It pays to read the comments of all the sections of this website–this is the area that helps folks to find good clues as to an potential investment.
Over the last many years as coupons tumbled and ‘spreads’ offered by fixed-to-floating rate preferred’s were very meager I have spent little time considering FTF issues. On the other hand a few years ago a limited number of issuer’s began to offer Fixed Rate Reset preferred’s. A FRR issue only has a coupon reset every 5 years and uses the 5 year treasury as the base rate and a spread is added to the 5 year treasury. Typically the ‘spreads’ of these issues are superior to the ‘spreads’ offered in the fixed-to-floating rate issues.
The Fixed-Rate-Reset issue that I find intriguing is the American Equity Investment Life 6.625% perpetual (AEL-B). Being an insurance company the issue is non-cumulative, but qualified. This issue carries a 6.625% fixed rate coupon until 9/1/2025, after which the rate will be reset and then every 5 years on the anniversary date a reset will take place.
The reset ‘spread’ on this issue is 6.297%!!!!. So if we reach 9/1/2025 and interest rates are at current levels the issue would reset to over 9% (6.297% plus 2.91%-the 5 year treasury rate).
So the issue is trading at $23.80 for a current yield of 6.96%. The approximate yield to worst on 9/1/2025 is about 8.4%. All things remaining at today’s level the reset coupon would be 9.2%.
While we obviously can’t see interest rates 3 years out it is reasonable to believe that the company will try to call the issue on 9/1/2025—prior to the reset.
American Equity Investment Life (AEL) is an insurance company primarily dealing in annuities. The preferred issues are rated BB (2 notches under investment grade) by S&P and Fitch.
NOTE–this idea came from the comments section–from Steve if I remember right.
This is not a recommendation but an idea for investors to perform due diligence. I will likely buy a starter position in this issue.