Northern Trust Corporation to Issue New Preferred

Banking company and asset manager Northern Trust (NTRS) will be selling a new fixed rate non-cumulative preferred issue.

Preferred investors have been awaiting this issue anticipating that the company would use the proceeds to redeem the 5.85% non cumulative preferred (NTRSP) that the company currently has outstanding. Since the redemption has been anticipated these shares were trading around $25.50 so only minor damage is done to holders. The redemption can only take place on a dividend payment date, which is January 1 and the payment will be 36.5 cents–at the current price of $25.28 there is 8.5 cents in the shares.

We would anticipate a sub 5% coupon on the new issue as the rating should be BBB+ from S&P and Baa1 from Moodys.

The preliminary prospectus can be read here.

23 thoughts on “Northern Trust Corporation to Issue New Preferred”

  1. I caution people against jumping on the same side of the boat. Lets step back and get some perspective here. JPM issued a 6% preferred at Baa2, 10 months ago. Dont get all caught up in the hoopla overloading on sub 5% perpetuals. This new issue would have to plummet to $19.50 to reach that 6% handle. There are a lot of conservative investors who may have serious regrets if this happened to them.
    Ten year has climbed 40 bps recently which is a nice reversal. Yet issuers keep sending lower and lower yields out despite the reversal. Just be prepared and understand. Its tough out there I understand…
    I try to balance… 1) Some anchors. 2) Some anchors with higher than market yield due to quirks 3) Call anchored 4) Adjustable, resets, term dated 5) A modest pinch of high yield to sweeten the cake a bit.

    1. As an addendum to Grid’s point, this SA article from last month points out the never ending dwindling yield spread between relative quality and lower quality issuers…

      A Bearish Signal From Credit Spreads
      Ploutos September 23, 2019

      Summary

      A spread differential between two parts of the corporate credit market has hit its lowest point since 2007.

      Lenders in BB-rated credits are being provided the least incremental compensation versus BBB-rated credits at any point since the Great Recession.

      Tightening credit spread differentials point to a new level in the “reach for yield”, which could signal future financial market imbalances.

      Late in 2018, as risky assets were rocked by volatility, there were a number of stories about the rising risk from the growing amount of BBB-rated credits. The logic went that BBB credit had grown meaningfully as a percentage of overall investment grade credit, and since these companies were rated just above “junk” status, a wave of downgrades could cause forced selling and lead to widening credit spreads. The disruption in credit markets could cause a negative feedback loop to corporate financing decisions and harm other markets, including equities.

      At the end of 2018, BBB corporate credit spreads paid bondholders an average premium of 1.94% over similar maturity Treasuries. Fast forward nine months and BB rated spreads – the next highest rated cohort, and the highest quality “junk” bonds – trade at just 2.06% over Treasuries on average, a figure that is “tighter” by 1.48% year-to-date. At the beginning of the year, BB credit offered investors a premium of 1.60% over higher rated BBB credit. The spread differential between BBB and BB rated credit stands at just 0.60%. Today, lenders to BB credits are getting paid roughly what lenders to BBB credits were getting paid at the beginning of the year. If BBB credits were a worry spot in late 2018, getting paid roughly the same premium lending to riskier companies nine months later should be a worry point.
      BBB and BB spread differential
      BBB and BB spread differential

      As you can see from the graph below, the difference between the spread compensation on BBB rated credit – the lowest rated bonds in the investment grade universe – and BB rated credit – the highest rated bonds in the below investment grade universe – is at its tightest differential since 2007.
      BBB vs BB spreads since 2007
      BBB vs BB spreads since 2007

      Lower Treasury rates in 2019 have incrementally pushed credit investors out the risk spectrum in search of yield, and BB rated credits have been the natural recipients of those incremental flows. It is a relatively rational response. Historically, the spread differential between BBB and BB rated credits has been too high for the incremental default rates between the two ratings cohorts. The market segmentation between investment grade and below investment grade at this BBB/BB cutoff led to a market inefficiency that has seen BB rated credits produce higher long-run loss-adjusted total returns than lower rated, higher gross yielding credits.

      Today, the yield on BB-rated credits is just 4.03%. It is difficult to see the BB rated part of the market producing adequate risk-adjusted returns for broad macro investors who moonlight in credit markets. Remember that when the BBB-BB spread differential was last this tight, the fed funds rate was at 5.25%. The all-in yield today for BB-rated credits is meaningfully below the yield on Treasury bills in early 2007.

      How should Seeking Alpha readers use this information? We have entered uncharted territory in this elongated economic expansion. In the United States, economic expansions have tended to end as a result of misguided aggressive monetary tightening or through exogenous shocks. Market participants need to look for late cycle behavior that is creating the types of financial excesses that necessitate tighter financial policy to ward off growing imbalances that can make downturns more severe.

      This tightening spread differential between BBB and BB rated credit hitting a new cycle low is a sign of growing risk-seeking behavior. Early in the economic recovery, Bernanke and the Fed were trying to push investors out the risk spectrum to ease credit markets, spur lending, and boost economic growth to foster their goal of full employment. With unemployment at 50-year lows, the Fed no longer needs to move investors out the risk spectrum, but rather rein in potential excesses that could threaten financial stability.

      The BBB/BB spread differential hitting a new cycle tight does not mean a turn in the business or credit cycle is imminent. The low in this metric before the end of the last business cycle occurred in March 2005 (0.4%), two-and-a-half years before the stock market would peak. For Seeking Alpha readers, this differential is something to keep on your macro radar as a sign of later cycle behavior. For investors in the credit markets, risk premia at the top end of below investment grade may prove inadequate.

    2. Grid – me thinks you did the folks here a service. I just love the thought of a new NTRS issue. I will be a buyer ………. at a lower price. It will come.

      I’m glad that the company didn’t do like some others have done recently by issuing institutional only preferred or bonds in order to redeem an exchange traded preferred.

      At the risk of sounding like a fortune cookie it’s a time to be patient. Even flips aren’t working any more.

    3. And 6) some par and even discount issues. Entergy pfds have these low yields and high prices. I think some big accounts need to diversify into low coupon positions. Emphasis on some. Say 5-10% of account

      1. If you prefer, I wrote too vaguely in previous post looking back. I agree there is nothing wrong with having some high quality lower yielders. As accurately predicting interest rate trends is largely just a guess even for the pros. Many of my anchors are of this type. I have some like IPWLO, UEPCO, and PPWLO of that 5% ish ilk myself. I was just expressing concerning for people getting too concentrated and overloaded in these new sub 5% issuances….Wish I hadnt been in car or I would have bought more than my modest 1500 shares on OSBCP yesterday. These type of issues arent really endangered by any rate up creep…Just call risk which I can handle.

        1. I have great regard for your knowledge and positioning grid…. And read your stuff at sa under another handle. Mine was just a throw away comment lol. Your warning is especially important. Preferreds in general are lowest on the seniority totem pole only above commons and you don’t need to go back to 2008 to see many down to $5. Do c 2018 was bad enough!!

          1. If you prefer, I am waaaay down the totem pole of cranial capacity compared to Jamie Dimon and Jeffrey Gundlach. And look at these two quotes from one year ago.
            In a tweet last month, Gundlach had forecast that the 30-year Treasury yield closing above 3.25% two days in a row will signify a “game changer,” a view he reiterated Thursday.
            Then his tweet Oct. 2018…
            Two consecutive closes above 3.25% = a breakout from multiyear head&shoulders base. Last man standing is down. 7/16 was indeed the rate low.
            He sure missed the mark!
            Dimon…August 2018
            “I think rates should be 4 percent today,” Dimon says. “You better be prepared to deal with rates 5 percent or higher.”
            If they cant get it right, I dont stand a chance! 🙂
            I remember my 15% CDs, so I guess it will only be natural for me to always have one foot trying run for the exits.

            1. Grid–just more yakking from these folks–there is not a single one of them I pay attention to–Gundlach was the bond king for a year–now he is just a talker–if you are a billionaire I guess you get a bigger platform.

            2. Dimon is great but not a bond guy. Gundlach is and I follow him closely. But let’s face it the top experts have been WRONG on rates. Terribly.

              Most or all went super short duration and stayed there since like 2016. The only bond guy who stayed long? A Gary Shilling.

              I’ve stayed long since forever for my ‘friends’. But like you continue to protect against higher rates by buying higher coops at a premium. I’ve been protecting people against higher rates (but stayed long too) for decades and am not changing my stripes at a 5000 year low in interest rates.

              Ps grants interest rate observer is another bond guy worth following.

  2. Since Capital one only called COF-C and COF-D last week, the 6% coupon looks safe not to be called by 12-3-2019. That puts the next call date at 3-3-2020. So 2 dividend periods look like the minimum you will get. Trading at $25.61. $0.14 profit over the next 18 weeks. Annualized that is 1.62%. Probably what you will get in a money market after Wednesday’s rate cut.

    So why do the trade? The next issue up for call for Capital One is in Dec 2020. Will they wait this long or do a standalone call for COF-P ? I am a little suprised is was not called this December (of course, technically they still could).

    So, I brought this as one of my no-risk trades (or low risk if they do a surprise call of COF-P this December)

  3. It’s good news that NTRS is issuing a new preferred. They could have redeemed NTRSP and left the world with nothing in the way of preferred.

    Yes, it’s gonna be real low, but this is probably the strongest preferred issuer in the country. And, no, I’m not counting 70-year old illiquid railroad issues.

  4. Oh, well brought recently. Will walk away with an equivalent annual yield of about 1.7% in Jan which is my money market rate at Schwab. Broke even.

    WRB-B worked. This was a small shot but risk-free

      1. My latest play is trading between similar funds, such as NLY-I and NLY-F. You would expect them to move in tandem and when they don’t swap one for the other. Paying 6.5% plus profits from the trades.

        1. I hope my BRENF does not get called in Jan 2021 but I suspect it might. Reset minimum with a 5.5% coupon. Trading over Par. Right now, it would jump to a 6%+ coupon.

          Thoughts on this being called?

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