BB&T Prices New $1000 Perpetual Preferred

BB&T Corp (NYSE:BBT) has priced a new $1000/share fixed rate reset non cumulative preferred with an initial coupon of 4.80%.

Quite honestly this is a total crap issue–perpetual, non-cumulative with a rating of BBB- from S&P and Baa1 (potentially to be downgraded) from Moodys and BBB- from Fitch. Just barely investment grade.

The coupon is fixed until 9/1/2024 and then resets at the 5 year treasury plus a spread of 3.003%. After this it will be reset every 5th anniversary. The issue becomes optionally redeemable on 9/1/2024 at the companies option.

To top it all off the issue will pay dividends only twice a year.

We don’t deal with $1000 issues on this site, but I thought it would be nice to show what is coming down the road.

The pricing term sheet can be read here.

13 thoughts on “BB&T Prices New $1000 Perpetual Preferred”

  1. Let me illustrate the issue with resets, by comparing this new BBT issue to a similar Canadian preferred, HSE.PR.E (“Husky”).

    The Husky issue was sold in March, 2011 as a 5-year reset with an initial coupon of 4.45%. It’s first reset came in March, 2016, at the 5-year BOC rate plus 173 bps. Rating was the Canadian equivalent of BB+.

    At the time of issue, the BOC rate was 1.72%, and on the first reset date, a mere 0.67%. This reset dropped the coupon from the initial 4.45% to 3.28%, where it stands today and will stand until the next reset in March, 2021.

    So, your coupon, the quarterly payment you receive, dropped by 26%. The price responded accordingly, especially after rates climbed from their record lows to almost 2.50% in late 2018.

    Between the lower coupon and the increase in the BOC rate, the stock went from an issue price of $25, to a peak of $26.81 in early 2013, to a low of $8.04 in early 2016. From peak to trough, a loss in price of 70%, on top of your 26% dividend cut.

    https://web.tmxmoney.com/charting.php?qm_symbol=HSE.PR.A

    I have no reason to believe this new BBT issue would not behave similarly to the Husky issue if the interest rate scenario repeated itself. If rates go down and stay down from this point, investors in the new BBT issue are going to lose a lot of money. Canadians already know that. The Husky situation repeated itself a hundred times with other issues.

    Canadian investors learned their lesson. American investors have yet to see the same thing happen. In Canada, at a minimum an issuer of a new 5-year reset has to offer the option to convert out of a 5-year reset to a 90-day floater. Many have to put minimum interest rates on the issue in order for it to sell. I would expect after a few of the U.S. 5-year resets bomb that you will see the same kinds of protective terms in future U.S. issues.

    So you know, U.S. 5-year resets with this issue are NI-B, SNV-E, and the new BBT issue. More are coming, I promise.

    1. Bob-in-De – with the two comparisons you’ve pointed out of Ni-B and SNV-E what is your theory as to why this one is being priced with such a miniscule beginning coupon and spread upon reset? Is it credit related, market related, audience related with this one being aimed at institutions or just plain overly aggressive investment banker pricing related?

    2. Bob, thanks for a very well illustrated example. If these very low resets become common, they might provide a place to go bottom fishing. Drastically discounted preferreds throwing off a decent yield (because of their discount) might be an interesting market to shop. I guess provided rates don’t slide down further from the reset point.

  2. To me, the good news that this won’t be available on an exchange and therefore will have fewer retail buyers.

  3. I wonder if these funds will be used for the takeover of suntrust versus calling their other preferred’s

    bob

  4. Pensions, insurance companies, institutions are looking for a break from buying Mexico 100 year bonds, negative yield EU or Japanese debt, and all that ilk. I bet they wolf it down simply because there’s no better alternative for them and they have piles of cash. Unless something changes, and that’s possible but improbable in my opinion, this issue does showcase “what is coming down the road”.

  5. It’s an almost foregone conclusion that most, if not all, of the callable Preferreds outstanding will be called shortly after this massive issue hits the market.

    Since I bought BBT-E just above par, I’m going to hold on until the final call.

    1. David, if a person was intent solely on underperforming PFF for the year, by trying to buy horrific preferreds, I still think they would fail to underachieve that fund.

  6. I just hear the underwriting brokers begging their “valued” clients to take shares of the horrendous issue. “I’ll take care of you on our next HOT issue, IF you will help me with these income shares”…
    Wishing you profitable investing, Nomad

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