CMS Energy Prices Baby Bond

As we noted earlier today Michigan utility CMS Energy (NYSE:CMS) has sold a new $25 baby bond issue today. The issue is rated Baa2 by Moodys and BBB- by Standard and Poors which makes it lower investment grade.

The CMS Energy Corporation 5.625% Junior Subordinated Notes due 2078 will be hitting the exchange in the next 5-10 days as the offering was effective today, March 5th. We will have to await the announcement of the ticker symbol as none has been specified. Very likely there will be no trading on the OTC Grey market since this is a debt issue.

Interest will be paid on the normal schedule of every 3 months starting on the 15th of June. Being interest the payment will not be qualified for preferential tax treatment.

This issue is 8,000,000 shares for gross proceeds of $200,000,000. The proceeds of this offering will be used to repay an outstanding term loan.

As pointed out earlier by “Gridbird” the issuer may “defer” payment of interest once of more for 40 consecutive quarters (10 years). Interest payments can’t be deferred past the maturity date and a new deferment can’t be declared while the company is already in a 10 year deferment. Additionally you will be required to pay income taxes on the interest that accrues to you even though you have received no payment.

Consequences of a deferment are quite severe, but the bottom line is that if a company declares a 10 year deferment you are basically screwed as an investor.  This is not an usual feature in particular in the utility baby bonds.

Further explanation is available in the preliminary prospectus here.

The pricing term sheet is here.

5 thoughts on “CMS Energy Prices Baby Bond”

  1. Pitiful “perpetual” yield. Hardly surprising though…The long yield isnt budging very much….I threw in the towel the past week and reloaded back into my all time favorite issue and first purchase, AILLL… For my purposes I would much rather have 6.25% QDI with 70 times dividend coverage than 5.6% subordinated ute debt, cap stack and ratings be damned. AILLL is safer as it is a ring fenced T&D only ute. CMS is holding company subordinated debt and a big power producer…I like T&D only.

    1. AILLL at 26.50, thats an expensive play, obviously they better not call it in near future….

      1. Been callable since 1998…. Some times things are not the way they appear to be. You have to dig deeper. But I dont recommend it for anyone but me. When I first bought this bigly in 5 years or so ago, broker wasnt wanting to sell it because he said it was a negative 30% YTC annualized. Well clearly he wasnt very smart because you can only lose money on one call, it cant continually be called for an anuualized return. I finally just told him to quit talking and unlock it and let me buy it. Best safest issue I have ever owned through the years. But that is only me… I have bought issues past call 20% above par and got away with it. One has to know what they are doing though with that type.

  2. CMS has been a super stable utility as I mentioned in the other blog posting. Agree with you guys, this is not an attractive offering for being that far out till the due date. Will definitely pass on this one but thank you Tim for the update.

  3. Hi GW–I could see myself buying it simply for the income stream if the bond fell to say $20 or lower–but otherwise no.

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