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CHS Reset Preferreds

I have noticed a lot of chatter on the message boards relative to the CHS ‘Reset’ preferreds.

I am referring to the CHSCN and CHSCM issues. Both of these issues are due to ‘reset’ for the first time in 2024. Note that contrary to most preferred issues with ‘reset’ in their name that only reset every 5 years–these reset quarterly. Both issues originally had a ‘cap’ on the reset of 8% maximum.

These are 3 month Libor resets (3 month Libor added to a fixed spread). Given that Libor is gone many times 3 month SOFR is being used–I DO NOT BELIEVE THAT IS THE CASE HERE.

Both of these issues have language in their prospectuses which outline an alternative to Libor. As I read it both will reset to a fixed rate–their original fixed rates.

For instance CHSCM has a 6.75% fixed coupon until 9/30/2024 and on 10/1/2024 the rate was supposed to change to 3 month Libor plus a spread of 4.155%. With Libor gone the back up language in the prospectus (as I read it) states it will be reset to 4.155% plus 2.595% which adds up to 6.75%.

Here is the lengthy snip from the prospectus. Let’s discuss this further.

 Holders of the Class B Series 3 Preferred Stock shall be entitled to receive, if, when and as declared by our Board of Directors, out of funds legally available for the payment of dividends, cumulative cash dividends at the following applicable rate (the “Dividend Rate”): (i) 6.75% per annum of the liquidation preference of $25.00 per share (equivalent to $1.6875 per share per annum) from, and including, September 15, 2014 to, but excluding, September 30, 2024 (the “First Reset Date”); and (ii) thereafter, while the Class B Series 3 Preferred Stock is outstanding, at an annual rate equal to three-month LIBOR, as determined for the applicable Dividend Period, plus a spread of 4.155%, but in no event will the sum of such annual rate and spread be greater than 8% per annum. For purposes of the foregoing Dividend Rate:

              “three-month LIBOR” means, for any Reset Rate Determination Date, as determined on the Reset Rate Determination Date for the applicable Dividend Period, the offered rate for deposits in U.S. dollars having a maturity of three months that appears on the Designated LIBOR Page as of 11:00 a.m., London time, on such Reset Rate Determination Date. If such rate does not appear on such page at such time, then the Calculation Agent will request the principal London office of each of four major reference banks in the London interbank market, selected by the Calculation Agent, to provide such bank’s offered quotation to prime banks in the London interbank market for deposits in U.S. dollars with a term of three months as of 11:00 a.m., London time, on such Reset Rate Determination Date and in a principal amount equal to an amount that, in the judgment of the

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Calculation Agent, is representative for a single transaction in U.S. dollars in the relevant market at the relevant time (a “Representative Amount”). If at least two such quotations are so provided, three-month LIBOR for the Dividend Period related to such Reset Date Determination Date will be the arithmetic mean of such quotations. If fewer than two such quotations are provided, the Calculation Agent will request each of three major banks in The City of New York to provide such bank’s rate for loans in U.S. dollars to leading European banks with a term of three months as of approximately 11:00 a.m., New York City time, on such Reset Rate Determination Date and in a Representative Amount. If at least two such rates are so provided, three-month LIBOR will be the arithmetic mean of such quotations. If fewer than two such rates are so provided, then three-month LIBOR for the Dividend Period related to such Reset Rate Determination Date will be set to equal the three-month LIBOR for the then current Dividend Period or, in the case of the Dividend Period commencing on the First Reset Date, 2.595%. All percentages used in or resulting from any calculation of three-month LIBOR will be rounded, if necessary, to the nearest one hundred-thousandth of a percentage point, with 0.000005% rounded up to 0.00001%.

36 thoughts on “CHS Reset Preferreds”

  1. QOL appended this note to the CHSCM page:
    “Notes: Statement from the 10Q filed January 10, 2024 — January 2, 2024 per the terms of our Class B Reset Rate Cumulative Redeemable Preferred Stock, Series 2 and Series 3, and the Adjustable Interest Rate (LIBOR) Act, the stated rates of 7.10% and 6.75%, respectively, were fixed at 7.10% and 6.75% (the “Fixed Rates”), respectively. We will pay dividends on Class B Reset Rate Cumulative Redeemable Preferred Stock, Series 2 after March 31, 2024, and on Class B Reset Rate Cumulative Redeemable Preferred Stock, Series 3 after September 30, 2024, at the Fixed Rates until they are redeemed.”

    Is this issue settled?

  2. I interpret the language a little bit differently. The way I read the language the 2.595% + 4.155% spread = 6.75% applies to the “DIVIDEND PERIOD COMMENCING ON THE FIRST RESET DATE.” The language may not apply to dividend periods commencing AFTER the first reset date . For example, for CHSCM the first reset date is Sept. 30, 2024. The way I interpret the language on the next subsequent reset date, December 30, 2024, the rate would be = 3 month SOFR fallback rate + 4.155% but in no event greater than 8%, unless the shares are redeemed.
    So on December 30, 2024 the dividend rate could be either 6.75% fixed, or the then SOFR fallback rate + 4.155%, unless redeemed at $25.00/share, depending upon the interpretation of the language in the prospectus and the interpretation of the regulations governing the adjustable interest rate libor act.

    What am I missing???

    1. Dave–there is no answer to the question and CHS will do what they desire. Whether fixed or floating benefits the shareholder can’t be known since none of use can correctly predict where interest rates. I think we just have to wait and see what they do.

  3. One thing I noticed the last week or so of 2023, the volume in chscl was double or triple its daily volume….that went on for several days….wonder who was doing that activity

  4. Tim; I only own the CHSCL but would like your opinion on with all of their 5 preferreds paying a very generous coupon rate wouldn’t it be more logical from their standpoint to just call these issues that you are referring to? I have read their last 2 quarterly’s and they are doing exceptionally well financially speaking. I have well over a double position in CHSCL.

      1. Chuck I own all 3 and just recently went overweight on the L to reduce my cost basis. I relied partly on your posts that these are pretty safe preferred.
        Thank You

        1. Charles; I’ve had my forensic CPA look at the company & I’ve read their last 2 quarterlys plus last years annual report. They are ranked #77 on the fortune 500 list. When you read thru their financial reports they certainly look rock solid. But of course life gives us no guarantees does it.

    1. L pays the highest dividend and if its called you still get an adequate return though not the best. Nothing wrong with that.
      I sold N at 26 and bought back just over 25 minus one divvy, keep an eye on price movement for trading opps.

    2. Chuck—the company has been shareholder friendly in the past and I am sure they are putting their finger up in the wind to see how a call would resonate with shareholders–many of whom in the past have also been coop members. Also these issue from CHS are all pretty large issues–15 to 20 million shares generally so it would take a fair amount of cash to make a call, but as you note their financials would support their ability to call them. I think with newer leadership now (the last couple of years) they will look at calling them if rates continue to fall and they determine that their members won’t be harmed.

      1. THANK YOU TIM; All great points. Lets hope they don’t call them due to shareholders (farmers) great relationship with the company. Hope you have a great 2024.

  5. I have a different take for what it is worth. The language above says “If fewer than two such quotations are provided, the Calculation Agent will request each of three major banks in The City of New York to provide such bank’s rate for loans in U.S. dollars to leading European banks with a term of three months as of approximately 11:00 a.m., New York City time, on such Reset Rate Determination Date and in a Representative Amount. If at least two such rates are so provided, three-month LIBOR will be the arithmetic mean of such quotations.” Certainly, three major banks in New York City can quote where they would lend three month money to leading European banks. LIBOR (or for that matter a widget) is then calculated (even though LIBOR ceases to be quoted). Just my take and it doesn’t mean the company could try to get away with a lower rate.

    1. Goldshoe–I thought of that, but would be surprised if anyone would quote a quasi libor rate–but interesting.

  6. So in summary, CHSCN will either go to 8% (SOFR used) in March, become permanently fixed at 7.1% or get called. If they go with SOFR, the 5y rate will have to drop below 2.8 for it to get below 7.1%. Could happen but will take over a year so meanwhile we keep getting those fat dividends. Similar story for CHSCM. Holding both as well as CHSCL

  7. Elsewhere I recall seeing Mark G. post the IR contact said the preferred will follow teh LIBOR act. If that is so, then the polling language shared here is not longer in force. If you look at the final regs, available here, (among other places) https://www.federalregister.gov/documents/2023/01/26/2023-00213/regulations-implementing-the-adjustable-interest-rate-libor-act

    Go to section 253.3 and you will see the Applicability section. This section describes when and how the regulations take effect on contracts. Within this section there it is in part 2(ii) discussing polling. In my experience, (which has been in structured finance not preferreds) this section of the regs invalidates the polling. If they follow the act you can see what the likely course of outcome is by reading these rules.

    1. Zarley,

      This seems to confirm that they will use the fallback rate.
      The first category of LIBOR contracts encompasses contracts that contain fallback provisions identifying a specific benchmark replacement that is not based in any way on any USD LIBOR values (except to account for the difference between LIBOR and the benchmark replacement) and that do not require any person (other than a benchmark administrator) to conduct a poll, survey, or inquiries for quotes or information concerning interbank lending or deposit rates.[20]

      These LIBOR contracts generally can be expected to transition to the contractually agreed-upon benchmark replacement as provided by their fallback provisions on or before the LIBOR replacement date—the first London banking day after June 30, 2023 (unless the Board determines that any LIBOR tenor will cease to be published or cease to be representative on a different date).[21]

    2. Actually, the language was “We are currently working on the analysis and intend to follow the guidance in the LIBOR Act. I would expect an announcement in January.” It doesn’t say what they WILL follow but that they INTEND to follow guidance…… There’s also a lot to absorb when attempting to “follow the guidance,” so it’s a big leap to say that following guidance means adopting SOFR +.26161. I’m hoping they can make that decision but what CHS wrote is not making any guarantee. Here’s the Act – https://www.congress.gov/bill/117th-congress/house-bill/4616/text

      1. 2WR,

        A good point on the “intend”. I relied on memory when I made my comment so your clarity is a welcome addition.

        One point I will make in favor of following the Act is that Issuers receive safe harbor from legal action when the follow the act. While that doesn’t guarantee anything, it is an appealing feature of following the Act.

  8. Time will tell but as a holder of CHSCN, I would be fine with it “locking” at the initial rate of 7.1%. Of course, it can still be called (3/15/24) but that’s another matter.

  9. I’m talking my book here, but I think the letter from CHS IR undermines Tim’s analysis. Why would they cite the LIBOR Act if they weren’t intending to switch to SOFR? If they were keeping a fixed rate based solely on the prospectus language, they wouldn’t have mentioned the LIBOR Act at all.

    1. When you take into account CHS’s prior history of decision making designed to favor the existing shareholder, I think the most likely way to interpret what IR’s saying is “We are looking onto whether or not we can adopt the SOFR Act language but we’re waiting on our lawyers to tell us if we can. We’d like to, but we don’t know if we’re allowed to yet.” At least that’s a different take on the language interpretation vs what was experienced at PMT for example, where it’s thought that they looked at the language from the point of view of trying to screw the PMT-A and B shareholders for the sake of the common shareholders.. I guess we’ll just have to wait and see. IMHO CHSCN is in a sweet spot, though, where they’re OK market price way if it goes fixed but has upside potential if it doesn’t.

      1. 2wr—yes they have been preferred friendly–at least to the holders of the original 8% holders. I hav pondered how they will react now–they canned the CEO who sold all these preferred (to build a nitrogen plant that never got built) so as you said we will have to wait to see to know for sure.

    2. David–the folks in IR generally know little of the details. CHS has been known to do things contrary to what is written, but one has to respect the prospectus.

      1. The email was actually from the CFO of CHS Hedging – I think it’s safe to assume that he knows all of the details.

        1. David – actually the Libor Act addresses the fallback language as to not having to go to SOFR if they have fallback language so they can readily refer the Libor Act whether they follow the prospectus which has specific fall back language in it. On the other hand CHS has made changes in preferreds before–their 8% issue they extended the call date by 10 years which benefited the holders of those securities. Whether going to SOFR or to fixed may or may not benefit shareholders – only if one has a crystal ball can that be known.

  10. I recall reading the details of those two preferred and it was the 8% cap that bugged me enough to avoid them. You take on the risk of a reset but lose the high upside rate advantage.

    Has any preferred issuing company actually called any EU or NY banks for any quote? That part of the prospectus always made me wonder. Based on just hanging here and reading news I do not think a calculation agent ever made a single call. They just waited for SOFR to come out and get stable.

    If I was a betting man.. I agree. This will be 6.75% as you predict. Almost guaranteed based on the language and nobody picking up the phone to call squat.

  11. Quantum Online has the same analysis – CHSCM

    Notes: The U.S. Three Month LIBOR will cease being quoted on June 30, 2023. Quantum Online has not found a statement from the company in regards to the LIBOR change for this security, however the fallback prevision in the prospectus states: If fewer than two such rates are so provided, then three-month LIBOR for the Dividend Period related to such Reset Rate Determination Date will be set to equal the three-month LIBOR for the then current Dividend Period or, in the case of the Dividend Period commencing on the First Reset Date, 2.595%

      1. I have the ‘L’ as noted a recent purchase here/ and am good there, treating it as a safe cash alternative for a yr/ or happily long for as long as they pay 7.5%.

        ((Do any of the pfd etfs put these in the etfs? haven’t checked that. If I get time maybe I will check some.)

          1. Below is from the iShares Preferred and Income ETF. The last 4 columns are % weighting, notional value, shares, price

            CHSINC CHS CUMULATIVE REDEEMABLE PREF CLA Equity 0.38 51,694,441.92 1,967,064.00 26.28
            CHSINC CHS INC Equity 0.35 48,119,839.20 1,897,470.00 25.36
            CHSINC CHS RESET RATE CUMULATIVE REDEEMAB Equity 0.33 44,781,558.40 1,805,708.00 24.8
            CHSINC CHS INC Equity 0.28 38,574,495.00 1,539,900.00 25.05
            CHSINC CHS INC. (8% CUMULATIVE REDEEMABLE Equity 0.25 34,646,458.00 1,124,885.00 30.8

            https://www.ishares.com/us/products/239826/ishares-us-preferred-stock-etf

          1. thanx Grid, didnt get a chance to look in the ER all night and still w mom waiting for a bed..full house..no sleep..omg..happy new year. Still there tapped into wifi briefly…I don’t really care only when the ETFs disgorge although often a good opportunity there as well. Wasnt planning on doing anything anyway today, all ‘correlations’ are way off in the market it is wonky for sure, strong employment report, rates 10yr backing off again under 4, gold up $20.. my cash is up to about 60% happy there for now. Thanx again folks. Bea

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