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Looking At Floating Rate and Fixed-to-Floating Rate Preferreds

DEFINITION–I use the term ‘potential coupons’ below. This refers to the coupon TODAY with the 3 month Libor rate at TODAYS level and TODAY being the dividend determination date (the date the quarterly coupon is locked in). When looking at floating rate securities one has to make some assumptions. I also have this on the google spreadsheet of fixed-to-floating and floating rate issues with real time interest rates.

FLOATER–a preferred issue which has a floating rate with a minimum coupon since the date of issuance and which resets every quarter based on 3 month Libor (to be 3 month SOFR in June). All currently trading floaters are investment grade issues with the exception of the Zions Bancorporation ZIONP issue.

FIXED-TO-FLOATING–a preferred issues (or a few baby bonds) which has a fixed coupon for about 5 years (although some are as much as 10 years) before moving to a floating rate which is reset quarterly based on 3 month Libor. I currently show 10 fixed-to-floating rate issues trading in the floating period. Another 17 issues will begin to float in 2023.

FIXED-RATE-RESET–a preferred issue that has a coupon which is fixed for about 5 years and then is reset every 5 years based on the 5 year treasury yield. There are no issues trading now in the floating rate period.

I am referring here to only $25/share preferred issues—their are some $1000/share issues outstanding which I do not cover at this time.

We have pure floaters and we have fixed-to-floating rate preferreds trading in the marketplace at this point in time. More recently we have had fixed-rate-reset preferreds being issued–but none of these are currently trading with their reset rates active.

The pure floaters have been around for quite a while (issued back in the early 2000’s) and have not traded with coupons above their ‘minimum’ coupons for many years until the last 3-6 months. The floaters all have ‘minimum’ coupons of 3% to 4%. The floating rates all are at very low ‘spreads’ which is added to 3 month Libor–obviously with 3 month Libor near zero for years and ‘spreads’ in the .35% to 1% area these issues have been trading at their respective minimum coupons. With the recent rise in interest rates the ‘potential coupons’ have risen into the 5.13% – 5.78% range–but the current yields are in the 7% area.

An example — Bank of America (BAC) has 5 pure floaters outstanding–with current potential coupons of 5.13% to 5.53%—with current yields in the 7% area–at current interest rates (they trade in the $19/shares area)–of course as 3 month Libor goes up or down this moves. On the other hand BAC has many fixed rate issues outstanding where a 6% current yield can be locked in now.

So should one buy a pure ‘floater’? I can not give an answer for that–only you can answer that question. To me 1st you need to have a opinion on where interest rates are going. If you believe that rates are going higher and that they will remain high for years and years then the answer might well be yes. If you believe that rates are near a peak and will move lower this year or next the answer may be no. Remember that there is only a minimal chance that these will be redeemed at $25 so one will not have pricing pegged to liquidation preference–when rates fall the price/share will drift down as your yield moves lower.

So the answer is not easy at all whether to buy or not.

Should I buy a fixed-to-floating rate preferred? Just like the floaters I can’t answer the question for you, but once again you should have an opinion of where interest rates are going (not that you will be correct since none of us know for sure). Unlike the floaters the 10 current issues of fixed-to-floating rate that are in the floating period are all junk rated (less than investment grade) and 1 of them has a suspended dividend. The potential coupons range from 8.36% to 11.66% (NGL-B would be higher but the dividend is suspended). So obviously one wants to buy an issue that fits their risk tolerance range. Additionally one should have an opinion if an issue will be redeemed anytime soon–and thus how much call risk is in the price of the shares (if it is above $25).

For instance I own the Customers Bancorp 6.45% perpetual fixed to floating rate preferred (CUBI-E). Shares are only redeemable on a dividend payment date. Shares are trading at $25.34 right now and the next dividend in 3/15/2022. The potential coupon is 9.92% (62 cents)–so there is no call loss risk in the issue, but one would see their net proceeds be reduced upon a call on 3/15/2022. This issue is a smaller issue (2 million shares) and the cost of dividends each quarter is about $1.2 million at the current floating rate coupon (estimated). I guesstimate they could refinance the shares at maybe 8.75% to 9% at this time (based on the 8.25% Merchants Bancorp issued shares in September) so their savings would equate to 10% on the dividend–quarterly savings of $120,000. The cost to issue new shares is just shy of $1.00/share (3.15% underwriting discout plus administration costs)–or close to $2 million on 2 million shares. At this rate it will take around 4 years for ‘payback’. Is 4 years a good enough payback for the bank? Do they want to issue high yield shares at this time that they will be stuck with for 5 years–or do they want to take a chance rates will fall and then refi at a lower coupon (say 7% or 7.5%).

So there is never an easy answer to whether to buy floaters or fixed to floating rate issues. Additionally while we as investors are stuck having to forecast interest rates–company’s are stuck having to make the same forecasts and assumptions.

Above is actually a very simplified look at these issues–there are plenty more factors. Issuers could issue common shares and call all of their preferreds–regardless of coupon. They could float debt at much lower coupons typically, but if you are a bank it is likely you don’t want to do that since non cumulative preferreds are Tier 1 capital and an issuer has much more flexibility with preferreds than debt.

What do readers think–do you owners some of these issues and what is your logic?

36 thoughts on “Looking At Floating Rate and Fixed-to-Floating Rate Preferreds”

  1. Funny but a 18mo or two ago libor floaters were wayyy under fixed. The main concern was what would take libor’s place…AND what exactly did the prospectus say/could the issues wiggle off the hook in hard times with an excuse as to why they weren’t going to have to float. IE going back to the 1st libor quote or some such legaleze disclaimer. Some places wouldn’t let you buy them w/o expressed acknowledgement that it wasn’t;t their fault if you got stiffed.

  2. Nice note and some very interesting comments.

    My portfolio is weighted towards pipelines and I have been adding to positions that Float and reset. I have become a beleiver in the market consensus exhibited by the futures curve (link below) and have been adding to positions with current floaters (SLMBP, TNCAF) and fixed resets that reset in the coming year (ENBA, ET-D).


    FWIW, I think the debt ceiling conversation scheduled for this summer will cause Chairman Powell to be more likely to raise rates earl in 2023. This will allow him to pause while the country is anxious about whether we will be paying our bills.

  3. Tim

    I bought some Allstate debentures and wonder why that issue hasn’t been called given an expected floating rate now of about 8%. Buying at around 24.75 seemed attractive. Your dollar per share cost to refinance is a good point and I also wonder if the new issue “window” is reliably open to all issuers. Allstate may want to wait until their year end numbers show that their 2022 mess was temporary.

    I greatly appreciate your discussion and the remarks but wonder also about yield inversion. The price and yield of the floaters will respond to general moves in the curve but why wouldn’t the price of floaters and F/F respond as well to changes in inversion? The spread between 3 month and 10 year early last week was already relatively high and then jumped to about 100 bps. I am watching for comparisons between now and the period between 2005 and 2006 when inversion was relatively steady until it disappeared. That period suggested that “head fakes” of changes of ten to twenty points didn’t necessarily indicate that inversion was going to stay in that direction? Ideas about inversion?

  4. I own about 15 fixed to float and resets (10 to 15% of portfolio). They are paying good at this time and offer protection if rates continue upwards or stay high. I am thinking rates will not go much higher and am buying IG bonds and baby bonds at 6% or better ranging from 2 to 20+ years. I could sleep very well with 6%. I recently bought Royal Bank of Canada, 6%, 2033: ENO: MGR: EAI. I have also been picking up some 1 to 5 year CDs. I would love to get a fairly low volatility, low risk portfolio paying 6%+ (sounds like a common dream!). I suspect that will only happen if the market and rates stabilize. I am now almost 100% in fixed income and intend to stay there. Good luck to all.

  5. This is a difficult question to answer. I own a boatload of various FTF or fixed rate reset issues. Some of which are currently or soon will be floating, others which will only float some years into the future.

    There is no blanket answer why I own the group. Rather each has its own story and reasoning why I bought and own it, whether it was selling at a sufficient discount to par that I expected to close once it went floating (like ALL-B which I have owned for a little over 2 months or VLYPO which I was able to buy at $22,45 in September (it paid it’s first floating dividend on 9/30). Others like CUBI-F and NSS I bought for the high income. Some others I bought because I believed they would stay relatively pinned to par until rates start to decline.

    More and more issues seem to have some type of floating component down the road – so to me it is a matter of continuing to monitor them like other issues, but adding in one additional factor, where you believe rates are headed and when and how it will impact these issues. Everyone will have their own opinion on rates

  6. My suggestion for anyone investing in this area is to write down your interest rate forecasts for whatever horizon you invest in. Maybe you forecast the different rates for January 1 of 2024,25,26 for example. Since you are investing in these, you either have an explicit or implicit forecast built into your investing choices. Think through the implications of choosing any of these vehicles hoping they will have attractive returns and what that implies for the underlying interest rate assumptions.

    You might gain some useful insights about your investment choices going through this exercise, not to mention review your forecasts each January 1.

    1. Tex, I didn’t look closely before but when I started buying these floaters I didn’t consider the IG with the 3% min just in case 1 to 5yrs down the road rates did fall that low.
      What I looked at was the floating rate without the adder of the Libor or the 5yr treasury. Anything below 4% I skipped (my low end ) to 6% on the high end I felt I would be covered even if 5yr treasury went to 1% and whatever replaces Libor is 2 to 3%
      Tim’s list doesn’t cover all the floaters but his list shows the reset rates. It’s not a unbreakable rule, just the parameters I decided to start with.

      1. Charles, the Fix-Floats and Fix-Resets I own were bought with the same idea: is the spread (what you refer to as the adder) itself attractive? If yes, the base (LIBOR or some treasury rate) is just gravy.

        1. Exactly Bur,
          Same as the higher divided now on the few that have already floated are a added bonus. If they get called I will find another preferred to replace it and it doesn’t have to be a floater.

  7. I own NLY-F, NLY-G, MS-E and ZIONL. I bought NLY-F @ 24.25, NLY-G @ $23.25, MS-E @25.03 and ZIONL @ 25.30. So, considering dividends no loss if they are all called, but it will be interesting to see how this goes. NLY-F is already floating, others float this year. I have two resets WSBCP and HTLFP they do not reset until 2025, no telling where the 5 year Treasury rate will be 2-3 years from now.

  8. Gaslog Partners B rolls over to floating rate of 5.839% plus 3 month Libor in March. There is some support in the price from the company which has been buying preferreds in the open market. March is within the rate hike cycle so the 3mo. rates should hold up well even though there has been weakness in longer rates.

  9. I own USB.prA and TFC.prI which are floaters.

    USB.prA is a security that never seems to come up in the floater discussion, and I am not sure why. The $1000 par value would not seem to be out of reach for the investors who post here. I would see it as a conservative investment. Yet, it is does not seem to be in the III database. There should be a rate fixed by LIBOR in about a week or so, and I would expect the rate to be competitive. USB is a well run, conservative bank.

    1. dono – Is this USB-A issue the one described on QOL as “the depositary shares will pay at a rate of the greater of 3.50% or the Three Month LIBOR plus 1.02%.” and its last trade was around $800? With LIBOr now at 4.81% and this one to lock in probably by the end of this week, then next coupon should be around 5.80%, right? If mkt price = $800, that sounds cheap at about 7.20%+ current yield and Baa1/BBB+ rated, doesn’t it? However, this was issued in 2011… A quick but sketchy read of the “what if there’s no LIBOR” language makes me wonder if this might end up being permanently fixed once LIBOR’s no more… I did not read it carefully.

      1. Yes, that is the one.
        I would say the issue you bring up about “what if there’s no LIBOR” is the great unknown for floaters in general, and keeps me from going whole hog on buying these type of issues.
        I am not convinced that anyone knows for sure how the absence of LIBOR will affect these issues down the road.
        As you might guess, I would be delighted if US Bancorp took one look at that issue paying 7+% and called it, for a very nice 25% gain (I bought this issue around 800, and it seems to stick around that number). But, I also know there is going to be a horde of lawyers looking at that prospectus, and who knows what happens if a lawsuit is filed over the prospectus language.

        1. Ahah! I see the catch on this one! It’s semi-annual pay and semi-annual calculation on 3 mo LIBOR. So LIBOR will not be locked in again this week. It will not recalculate until again until 3/15. LIBOR was last calculated on or about October 12 which would mean the present coupon payment should be approx only 5.03% . So current yield based on the next payment on 3/15 and $800 mkt price = only 6.29%. Now the market price makes more sense.

          1. Both Morningstar and my Vanguard account indicate that USB prA pays quarterly, and that my shares went ex-dividend on 12/29. Quantumonline also states the dividends are quarterly.

            I did take a look at the prospectus, and it is my interpretation that the issue paid semiannually until its call date in 2011, and quarterly afterwards. Vanguard gives the yield as 7.28%, which agrees with your initial calculation.

            1. Got you, dono – I see that now. I was reading prospectus too quickly without absorbing the details…. My fault….. Thanks for the clarification.. back to thinking this one’s cheap… ha

            2. donocash, could you confirm that the 12/29 dividend is going to be $13.03 per USB-A share?

              is so, then you are correct that the yield is about 6.5% at $800/share. And if they ever call, a very nice cap gain results.

              I sure am tempted to get a few shares, but it will be a small number because of the high price.

              1. Just my 2 cents (and it may not be worth that much) on USB-A. I don’t see USB calling it anytime soon given the low base rate and floating kicker. I suspect they will ride out the current high floating rates.

                My worry is it is a thinly traded issue and when rates eventually start to decrease the door to get out will be quite narrow. So one will need to be pretty nimble.

                i myself am passing but good luck to those of you who own it

                1. I decided that a 6.5% yield is acceptable for my anticipated lifetime, and will be ok even if it is never called.
                  So I purchased only 5 shares @ $798 to start. If it drops below $740, will get more.

      2. They could argue for SOFR. Either way if rates drop it’s down to 3.50%. Worth watching closely.

  10. Your google spreadsheet https://innovativeincomeinvestor.com/floating-rate-and-fixed-to-floating-rate-preferred-stocks/ isn’t intended to all inclusive, is it? With all the recent discussion re ALL-B, I was surprised not to see it here…. Also, I’m fascinated by the USD Enbridge reset preferreds and their subordinated F/F note ENBA as well… There is an entire microcosm right there amongst these four, EBBNF, EBGEF EBBGF and ENBA and trying to figure out which is the cheapest between them is quite the challenge. Alot depends on what you want to assume for the next 6 months as 1 will reset for the next 5 years, one just reset and is fixed for the next 4 3/4 years and the F/F issue will begin to float @ 3mo Libor +3.593… IMHO, they all seem cheap to me given they’re IG…. I suppose if you want to own CDN demoninated issues, other ENB issue may even be cheaper yet, I’m not sure. However, they’re not on your list either, because they’re Canadian but USD denominated maybe?

    1. Tim – I own a number of these pups – but all bot below par. It’s a guessing game for both us holders and the issuers. For now enjoying divies and interest.

  11. I have NSS baby bond which I have been buying under 25 but at a full position now, one of my largest overall holdings. And WTFCP bot at 24.50 which resets at 5YT plus a healthy 6.507. I like the decent base rates on both. Still trying to get the WesBanco 5YT reset WSBCP at 25/par or less.

    Other that those I am long fixed rate issues now that for the most part have low rates and are unlikely to be called anytime soon other than a merger/buyout. So– for both income off my cost to reinvest elsewhere and potential for capital gains–although at these prices for many which we have been waiting for years to get, many are ‘keepers.’ Bea

    1. Thanks to your mention of WSBCP in another comment, I looked into it further and bought it at $25.27. I wish I’d seen it closer to $25, but glad I got it when I did. Tim’s timing was really excellent for HTLFP, but I couldn’t catch it before it shot up.

  12. 2WR looking at my holdings I bought with the idea I wanted a decent rate now knowing that some would float soon and I was good with them being called after they floated
    CUBI F I bought between 24.69 to 25.15 to get 6% if they never call it and LIBOR floats around 2% in a couple years I still earn about 6%
    ZIONO is the same, I bought to get 6% and it gets called I am ok. It continues on for a few years after floating I may get 5 to 6%
    DCP-B Same
    CHSCN Same
    CHSCM Same
    HTLFP Only preferred for this bank and pays good div, doesn’t reset til July 2025 5yr treasury even at 0% on 5yr it still would pay 6-5/8%
    SEAL-B is my high risk play , I have reasons for it
    I did have NS-PA and VLYPO but sold.

  13. I own RITM-D which I bought kind of on a whim. I am enjoying the nice dividend (which will even get better when it floats) but I definitely consider this as the riskier end of my portfolio spectrum.

  14. Tim, i’ve commented on usb-h several times the last couple of year, bought when rates stunk. but my yield is over 4% at cost with a “floor”, It’s currently yielding 6.92% according to your spread sheet, i’d certainly consider added here but I’ve got an over weight position, including usb-p & usb-s.

    1. mike–very interesting issues–I hadn’t looked closely at the floaters and am quite impress with their current yields. So the question is once we peak where do we go from there?

  15. Tim,
    I own a decent amount. My looking at them either right or wrong is looking at the only thing I can compare them to in my lifetime and that was the early 80’s
    40 years since the last time we saw sharply increasing rates. How long will it last? who knows. I hope at least a year and then a slow draw down.
    I don’t think we will see rates like this again for a long time. I agree with others that the economy couldn’t function and the government couldn’t support the debt at 8 or 12%
    So far the economy has held up and is adjusting. If banking and commercial debt has to pay 4 to 6% to borrow I think they can live with that.
    I hope we never go back to the 1% to 3% borrowing. As you pointed out, some of the older bank preferred and trust was issued at 6%

    1. Charles–with you–hope we don’t see 1% again, but I think we will see 3 in a few years.

  16. So here’s the conundrum for those of us who are buying F/F rate issues such as CUBI-E or F. Are we in them for stability of principal or to maximize current yield? What I wonder about is how will these act if/when interest rates begin to go down… In your theoretical example, Tim, let’s assume you’re right that CUBI could refinance apples to apples exchanging floater for fixed rate for 100 basis point improvement approx…. Now if interest rates come down, and ignoring any potential for credit deterioration on CUBI’s part, then their refinancing rate will come down as well, but isn’t it likely that the spread paid by the F/F issues will remain a favorable spread for F/F shareholders vs the refinancing rates? So even though div payments might come down, shouldn’t these issues continue to act as “pinned to par” types of issues even in a decreasing interest rate environment? So if someone’s more concerned about preservation of principal in any interest rate environment (either increasing or decreasing) than they are in locking in a set dividend amount based on right now interest rate levels, shouldn’t F/F issues with relatively high 3 mo Libor plus parameters continue to have relatively stable pricing?

    1. 2wr–exactly correct I believe and pinned to par is one feature I like. The entire exercise is much more complex than folks would like to believe at 1st glance.

      1. I agree Tim depending on what you buy they will react differently so you just can’t really lump them together. At some point I will have to unwind some. I have some heading towards 11% such as NSS, SLMBP, and TNCAF. Also own a 5.37% EIX reset, ALL-B, and NS-B. But I have short duration through perpetual also.

    2. This is how I have been looking at them. As an engineer I would say that these issues are like a capacitor or a spring. There is energy in them that is being restrained on the upside because of the threat they could be called. You have to deplete that reservoir before they would actually fall. So, in the example you give, that reservoir would be 1% in interest rate changes.

      That should give you more time to switch to other issues should the time ever come where it is advantageous to do so. And in that case, there should be some very attractive lower rate IG issues you can ride back up.

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