The Fixed-to-Floating Rate Preferred Conundrum

As we have watched interest rates go down, down, down over the last few years it was only a matter of time before fixed-to-floating rate preferreds began to be impacted.

Up until this point we have had just a few issues that were in their respective ‘floating rate periods’ where the coupon would reset every quarter–normally to 3 month Libor plus a fixed spread.

As most of you know 3 month libor has been on a downward trend for years and now is in the .3% area. This means that almost all fixed-to-floating rate issues which were issued years ago will see falling coupons when they enter the floating rate period.

We have a list of all the issues with their ‘potential’ coupons here.

Even worse these issues have no floor to the 3 month Libor reset level–if 3 month Libor goes negative coupons will keep right on falling.

So let’s look at the most recent example and that is the Customers Bancorp 7% Fixed to Floating non cumulative preferred (CUBI-C).

This issue was tooling along with pricing in the $26 area all the way until March 1, 2020–of course shortly thereafter we had the COVID 19 disruption and the share price fell to $14—but now recovered to $21.24

The terms of the issue would become 3 month Libor plus 5.30% on 6/15/20 — the first dividend payment date would not be until 9/15/2020 under the floating rate structure. If 3 month Libor remains at .3% the new coupon will be 5.60% for the next payment in September.

Knowing what we know today about interest rates the conundrum is whether the CUBI-C issue is a good buy at $21.24? With a coupon of 5.60% the current yield would be 6.60%.

3 month Libor has never traded at negative levels (going back to 1986), but these are not normal times we live in and one should never say never when making a forward looking forecast.

If 3 month Libor falls the coupon will fall for this issue and share pricing would likely follow.

But let’s make this a little more complex. What if interest rates generally and the 3 month Libor in particular jump by 1%? With bond like securities you would normally expect price to move in the opposite direction to rates–but not here. If 3 month Libor moved higher it is likely the share price would move higher, although it probably is more complex–meaning the level of the 10 year treasury would affect pricing as well.

In the case of CUBI-C if 3 month Libor moved sharply higher while the 10 year treasury moved only modestly higher it is possible that Customers Bancorp (CUBI) could potentially redeem the issue in which case a huge capital gain could be realized by the investor. It is hard to fathom this scenario occurring–but as I wrote above never say never.

Currently this is the only fixed-to-floating rate issue that Customer Bancorp has that is in the floating rate period, but they have another 3 issues that will go into the floating rate period in the next 18 months–all currently priced in the $19 to $22 range–all of which are already factoring in reduced coupons.

So it is quite the puzzle—and your action really depends on your personal outlook for interest rates.

Currently only a handful of fixed-to-floating rate issues are trading in the floating rate period–but in the number of years we will see bunches of issues go floating.

As noted by many we are starting to see large spreads coming with the new issues. Additionally as DoubleV pointed out we have the Fixed-Rate Reset issues coming with large spreads–for instance the newer Wintrust 6.875% non cumulative preferred comes with a spread of 6.507%.

What we are still missing is a ZERO floor in the variable portion of the coupon–if 3 month Libor–or alternatively SOFR or the 5 year treasury goes negative–the rate is zero—I won’t hold my breath for this in preferred stocks.

Errors and Omissions

On this page reader/participants can post comments pointing out ERRORS AND OMISSIONS on our various lists.

I think we are dealing with near 1000 pages on site at this moment (1/5/2019) and we always say we have maybe 98% good data with 2% being incorrect or simply missing.

For instance this week Affinity4Investing let us know we were missing one of the Allstate Corp preferred issues–fortunately we stumbled on his comment so we were able to get the issue added, BUT there is so much commenting activity we can only skim through them.  Thus if they are posted here were can, at a glance, find out issues.

We will respond to comments on this page, but we will clear it off every week or two.

Monday Morning Kickoff

Last week was a loser week for the S&P500 as it traded with a low of 3004 and a high of 3155 before closing the week near the low at 3009–down about 3% on the week. With the SP500 around 3000 the index is off 7% year to date and about 12% off of the 52 week high.

The 10 year treasury traded in a range of .63% to .73% and closed the week at around .64%.

3 month Libor (as the reset variable for most fixed-to-floating preferreds) closed last week at .37%. As fixed-to-floating rate preferreds move into their floating rate period this is an important number.

The Fed balance sheet FELL by $12 billion last week. The balance sheet has fallen by $86 billion in the last 2 weeks. The REPO market has been very quiet the last few weeks–obviously there is plenty of liquidity in the system, at least temporarily.

The average$25/share preferred stock and baby bond fell by 28 cents (around 1%) last week. Every sector fell, with lodging REIT preferreds falling hardest with the average share off around 6%.

Last week was a quiet week for new preferreds and baby bonds. There we no new issues.

Brookfield Infrastructure Partners (BIP) announced a new issue of preferred units–but as of this moment we are not aware of any pricing of the shares.

We did see the start of trading of the WESCO International 10.625% preferred (WCC-A). This is a fixed-rate-reset with a reset spread of 10325%. This is a special situation and investors should make sure to do their due diligence.

Investor Confidence In Check as Unknowns Multiply

The last 3 weeks we have seen common stocks move lower by over 6%–which means that at current levels the S&P500 is 11% below the 52 week high.

This mover lower is something I have expected–and the way it is occurring–not in a panic, but in an orderly fashion (in spite of 500-700 dow point moves) is just the way I want to see stocks fall. When common stocks move lower in an orderly fashion we don’t reach the point where the ‘baby gets thrown out with the bath water’ so most of the issues I now own have been pretty stable.

As always we all can predict (known as a WAG–wild ass guess) the future–of course we have no real clue as to what the future holds–to guide our investing. I used to always formulate what I thought the economy, both domestically and globally, would look like 6-12 months out to formulate my investing, but NOW it is a waste of my time as we are in totally uncharted waters–but I do it anyway.

Right now it looks like we are going to see more ‘lock downs’ throughout the country. So all of the zombie companies that are out there will have to finally toss in the towel. I’m talking some of the airlines, cruise lines, restaurants and bars, some retailers and lodging companies. As I type this airlines are making plans to layoff huge numbers of folks and cruise lines are pushing out sailings further and further. Air travel, while being touted as staging a comeback, is still off 77% from last year. In a business like airlines if your business is off 5 or 10% year over year you are going to be in poor shape–let alone down by 25, 50 or 75%!! I understand some of the amusement parks have reopened in Florida, but no one is showing up. With little air travel crowds are small – will they lose more money when open than they do when they are closed?

Of course my sour mode on the economy can change rapidly if we have a breakthrough treatment for COVID 19, or a vaccine. Neither of these will be in time to rescue the zombies. Borrow more and more money to stay afloat which simply raises your cost of operating as all of the free cash goes toward servicing debt.

I haven’t even touched upon the state and local governments that are barreling toward insolvency. In Minnesota many local governments can’t even open their public swimming pools for the kids–sad. On the other hand if these local governments were managing the city correctly they would have some reserves–but no, they spend every penny they can lay their hands on. In my town they are finally opening the pool on Monday since the governor has finally released the CARES act money to the local governments–helicopter money to bail out the local governments. Everyone complains about high taxes–just wait!!

So I stay invested in the income issues I truly and totally believe in–preferred stocks of closed end funds and utility preferreds and baby bonds. After doing some around the edge trimming in the last 10 days I am down to around 65% invested–I’m fine there and am very willing to forgo some income to sleep at night.

Down We Go But I’m Not Buying

Markets are taking a leg lower as folks wake up a bit from the never ending ‘v recovery’ chant.

I’m doing nothing really. I have been selling a bit in the last week around the edges–i.e. for some of the utility baby bond issues which I held full positions in I have taken a portion off the table. Really they were pretty extended–and given my expectations for better buying opportunities ahead I just banked some profits.

I had held a full position in the Wintrust 6.875% Fixed Rate Reset preferred issued on 5/2/2020 and I unloaded that for 2-3% gain. I am not enamored by any of the smaller community banks issuing high yield preferreds (i.e. 7%+/-). When I look at the exposure they have to ‘main street’ and in particular lodging and retail I think I can safely predict they are going to take some pretty massive write downs.

Bottom line is I think that we will see some nice buying opportunities in preferreds and baby bonds, but it is likely that until we start seeing 2nd and 3rd quarter earnings (or losses) we won’t have any real fundamental data to base investments on–or at least fundamental data that I can hang my hat on.

Right now 3 of 4 accounts we have are in the black–one is in the red yet by 5% so don’t know if I can get back to even this year on this one–the good part is this account had a nice double digit gain last year so likely my 6-7% annual average will remain intact.

VEREIT to Redeem 6 Million Preferred Shares

Giant triple net lease REIT VEREIT (VER) has announced that they will be redeeming 6 million shares of the 6.70% perpetual preferred (VER-F) issue.

Last week the company sold some debt and at the time stated they would likely redeem more of this giant sized preferred issue.

Bob-in-DE caught the announcement today that they will redeem 6 million shares for $25 plus accrued dividends on 7/22/2020. The 6 million shares is around 19% of the total currently outstanding–this will leave around 24.9 million shares yet outstanding.

VER-F is a monthly payer and goes ex-dividend on 6/30/2020 for 13.9 cents for payment 7/15. There will be an additional ‘stub’ dividend payment for 7/15/2020 to 7/21/2020 of 3.3 cents on the redeemed shares.

VER-F is now trading around $25.05.

It is likely that in the next few days you will see around 19% of your shares segregated in your brokerage account if you are a holder. NOTE I hold a full position of this one.

The company announcement is here.

Still Awaiting Brookfield Infrastructure Partners Pricing

I have not yet seen any pricing on the new Brookfield Infrastructure Partners (BIP) preferred issue..

I have noted that since the start of the pandemic that pricing is slower as is the movement from the OTC grey market to the permanent exchange. Some of the new issues are taking a month or more to move to their permanent exchange–typically it would be a week to 10 days.

WESCO International to Issue Preferred Stock–UPDATE

AS NOTED BELOW IN THE COMMENTS FROM GRIDBIRD THIS ISSUE IS NOW TRADING UNDER TICKER WCC-A AND LAST PRICED AT $27.10 NOW ON ALMOST 200,000 SHARES.

WE FIND NO RATING ON THE NEW ISSUE, BUT WESCO WAS RATED BB- BY STANDARD AND POORS AND ANIXTER WAS RATED BB. MOODYS RATES WESCO B1

Supply house WESCO International (WCC) will be issuing a new issue of $25 preferred stock in connection with the company’s acquisition of Anixter International (AXE). These shares were issued directly to Anixter shareholders as partial consideration in the merger.

These cumulative shares will be fixed-rate reset with a giant initial coupon of 10.625%.

The coupon will reset every 5 years at the 5 year treasury plus a spread of 10.325%

Dividends will be paid on the last day of March, June, September and December being 9/30/2020.

The registration statement is here.

Additional information is shown here in the Depository Agreement.

NOTE–while we see the shares are registered to trade on the NYSE we don’t know all of the details as of this moment.

I will post more detail as I dig through the merger agreement documents.

MCG WAS ON THIS ONE EARLY TODAY

Brookfield Infrastructure Partners LP to Sell Preferred Units

Giant Canadian partnership Brookfield Infrastructure Partners (BIP) will be selling a new issue of preferred units (preferreds issued by partnerships are call ‘units’, not ‘stock’).

This security will issue a K-1 at tax time.

The shares will trade on the NYSE under permanent ticker BIP-A after a short stint on the OTC grey market (ticker not announced).

They will have a optional redemption period starting on 7/31/2025.

The preliminary prospectus can be found here.

Eugene was right on top of this one.

Monday Morning Kickoff

The S&P500 traded in a range of 2966 to 3155 last week before closing on Friday at 3098–a gain of around 2% on the week.

The 10 year treasury traded in the range of .66% to .76% last week and closed at .70%.

The Fed balance sheet FELL by $74 billion last week. This tumble came after rising just $4 billion last week. You can be certain that this will NOT continue longer term–with the Federal government spending like crazy and tax revenue drying up the Fed will be forced to continue to buy debt to fund the crazy spending.

The average $25 baby bond and preferred stock moved higher last week by almost 1%–up 20 cents/share. Investment grade issues moved up 1%, CEF preferreds moved lower by 10 cents. Lodging REIT preferreds moved lower by 2.5% as Ashford Hospitality suspended their preferred dividend which sent their preferred way down.

Last week we had 5 new income issue come to market.

It started off with Office Properties Income Trust (OPI) selling an investment grade debt issue with a coupon of 6.375%.

This issue is not yet being traded as near as we can tell. Begin debt there is no OTC grey market trading.

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Small Texas Banker, Triump Bancorp (TBK) sold a new issue of non cumulative preferred with a fixed rate coupon of 7.125%.

The issue is now trading on the OTC grey market under ticker TMPHL. The shares last traded at $24.45.

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BDC Saratoga Investment (SAR) issued a new baby bond with a fixed rate coupon of 7.25%. There is no OTC grey market trading in this issue.

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For the second time in about a month First Midwest Bancorp (FMBI) has come to market with a non cumulative preferred with a fixed rate coupon of 7%. The issue is trading under OTC ticker of FMDWl and last traded at $24.75.

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Lastly Iowa banker Heartland Financial (HTLF) has sold a new issue of fixed rate reset preferred. The issue priced at a fixed rate of 7% for about 5 years after which it will reset to the 5 year treasury plus a spread of 6.75%.

The OTC grey market ticker has not yet been announced.

Iowa Banker Heartland Financial to Sell Preferred Issue–UPDATE TICKER

THE OTC GREY MARKET TICKER IS HRLLL.

Heartland Financial (HTLF) is selling a new issue of Non-Cumulative preferred stock. HTLF is a holding company and owns banks in 11 different states.

Headquartered in little Dubuque, Iowa, the company has around $13 billion in assets.

The issue will be a fixed-rate reset preferred meaning it will have a fixed coupon for around 5 years and then will reset at the 5 year treasury plus a spread. It will then reset every 5 years there after while outstanding. Right now the 5 year treasury is around .30% – so the key to the issue is what the spread end up being (pricing not yet announced).

The issue will be non-cumulative, but qualified.

The issue will trade on NASDAQ under ticker HTLFP after a stint on the OTC grey market (ticker not yet announced).

The preliminary prospectus can be read here.

mcg was on this early with SteveA tagging on.

Ashford Hospitality Suspends Preferred Payments

Lodging REIT Ashford Hospitality (AHT) has finally suspended their preferred stock dividends. It was obvious that this was coming. Shares are tumbling on the official news (we all knew this was coming–only a fool would keep paying when they are fighting for survival).

The company joins Hersha Hospitality (HT) and Sotherly Hotels (SOHO) in having their preferred dividends suspended.

The preferreds are cumulative, meaning they will have to pay the suspended dividends before they ever pay another common dividend. This assumes that the company is solvent enough in the future to do so.

Ashford carries a ton of debt (over $4 billion)–but all debt is at the property level so I suspect we will see the REIT walk away from many properties instead of continuing to make debt payments–the company has over $200 million of cash on hand.

A chart of all lodging REIT preferred can be seen here.

The SEC announcement is here.

Triple Net Lease REIT VEREIT to Redeem More Preferred Shares

Many of us have held the preferred shares in triple net lease REIT VEREIT (VER) for quite some time. I have a few shares now, but just a taste.

The company has a 6.70% perpetual preferred (VER-F) outstanding which was a giant issue–originally around 43 million shares. Since the issue became redeemable in 2019 the company has called for redemption at least twice for 12 million shares–last I calculated there were still around 30 million shares outstanding.

Shares are now trading around $25.09. The shares pay a monthly 13.9 cent dividend. I expect shares will trade around the same level for the next year or so based upon the expectation that shares will all be called when the company is able to garner enough money to make it happen.

The company is selling more debt to redeem another chunk of the Series F preferred

For those that don’t own any of the VER-F issue it is a reasonable spot to garner 6.70% from a large REIT.

Potential investors should do their due diligence to understand the history behind VEREIT. Any one buying at this moment will have a portion of their shares called away in the next month (i.e. if you buy 100 shares today you may have around 20 shares called–just guessing).

Saratoga Investment Prices Baby Bonds

BDC Saratoga Investment (SAR) has priced their new issue of baby bonds.

The bonds will carry a fixed rate coupon of 7.25%.

The bonds will have an optional redemption period starting 6/24/2022 and will have a final maturity date of 6/30/2025

There will be no OTC grey market trading in this issue.

SAR has one other 6.25% baby bond outstanding which can be see here.

The pricing term sheet can be read here.

First Midwest Bancorp Prices Preferred-UPDATE TICKER

THE OTC GREY MARKET TICKER IS FMDWL

First Midwest Bancorp (FMBI) has priced their newest preferred stock issue.

Just like the issue sold last month the issue carries a coupon of 7%.

The issue is non investment grade, non cumulative , and qualified.

The OTC grey market ticker has not yet been announced.

The 7% issue they sold last month can be found here.

The pricing term sheet can be read here.

WTH First Midwest Bancorp to Sell Preferred

I say What the Hell!!

First Midwest Bancorp (FMBI) is selling a new issue of $25 preferred stock.

FMBI just sold a new issue 1 month ago–so this was a surprise. George M picked this one up early mid day. If you Prefer had it also.

The issue will be non-cumulative, qualified and rated BB- by S&P and Ba1 by Moodys.

The issue from last month carries a 7% coupon and is trading around $24.84 right now.

The preliminary prospectus for the new issue can be found here.

Saratoga Investment Corporation to Issue Baby Bonds

BDC Saratoga Investment Corporation (SAR) has announced they will be issuing a new baby bond.

This issue is rated BBB by Egan-Jones.

The issue will trade under permanent ticker SAC when it begins to trade on the NYSE. No OTC grey market trading will take place, although anxious investors may be able to call their broker with the CUSIP number (when known) and secure shares prior to exchange trading.

The new baby bond will mature in 2025 an will pay the typical quarterly interest payments. There will be a early redemption option for the company but the date has not yet been released.

SAR has 1 other baby bonds currently outstanding–it can be seen here.

The preliminary prospectus can be seen here for the new issue.

EarlyBird was early with this new issue.

Triumph Bancorp Prices New Preferred–UPDATE TICKER

THE OTC GREY MARKET TICKER IS TMPHL.

Triumph Bancorp (TBK) has priced their previously announced issue of perpetual preferred stock.

The issue priced at a fixed rate of 7.125%. The issue is non-cumulative and qualified. It is unrated by the major rating agencies. There will be a optional redemption available starting on 6/30/2025

The issue will trade on the OTC grey market, but the temporary ticker has NOT yet been announced.

Note that while we have had many smaller banks selling preferreds lately TBK may be about the smallest of the group with assets of just $5 billion. Maybe more due diligence is warranted before purchase.

The pricing term sheet can be read here.

Office Properties Income Trust Prices Investment Grade Debt

Giant office property REIT Office Properties Income Trust (OPI) has priced the previously announced senior note issue.

The issue carries a fixed rate of 6.375%. Being debt the interest payments are not qualified.

The issue matures on 6/23/2050 and has an optional redemption period starting 6/23/2025.

The issue carries low investment grade ratings from both S&P and Moodys.

Being a debt issue there will be no OTC grey market trading, but if one is anxious and wishes to buy before exchange trading begins a call to your broker with the CUSIP shown below may get you some shares early.

The pricing term sheet can be found here.

REIT Office Properties Income Trust to Offer Senior Notes

Office REIT Office Properties Income Trust will be offering some baby bonds with a maturity in 2050.

The ticker will be OPINL and the baby bonds will trade on NASDAQ. The issue will not trade on the OTC grey market, but you might be able to secure notes before exchange trading by calling your broker.

I did a quick look at the offering and don’t find anything unusual–quarterly interest payments, optionally redeemable starting in 2025 and a maturity date in 2050.

The preliminary prospectus can be read here.

Monday Morning Kickoff

The S&P500 traded in a range of 2984 to 3233 last week before closing at 3041 which is a loss of about 5% on the week.

The 10 year treasury traded in a range of .65% to .92% before closing the week at .70%

The Fed balance sheet grew by only $4 billion last week–certainly the smallest rise in months.

The average $25/share baby bond and preferred stock fell by over 2% last week. Bank issues fell by 3%, utility issues by just over 2%, lodging REIT preferreds by 6%. This was the 1st losing week since back in early April.

Last week we had 3 new income issues announced.

We started off the week with self storage giant Public Storage (PSA) announcing a new perpetual. The new 4.625% coupon issue is trading under temporary ticker PUBXL now last traded at $24.50. They have called the 5.375% PSA-V issue with the proceeds of the new offering.

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Associated Banc-corp (ASB) announced a new non-cumulative preferred issue with a 5.625% coupon. The issue is trading under OTC grey market ticker ABBCL and last traded at $24.67.

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Lastly annuity provider American Equity Investment (AEL) announced a new non cumulative perpetual preferred that is a fixed-rate reset issue (reset every 5 years). The issue is trading under temporary ticker AEIHL and last traded at $24.56.

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Wee!! Down We Go!! Bargains Appearing

Not a surprise to most of us here to see the DJIA off about 2,000 points this week–easy come, easy go.

We are back to a realization that the economy pretty much sucks–of course it does. The question is always what it will do in a few quarters?

Companies stepping forward and talking about the future–in a realistic way, are bringing share prices back to earth.

The airlines as well as the cruise lines have traded at silly prices–no matter the bounce back in traffic–a doubling from near nothing is still pretty much nothing. Delta (DAL) today said they were looking to renegotiate credit terms with dire implications if they were unable to do so.

Royal Caribbean Cruises (RCL) traded to $75 just a few days ago–up from $22 a month ago!! RCL has no business–today, next month and maybe a few months from now. RCL is carrying a $12 billion market cap–with no business—WTH.

These companies are again need to go to the debt market and their credit ratings are being lowered–i.e. they are screwed if this recovery doesn’t come off perfect.

In the markets we care about–preferreds and baby bonds we are seeing more red than we have for months. The air is being let out of many of the junkier issues. You can see the losers here.

All the crap issues such as the Ashford Hospitality preferred are off significantly. The AHT preferreds are off 25% TODAY. Almost all the lodging REIT preferreds are getting the wood put to them. This is true of the mREIT preferreds as well.

I am not buying–just watching the ride down. Believe it or not there are only about 20 gainers out of near 500 preferred shares today. Even the utility preferreds and baby bonds are off 1-3%.

Will there be even better bargains ahead for income investors? Everyone has an opinion–none of us know for sure.

American Equity Investment Life Holding Prices Preferred

Annuity provider American Equity Investment Life (AEL) has priced their new fixed-rate reset perpetual preferred with a fairly tasty initial coupon of 6.625%.

More importantly the issue, which will have the 1st coupon reset on 9/1/2025 has a ‘spread’ of the reset at 6.297%. The spread will be added to the 5 year treasury every 5 years to ‘reset’ the coupon.

This issue is non-cumulative, qualified, and NOT investment grade.

The issue will trade immediately on the OTC grey market under ticker AEIHL

The pricing term sheet can be read here.