corp., 6.600%, Depositary Shares, Ser L (Z) | 109,840 | 1,977,120 |
| Duke Realty Corp., 6.625%, Depositary Shares, Ser J (Z) | 449,400 | 8,003,814 |
| Public Storage, Inc., 6.450%, Depositary Shares, Ser X (Z) | 30,000 | 636,600 |
| Public Storage, Inc., 7.500%, Depositary Shares, Ser V (Z) | 100,000 | 2,485,000 |
| Wachovia Preferred Funding Corp., 7.250%, Ser A (Z) | 170,000 | 3,374,500 |
| Thrifts & Mortgage Finance 1.59 % | ||
| Federal National Mortgage Assn. (8.250% to 12-13-10, then | ||
| variable) (I) | 75,000 | 86,250 |
| Sovereign Capital Trust V, 7.750% (Z) | 232,500 | 5,524,200 |
| Materials 0.33% | 1,177,000 | |
| Metals & Mining 0.33 % | ||
| Freeport-McMoRan Copper & Gold, Inc., 6.750% | 11,000 | 1,177,000 |
| Telecommunication Services 9.14% | 32,367,997 | |
| Diversified Telecommunication Services 0.16 % | ||
| AT&T, Inc., 6.375% (Z) | 21,000 | 545,370 |
| Wireless Telecommunication Services 8.98 % | ||
| Telephone & Data Systems, Inc., 6.625% (Z) | 155,000 | 3,361,950 |
| Telephone & Data Systems, Inc., 7.600%, Ser A (Z) | 666,834 | 15,290,504 |
| United States Cellular Corp., 7.500% (Z) | 559,243 | 13,170,173 |
| Utilities 30.44% | 107,829,327 | |
| Electric Utilities 19.41 % | ||
| Constellation Energy Group, 6.990% (Z) | 39,870 | 3,450,003 |
| Duquesne Light Co., 6.500% (Z) | 98,450 | 4,411,791 |
| Entergy Texas, Inc., 7.875% | 33,000 | 889,350 |
| FPC Capital I, 7.100%, Ser A (Z) | 316,000 | 7,900,000 |
| FPL Group Capital Trust I, 5.875% (Z) | 225,000 | 5,665,500 |
| Page 3 |
John Hancock Preferred Income Fund II
Securities owned by the Fund on
October 31, 2009 (Unaudited)
| Shares | Value | |
| Utilities (continued) | ||
| Georgia Power Capital Trust VII, 5.875% (Z) | 95,000 | 2,334,150 |
| HECO Capital Trust III, 6.500% (Z) | 156,369 | 3,674,672 |
| Interstate Power & Light Co., 8.375%, Ser B (Z) | 699,350 | 19,406,963 |
| NSTAR Electric Co., 4.780% (Z) | 15,143 | 1,155,128 |
| PPL Energy Supply, LLC, 7.000% (Z) | 626,184 | 16,067,881 |
| Southern California Edison Co., 6.000%, Ser C (Z) | 20,000 | 1,689,376 |
| Westar Energy, Inc., 6.100% (Z) | 87,700 | 2,122,340 |
| Gas Utilities 2.32 % | ||
| Southwest Gas Capital II, 7.700% (Z) | 330,000 | 8,207,100 |
| Multi-Utilities 8.71 % | ||
| BGE Capital Trust II, 6.200% (Z) | 474,700 | 10,206,050 |
| DTE Energy Trust I, 7.800% (Z) | 287,200 | 7,280,520 |
| Public Service Electric & Gas Co., 4.180%, Ser B (Z) | 4,805 | 364,940 |
| South Carolina Electric & Gas Co., 6.520% (Z) | 15,000 | 1,431,563 |
| Xcel Energy, Inc., 7.600% (Z) | 440,000 | 11,572,000 |
| Par value | Value | |
| Short-Term Investments 1.01% | $3,573,997 | |
| (Cost $3,573,997) | ||
| Repurchase Agreement 0.44% | 1,574,000 | |
| Repurchase Agreement with State Street Corp. dated 10-30-09 at | ||
| 0.01% to be repurchased at $1,574,001 on 11-2-09, collateralized | ||
| by $1,555,000 Federal Home Loan Mortgage Corp., 7.00% due 3- | ||
| 15-10 (valued at $1,607,481, including interest). | $1,574,000 | 1,574,000 |
| Maturity | ||||
| Yield * | date | Par value | Value | |
| U.S. Government Agency 0.57% | 1,999,997 | |||
| Federal Home Loan Bank, | ||||
| Discount Note | 0.05% | 11/02/09 | 2,000,000 | 1,999,997 |
| Total investments (Cost $622,187,860)† 152.77% | $541,156,088 | |||
| Other assets and liabilities, net (52.77%) | ($186,925,573) | |||
| Total net assets 100.00% | $354,230,515 |
The percentage shown for each investment category is the total value of the category as a percentage of the net assets of the Fund.
(I) Non-income producing security.
(S) This security is 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 segregated as collateral for the Committed Facility Agreement. Total collateral value at October 31, 2009 was $406,865,243.
† At October 31, 2009, the aggregate cost of investment securities for federal income tax purposes was $622,441,831. Net unrealized depreciation aggregated $81,285,743, of which $10,588,803 related to appreciated investment securities and $91,874,546 related to depreciated investment securities.
* Yield represents either the annualized yield at the date of purchase, the stated coupon rate or, for floating securities, the rate at period end.
| Page 4 |
Notes to the 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. Equity securities held by the Fund are valued at the last sale price or official closing price (closing bid price or last evaluated price if no sale has occurred) as of the close of business on the principal securities exchange (domestic or foreign) on which they trade. Debt obligations are valued based on the evaluated prices provided by independent pricing services, which utilizes both dealer-supplied quotes and electronic data processing techniques, which take 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. Foreign securities and currencies are valued in U.S. dollars, based on foreign currency exchange rates supplied by an independent pricing service. 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. Equity and debt obligations, for which there are no prices available from an independent pricing service, are valued based on bid quotations, or evaluated prices, as applicable, obtained from broker-dealers or fair valued as described below. Certain short-term debt instruments are valued at amortized cost.
Other assets and securities for which no such quotations are readily available are valued at fair value as determined in good faith by the Fund’s Pricing Committee in accordance with procedures adopted 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. The values of such securities used in computing the net asset value of the Fund’s shares are generally determined as of such times. Occasionally, significant events that affect the values of such securities may occur between the times at which such values are generally determined and the close of the NYSE. Upon such an occurrence, these securities will be valued at fair value as determined in good faith under consistently applied procedures established by and under the general supervision of the Board of Trustees.
Fair value measurements
The Fund uses a three-tier hierarchy to prioritize the assumptions, referred to as inputs, used in valuation techniques to measure fair value. The three-tier hierarchy of inputs and the valuation techniques used are summarized below:
Level 1 — Exchange traded prices in active markets for identical securities. This technique is used for exchange-traded domestic common and preferred equities, certain foreign equities, warrants, rights, options and futures.
Level 2 — Prices determined 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 techniques are received from independent pricing vendors and are based on an evaluation of the inputs described. These techniques are used for certain domestic preferred equities, certain foreign equities, unlisted rights and warrants, and fixed income securities. Also, over-the-counter derivative contracts, including swaps use these techniques.
Level 3 — Prices determined using significant unobservable inputs. In situations where quoted prices or observable inputs are unavailable, such as when there is little or no market activity for an investment, unobservable inputs may be used. Unobservable inputs reflect the Fund’s Pricing Committee’s own assumptions about the factors that market participants would use in pricing an investment and would be based on the best information available. Securities using this technique are generally thinly traded or privately placed, and may be valued using broker quotes, which may not only use observable or unobservable inputs but may also include the use of the brokers’ own judgments about the assumptions that market participants would use.
The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
The following is a summary of the inputs used to value the Fund’s investments as of October 31, 2009, by major security category or security type. Other financial instruments are derivative instruments not reflected in the Portfolio of Investments, such as interest rate swap contracts, which are stated at market value.
| Investments in Securities | Level 1 | Level 2 | Level 3 | Total |
| Consumer Discretionary | $41,759,435 | - | - | $41,759,435 |
| Consumer Staples | - | $10,160,000 | - | 10,160,000 |
| Energy | 29,950,548 | 8,651,000 | - | 38,601,548 |
| Financials | 240,158,008 | 3,040,000 | $16,797,109 | 259,995,117 |
| Materials | 1,177,000 | - | - | 1,177,000 |
| Telecommunication Services | 37,854,797 | - | - | 37,854,797 |
| Utilities | 95,359,116 | 52,675,078 | - | 148,034,194 |
| Short-Term Investments | - | 3,573,997 | - | 3,573,997 |
| Total Investments in | ||||
| Securities | $446,258,904 | $78,100,075 | $16,797,109 | $541,156,088 |
| Other Financial Instruments | - | (6,758,165) | - | (6,758,165) |
| Totals | $446,258,904 | $71,341,910 | $16,797,109 | $534,397,923 |
The following is a reconciliation of Level 3 assets for which significant unobservable inputs were used to determine fair value:
| Financials | ||||
| Balance as of July 31, 2009 | $15,853,882 | |||
| Accrued discounts/premiums | - | |||
| Realized gain (loss) | - | |||
| Change in unrealized appreciation (depreciation) | 943,227 | |||
| Net purchases (sales) | - | |||
| Transfers in and/or out of Level 3 | - | |||
| Balance as of October 31, 2009 | $16,797,109 |
Repurchase agreements
The Fund may enter into repurchase agreements. When the Fund enters into a repurchase agreement through its custodian, it receives delivery of securities, the amount of which, at the time of purchase and each subsequent business day, is required to be maintained at such a level that the market value is generally at least 102% of the repurchase amount. The Fund will take receipt of all securities underlying the repurchase agreements it has entered into, until such agreements expire. If the seller defaults, the Fund would suffer a loss to the extent that proceeds from the sale of underlying securities were less than the repurchase amount. The Fund may enter into repurchase agreements maturing within seven days with domestic dealers, banks or other financial institutions deemed to be creditworthy by the Adviser.
Interest rate swap agreements
Interest rate swaps represent an agreement between two counterparties to exchange cash flows based on the difference in the two interest rates, applied to the notional principal amount for a specified period. 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 receivable or payable under the swap contracts on a periodic basis. For more information on interest rate swap contracts, please refer to the Fund’s Prospectus, semi-annual and annual reports.
The Fund entered into interest rate swaps in anticipation of rising interest rates. The following summarizes the contracts held at October 31, 2009:
| PAYMENTS | PAYMENTS | ||||||
| NOTIONAL | MADE BY | RECEIVED | EFFECTIVE | TERMINATION | UNREALIZED | MARKET | |
| COUNTERPARTY | AMOUNT | FUND | BY FUND | DATE | DATE | DEPRECIATION | VALUE |
| 3-Month | |||||||
| Bank of America | $63,500,000 | 4.37% | LIBOR (a) | 11/15/2007 | 11/15/2010 | ($3,701,069) | ($3,701,069) |
| 3-Month | |||||||
| Morgan Stanley | 63,500,000 | 4.65% | LIBOR (a) | 1/7/2008 | 1/7/2011 | (3,057,096) | (3,057,096) |
| $127,000,000 | ($6,758,165) | ($6,758,165) | |||||
| (a) At October 31, 2009, the 3-month LIBOR rate was 0.28063%. | |||||||
Interest rate swap notional amounts at October 31, 2009 are generally representative of the interest rate swap activity during the period ended October 31, 2009.
Fair value of derivative instruments by risk category
The table below summarizes the fair values of derivatives held by the Fund at October 31, 2009 by risk category:
| Financial | Liability | ||
| instruments | Asset Derivatives | Derivatives | |
| location | Fair Value | Fair Value | |
| Interest rate swap | |||
| Interest rate contracts | contracts | - | ($6,758,165) |
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: December 18, 2009
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: December 18, 2009
By: /s/ Charles A. Rizzo
-------------------------------------
Charles A. Rizzo
Chief Financial Officer
Date: December 18, 2009