Category: Education Item

When you are holding ‘live’ (issues that are currently in the floating period) floating rate, fixed to floating rate and fixed rate reset securities you need to know the date that is used to determine the next dividend since the coupon is determined by either 3 month Libor or in the case of newer issues 3 month SOFR.

For instance the Customers Bancorp 6.00% fixed to floating rate perpetual preferred (CUBI-F) is now in the floating rate period. The issue has a ‘spread’ (the fixed portion of the coupon) of 4.762%, which is added to 3 month Libor. So today (if today was the dividend determination date) the coupon for next quarter (payment on 12/15/2022) would be 7.992% (3 month Libor is 3.23% added to the fixed spread of 4.762%).

From the prospectus–

We will pay dividends on the Series F Preferred Stock only when, as, and if declared by our board of directors or a duly authorized committee of our board and to the extent that we have lawfully available funds to pay dividends. Dividends on the Series F Preferred Stock will accrue and be payable quarterly in arrears, on the 15^th day of March, June, September, and December of each year, commencing on December 15, 2016, at a fixed rate per annum equal to 6.00% from the original issue date to, but excluding, December 15, 2021, and thereafter at a floating rate per annum equal to three-month LIBOR (as defined in this prospectus supplement) on the related dividend determination date (as defined herein) plus a spread of 4.762% per annum.

Note that they refer to the dividend determination date–but for some damned reason can’t simply lay out when that is – they make us dig deeper into the prospectus.

From the prospectus–

For any dividend period during the floating rate period, three-month LIBOR (the London interbank offered rate) shall be determined by the calculation agent on the second London business day immediately preceding the first day of such dividend period (which we refer to as the “dividend determination date”) in the following manner. A dividend period is from payment date to payment date.

So this means that 2 days prior to a dividend payment date the 3 month Libor rate is locked in for the next payment. So CUBI-F will pay a dividend on 9/15/2022 (next week). On 9/13/2022 the 3 month Libor rate will be locked in for the next payment on 12/15/2022.

Now Libor is going away on 6/30/2023 so that will no longer be used. At this time the Federal Reserve is determining the replacement–it will likely be 3 month SOFR plus an adjustment, but this is not yet determined.

The bottom line is that for all floating rate issues there is a dividend determination date. I reviewed 5 issues anad all had dates 1-2 days prior to a dividend payment date, but some may be different and investors need to dig into their prospectus if you want to know for sure.

NOTE–I know that many seasoned folks know the above info, but because we have many newer investors reading these pages I need to cover items like this.

I see some questions on CLO’s (collateralized debt obligations) relative to Eagle Point Income Company (EIC)

This company invests mainly in the debt tranches of the CLO’s–just like debt of any company it is senior to equity. The vast majority of all of the CLO holding company’s hold ‘equity’ tranches of a CLO. In this respect EIC would seem to be a bit safer.

Here is the latest semi annual report from EIC which outlines what they intend to do investment wise–they can go up to 35% in equity tranches (most risky). It also has most recent data on investments etc.

Additionally here is something very basic I wrote almost 2 years ago which includes a chart which some may find helpful.

A few times a year I search through the various Gabelli Closed End Funds SEC reports to check the leverage ratios so I can update the CEF preferred spreadsheet with leverage ratios.

As most of you know closed end funds must have an asset coverage ratio at or above 200% on their senior securities which includes preferred stock and debt.

It is amazing that after being the 1st person to write about CEF preferred stocks more than a decade ago on my previous website ‘The Yield Hunter’ that I didn’t know that Gabelli publishes their leverage ratios every month on their website.

I want to thank James Craig for noting the Gabelli leverage page in the comments earlier today.

That’s what I love about having lots of commenting on site–some one always has the knowledge–and after 10 or 15 years of writing on the CEF preferred I now know it also.

Anyway the page is here–and it is updated each month.

Just a bit of trivia into who issues $25 preferred stocks and baby bonds.

Below is a chart that breaks down the number of issues of $25 issues outstanding.

This is really nothing new for those that have been investing in these issues for years–but maybe newer investors aren’t aware of the breakdown.

This doesn’t show them by dollars–just by individual issues outstanding. The chart shows banks are the largest issuer–and if I listed by dollar value it would show banks are by far and away the biggest issuer since the big banks–i.e. JPMorgan and Bank of America tend to sell issues with 30, 40 or 50 million shares–while REITs etc are more in the 1-10 million area.