Mortgage company PennyMac Mortgage Investment Trust (PMT) has announced the upcoming issuance of a $25/share baby bond with a maturity date in 2028.
I don’ recall any residential mREIT selling a baby bond in the past–maybe there has been one but I don’t recall it.
The issue will trade on the NYSE.
The preliminary prospectus can be found here.
Thanks to J for noting this new one!
As I think through this issue more fully I think I understand this situation a bit better. FWIW I have started to think about it like this:
1)Clearly it is in the interests of holders of the fixed/floating securities that the start to float with SOFR. (this is true only because rates went up)
However,
2)It is not in the interests of Bond holders (the lesspaid in dividends the better)
3)Is it not in the interests of Common Equity (the less paid in interest and preferred dividends the better))
4)It is not in the interests of any preferred equity holders that might have a fixed coupon issue (the less paid in dividends for others the better)
5)It is arguable not in the interests of management (more cash for them)
So in the same way holders of the fixed/float have a reason to sue because the prospectus is interpreted they the issue remain fixed categories 2-4 have a reason to sue if they do start to float, category 5 won’t sue of course.
It is also interesting that this is only an issue because the SOFR went up so much. If rates went down the same parties would have the opposite view of things.
I found it very instructive to (finally) understand the difference between NLY and PMT in terms of prospectus language. There is materially different language in these two documents as it pertains to the end of LIBOR scenario.
The point is best illustrated with CIM. The D and C have very clear remedy for the situation in which LIBOR ceases to exist and the B does not.
For me this is a big lesson learned as it pertains to Covenants contained within the prospectus.
I also realize when looking at interests of all concerned parties that there is quite a can of worms here.
It just seems best to move into preferred issues that have a clear prospectus and sell those that don’t. Might also be best to do this sooner rather than later.
FWIW
8.5% coupon gets attention, but I go back to the 5Cs of credit.
Character, Cash, Credit, Collateral, Covenants
Pretty much when a bond or preferred stock flunks the Character test there is no need to go further.
After the recent Barron’s article I was involved in one of these threads with 2WhiteRoses. The discussion focused on the difference between the NLY prospectus and PMT prospects for the fixed to floating preferred.
The reason for the comparison is that NLY issues started to float with SOFR and PMT didn’t.
There was a particular paragraph in the NLY prospectus that was not in PMT’s. That aside – I still feel PMT’s action speaks to the firm’s Character. While I like the 8.5% coupon, there are plenty of others out there to loan money to.
wont touch it. PMT management has shown they will screw over their shareholders if they can. I will not invest in a company where i dont trust the management.
Mcreits have always been a big Question. Invesco and KKR each have one. They seem to be kitchen sink investments. You never know what you are going to get. That being said, mcreit PFD share holders have done far far better than the big companies 4 to 4 and a half coupon investment grade pfds! Some NLY’s are over par!
Last weekend Barrons wrote up a scathing taking of PMT for not ‘honoring’ their LIBOR float terms. So they were beating up on a 3 billion dollar firm trying to survive….while ignoring the TBTF bank which stiffed all of their fixed to floats. Some80X larger in market cap, ignored! SO get it? We were all told to ‘read the prospectus’ re libor floats. Well it turns out only a lawyer could read them, and they disagreed!!! So good luck you or me being able to interpret what’s there. Its a jungle out there…!
“.while ignoring the TBTF bank which stiffed all of their fixed to floats”
I assume you’re talking about MS. The lawyers at MS found a very clever and legal way to wiggle out of the contract. Basically, you can’t be found liable for breach of contract unless you can prove harm. I call it the “no harm, no foul” doctrine.
MS realized that “stiffing” the FTF issues would not cause the price of them to go down because the fixed rate was sufficient to support the price. This is evidenced by the fact that MS’s FTF preferreds (which became fixed) performed roughly the same as MS’s fixed rate preferreds in the days after their announcement. That makes it very difficult to prove harm.
In contrast, PMT’s floaters dropped immediately in price relative to their fixed rate preferreds after the announcement. The harm is very obvious in this case.
8.50%
First the disclosure: I have never owned Pennymac securities and don’t plan to.
However, from all the discussions on this (and other) boards, their management team doesn’t seem to be a very trustworthy (for investors).
It seems (from the discussion – I haven’t read the prospectus) that they found a way to screw investors. Probably legal (or the securities law firms would be all over them), but it smells bad.
So, I guess they are now going to test the notion that if you screw investors and then have to go back to the market for more funding, you run the risk of investors turning their backs on you (i.e. you will have to pay more). “fool me once, shame on you. Fool me twice, shame on me.”
I guess the counter notion is that a rat will crawl over another rat dead in the trap to get the cheese.
I will stay on the sidelines to see how this plays out.
Tim:
ABR has 6 notes, and there’s AJX, RC, SACH, and more(?).
The prospectus did not cover the situation that occurred with the PMT floaters because that situation wasn’t considered at the time.
Once the FCA announced the end of Libor, all prospectuses that I’m aware of listed the end of Libor in the risk factor section. They also said the commonly accepted standard for replacing Libor would apply if Libor ended.
Virtually all prospectuses before the FCA announcement do not consider this risk. What they do consider is the temporary unavailability of Libor. The “no such dividend period” language at that time was thought to be talking about a temporary unavailability of Libor — not a permanent end.
If Libor going away was a foreseeable event, they absolutely had the responsibility to list its end as a risk factor. They provide an exhaustive list of reasons the preferreds could go down in price. They do not list the end of Libor as a possible reason while every prospectus after FCA announcement lists that as a possibility. If the end of Libor was foreseeable, then PMT is liable for not listing that risk factor.
If Libor going away was NOT a foreseeable event then the contract law doctrine of “frustration of purpose” applies.
““Frustration of purpose” is a common law doctrine. Under contract law, an excuse can be used by a buyer for non-performance of contractual duties when a later an unforeseen event impedes the buyer’s purpose for entering into the contract, and the seller at the time of entering the contract knew of the buyer’s purpose.”
Source: https://www.law.cornell.edu/wex/frustration_of_purpose#:~:text=%E2%80%9CFrustration%20of%20purpose%E2%80%9D%20is%20a,knew%20of%20the%20buyer's%20purpose.
The unforeseen event in this case was Libor ending, the buyers purpose for entering into the contract was to gain exposure to a floating rate, and PMT knew the buyer’s purpose.
Language that unintentionally frustrates the purpose of a contract is void. Someone really needs to sue them.
Hence my insistence that this was an intentional bait and switch. The insertion of language that changes the purpose of the issue from 5 year fixed, and then floating perpetual to a fixed perpetual is nonsense. Nice to see a legal principle “frustration of purpose” being violated.
Exactly. “Someone” should sue them.
I know this will sound cynical, but unfortunately, lawsuits are often what keep companies honest.
I have been in board rooms a couple of times where someone has suggested a questionable course of action with the idea that “nobody would ever sue us for this”. Luckily, it didn’t happen in either case.
Like it or not, we live in an adversarial legal system. Until someone sues, everything is doable. Even things that are criminal are done regularly because there isn’t anyone to investigate and prosecute (think about traffic laws, or littering laws, etc.).
So, if you think you were wronged, call one of the security-bloodhound law firms and ask them if they will take your case. Maybe you can be the named plaintiff and get a bigger slice of the recovery.
FWIW – I think this is one benefit of buying bonds (even though I don’t own that many). Most decent bonds have at least a few big institutional investors who will happily sue if there is a breach by the issuer. I actually think this is one of the reasons there is less “silliness” around bonds — because companies don’t want to have the fight.
https://www.youtube.com/watch?app=desktop&v=CLJVLwB51LA
“Exactly. “Someone” should sue them.”
Sue them for what exactly ????
Following the prospectus ??? Yeah that lawsuit isn’t going anywhere.
This is what the prospectus says:
If fewer than three New York, New York banks selected by us quote rates in the manner described above, the three-month LIBOR for the applicable dividend period will be the same as for the immediately preceding dividend period, or, if there was no such dividend period, the dividend shall be calculated at the dividend rate in effect for the immediately preceding dividend period.
It is getting laughable with all the whining and thinking PMT did something illegal. The language in the prospectus is clear – if no one quotes libor, the dividend shall be calculated at the dividend rate in effect for the immediately preceding dividend period.
Some people may not like it but they are simply following what the prospectus says . Hell, I owned a few hundred shares and dumped them – so I was personally vested but I hold no ill will given they have done nothing illegal and are just following the prospectus
“Sue them for what exactly ????”
Breach of contract or failure to disclose material facts.
“It is getting laughable with all the whining and thinking PMT did something illegal. ”
Only if they had a responsibility to disclose the end of Libor as a risk would PMT potentially have done something criminal or illegal. If the end of Libor was not foreseeable, then they merely breached their contract which is a civil tort.
“The language in the prospectus is clear ”
The language you’re quoting frustrates the purpose of the contract and therefore is void. Or if it does not frustrate the purpose of the contract, then PMT committed a crime by not disclosing the risk of Libor ending.
So where are the lawsuits? It’s been almost 4 weeks since PMT’s announcement. Usually they’d show up in droves way before now don’t you think? .Are there any signs of any ambulance chasers mounting any cases? There’s one guy on SA blah blah blahing about doing something but historically what he’s said one day he’s capable of doing a 180 on the next , then back again, etc. etc. etc., all in attempts to move markets short term, nothing more. I’ve not seen anyone actually doing anything, have you?
“So where are the lawsuits? It’s been almost 4 weeks since PMT’s announcement. Usually they’d show up in droves way before now don’t you think? .Are there any signs of any ambulance chasers mounting any cases?”
I have never seen the ambulance chasers ever independently mount a case related to any preferred stock without someone else organizing it. It’s not on their radar. All of the lawsuits related preferreds have been brought about by individuals who spearheaded the effort. A good example is Jan Martinek who was an investor in the Amtrust preferreds and organized the class action lawsuit. Another example is Norm Roberts who organized a lawsuit against Navios related to their preferreds. The granddaddy of prefered lawsuits was a lawsuit against Goldman Sachs related to a hotel REIT they took private. That was spearheaded by Joseph Sullivan.
Someone needs to step up here and sue. The problem is that unlike other lawsuits related to preferreds, the damages on a percentage basis are quite small. The preferreds only dropped by something like 5% after the announcement. That makes it harder to pencil out the economics of a lawsuit.
“So where are the lawsuits? It’s been almost 4 weeks since PMT’s announcement. Usually they’d show up in droves way before now don’t you think? .Are there any signs of any ambulance chasers mounting any cases?”
I have never seen the ambulance chasers ever independently mount a case related to any preferred stock without someone else organizing it. It’s not on their radar. All of the lawsuits related preferreds have been brought about by individuals who spearheaded the effort. A good example is Jan Martinek who was an investor in the Amtrust preferreds and organized the class action lawsuit. Another example is Norm Roberts who organized a lawsuit against Navios related to their preferreds. The granddaddy of prefered lawsuits was a lawsuit against Goldman Sachs related to a hotel REIT they took private. That was spearheaded by Joseph Sullivan.
Someone needs to step up here and sue. The problem is that unlike other lawsuits related to preferreds, the damages on a percentage basis are quite small. The preferreds only dropped by something like 5% after the announcement. That makes it harder to pencil out the economics of a lawsuit.
2WR, My reply keeps getting sent to moderation (for no obvious reason). Hopefully Tim will release it soon.
I am still building my case. We have many months to go until the float. My lawyers will present the case with plenty of time on the clock. I lost over $150K on the 5% drop when it was announced. I’m probably the largest single preferred stock holder other than institutional. I like to post contradictory statements to get reactions from both sides for conversation purposes, not to pump or dump. I always intended to sue.
“So, if you think you were wronged, call one of the security-bloodhound law firms and ask them if they will take your case. Maybe you can be the named plaintiff and get a bigger slice of the recovery.”
I’ve never owned PMT preferreds so I have no standing to do this. But I encourage the folks who were wronged to contact a law firm and see if they’ll take the case.
I do own CIM-B and if they try and screw me, I guarantee I will be suing. That’s an even easier case to prove.
Yes, CIM is in a pickle with CIM-B.
In recent filings, They have contradicted what is in the prospectus. Whoops!
Any links Maine?
You can get the gist of it from this article which is only partially free.
https://www.thereitforum.com/p/update-on-cim-b
Basically, management came out and said that they are still researching CIM-B, when asked whether it will float as they have indicated in recent filings , at least generally.
Thanks…. isn’t this more opinion than definitive comments by CIM?
Yeah, nothing definitive. But reading the tea leaves, at least 50% CIM-B doesn’t float.
This was their IR response from last week:
Dear Investor,
After June 30, 2023, all LIBOR tenors relevant to the Company ceased to be published or became no longer representative. Under the federal Adjustable Interest Rate (LIBOR) Act (the “Act”) and the related regulations promulgated thereunder, three-month CME Term SOFR will automatically replace three-month LIBOR as the reference rate for calculations of the dividend rate payable on each of the Company’s 7.75% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock (the “Series C Preferred Stock”) and 8% Series D Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock (the “Series D Preferred Stock”) for dividend periods from and after September 30, 2025, in the case of the Series C Preferred Stock, or March 30, 2024, in the case of the Series D Preferred Stock. The replacement rate, and therefore the calculation of the dividend rate payable, for the Series C Preferred Stock and the Series D Preferred Stock will also include the applicable tenor spread adjustment of 0.26161% per annum, as specified in the Act. With respect to the Company’s 8% Series B Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock (the “Series B Preferred Stock”), the Company is currently evaluating the impact of the cessation of LIBOR and the application of the Act and the applicable dividend rate payable on the Series B Preferred Stock after March 30, 2024.
Thank you for your interest in Chimera,
Investor Relations
Chimera Investment Corporation
The language in the prospectus of CIM-D is materially different than CIM-B – which is why they may be treated differently
I am sure the conspiracy theorists will whine if they do like they have with PMT
See page 38 (as marked on the page) of Chimera’s 10-Q dated 6/30/2023 https://www.chimerareit.com/sec-filings/all-sec-filings/content/0001628280-23-027191/cim-20230630.htm
“The Company’s fixed-to-floating rate series B, C and D preferred stock are LIBOR based and will become floating on their respective call dates.”
A question for those with legal training: is such a representation in a report filed with the SEC legally binding on the company?
A 10-Q is not a legal document per se. It is a securities document intended to provide disclosure at a specific point in time and while typically a firm’s auditor’s will review it, you typically do not have lawyers reviewing it
In addition, a 10-Q reflects simply a snapshot in time of a companies financials
Conversely a prospectus is a governing legal document over securities
Can a company be sued over significantly misleading statements in a 10-Q . In today’s climate a company can be sued over anything. The better question is the chance of success of such a suit. I would not hold out hope on that statement in the 10-Q which technically as of 6-30 was accurate. Especially since if you go on reading on page 71 of the SAME document there is this detailed discussion. NOTE the last 2 sentences
“Holders of our fixed-to-floating preferred shares should refer to the relevant prospectus to understand the USD-LIBOR cessation provisions applicable to that class. We do not currently intend to amend any of our fixed-to-floating preferred shares to change the existing USD-LIBOR cessation fallbacks.”
Effect of U.S. Dollar London Inter Bank Offered Rate or, LIBOR transition
The interest rates on our certain adjustable-rate mortgage loans in our securitizations are based on LIBOR, as are some classes of our preferred stock. On March 5, 2021, the United Kingdom Financial Conduct Authority, or FCA, which regulates LIBOR, announced that all LIBOR tenors relevant to us will cease to be published or will no longer be representative after June 30, 2023. The FCA’s announcement coincides with the March 5, 2021, announcement of LIBOR’s administrator, the ICE Benchmark Administration Limited, or IBA, indicating that, as a result of not having access to input data necessary to calculate LIBOR tenors relevant to us on a representative basis after June 30, 2023, IBA would have to cease publication of such LIBOR tenors immediately after the last publication on June 30, 2023. These announcements mean that any of our LIBOR-based adjustable-rate mortgage loans have been converted as of July 1, 2023.
On March 15, 2022, President Biden signed the Adjustable Interest Rate (LIBOR) Act (the “Act”), which transitions contracts that use LIBOR as a benchmark for adjustable interest rates to another benchmark, effective July 1, 2023 as LIBOR is permanently discontinued. The Act provides, among other things, that a default alternative benchmark based on SOFR published by the New York Federal Reserve Bank will automatically apply after the LIBOR replacement date for any contract that does not select a benchmark replacement for LIBOR or identify a person authorized to select a benchmark replacement after LIBOR is permanently discontinued. The Act also provides that if the SOFR-based benchmark replacement is selected to replace LIBOR, the person responsible under a contract for determining values is not required to obtain the consent of anyone before determining values based on that benchmark replacement. The Act further creates a safe harbor by ensuring that the SOFR-based benchmark replacement is by law a commercially reasonable replacement for LIBOR, that the use of that benchmark replacement cannot be deemed a breach of a contract or an impairment of the right of any person to receive payment under that contract, and that no person can be liable for selecting or using that benchmark replacement. The Act further authorizes the Board of the Federal Reserve to promulgate regulations under the statute to designate specific SOFR-based rates that incorporate the statutory spread adjustments as replacement rates for covered LIBOR contracts. The Federal Reserve’s final rules were issued in December 2022 and provide for the following SOFR-based replacement rates: (i) SOFR compounded in arrears for derivatives, using the same methodology as under the International Swaps and Derivatives Association protocol, (ii) CME Term SOFR for all covered cash products, except FHFA-regulated entity contracts and (iii) a 30-day compounded SOFR average for certain FHFA-regulated entity contracts.
We are evaluating the impact of the final rules on adjustable-rate mortgage loan investments covered by the legislation and will continue to consider all available options, including the potential impact on certain classes of our outstanding fixed-to-floating preferred stock. However, we believe that the Act has provided some measure of certainty with respect to the treatment of such instruments. As our LIBOR-based adjustable-rate mortgage loans in our securitizations are converted to SOFR, the differences between LIBOR and SOFR, plus the recommended spread adjustment, could result in interest income that is lower than if LIBOR had remained available. It is not yet possible to predict the magnitude of LIBOR’s end on our interest income and other operations given the remaining uncertainty about future SOFR rates. Holders of our fixed-to-floating preferred shares should refer to the relevant prospectus to understand the USD-LIBOR cessation provisions applicable to that class. We do not currently intend to amend any of our fixed-to-floating preferred shares to change the existing USD-LIBOR cessation fallbacks.
Hi Mav,
I have been on boards and have advised boards of boards of public companies. In my experience, 10K and Q ALWAYS get reviewed by lawyers (at least in every company I have worked with).
Management, lawyers, auditors all work toward releasing a document that accurately reflects the state of the company at a point in time and that is not materially misleading. Some do better at that than others.
As you say, if a K or Q contains material misrepresentations, it can be a huge mess – but because things change over time, those documents can quickly become outdated. Key to anyone wanting to challenge management over such a document was whether it was accurate when released.
Usually companies release news (and file with the SEC) about material events. That can be another mess for the corporate finance/legal/audit teams.
In addition to the prospectus, it can sometimes be useful to look at the certificate of incorporation (that’s what its called in Delaware – name can vary by state). It usually sets out rights, privileges, etc. of preferred shares.
I can’t tell you how happy I am not to have touched CIM or PMT stock….
Sorry – I am wandering.
Hey Private
Perhaps things have changed as it has been a while since I worked in public accounting. But when I did there was never any lawyer reviewing a 10-Q (unless there was a particular legal issue being discussed). Now we as public accountants did review the 10-Q. Conversely, lawyers always reviewed every word of a prospectus. Just my experience. But things could have changed over time.
You are correct that these documents can become outdated quickly and the key to anyone wanting to challenge management over such a document was whether it was accurate when released.
This is correct. The C and D have specific language in the prospectus that provides treatment for the case where LIBOR does not exist. B does not.
Personally I don’t see a reason to risk this. I would consider selling the B and buying the D personally. They both have the same call dates, and are similarly priced.
Is there a reason why one would not simply sell the B and buy the D?
Yes August, if you don’t want to take the risk on whether CIM-B will float or not, it makes sense to swap from CIM-B to CIM-D. While not equal in price, for someone risk adverse, they are close enough that it likely makes sense to switch
CIM-B is a dollar lower than CIM-D which floats at a lower rate. Why? If B goes fixed wouldn’t D likely also go fixed?
Not necessarily. The CIM-D prospectus is clear that if LIBOR ceases, it will be replaced by the industry standard replacement rate and will float accordingly. With CIM-B, the relevant language isn’t there, and whether it will float appears be in doubt, at least to CIM management. The cited price disparity might well indicate that the market is skeptical that CIM-B will float, especially given what’s happened to others with language similar to CIM-B in the prospectus.
LI – >”That’s an even easier case to prove” (referencing CIM-B). Can you briefly elaborate? Thanks.
> Language that unintentionally frustrates the purpose of a contract is void. Someone really needs to sue them.
It’s almost certainly a losing battle. Look, there’s federal legislation from 2022 that speaks to this, and it basically says, “if you follow these guidelines for the given contractual language you won’t be found liable for damages due to the phasing out of LIBOR.”
As best I can tell PMT (and STT, etc.) did in fact follow those guidelines. So, it sucks to be an owner of one of those but whatcha gonna do?
So you think “Language that unintentionally frustrates the purpose of a contract is void” is effectively now legalized by the Finra Act? I highly doubt that any reasonable Judge or Jury would find that the Finra Act wording applies to language that never should have been in the prospectus.
That is what the Courts exist for to decide these matters.
” “if you follow these guidelines for the given contractual language you won’t be found liable for damages due to the phasing out of LIBOR.”
PMT is claiming the Libor Act does not apply to them because their contract has a “workable fallback”. Therefore, they cannot use its safe harbor. If the Libor Act applied to them, then they would have to transition to SOFR.
The point is they did not follow the guidelines of the Libor Act because they claim it doesn’t apply in this situation.
Their fallback language violates the “frustration of purpose” common law principle and thus should be void. A reasonable counter-argument and something that the Courts should decide. That is why we have Courts and a Justice system.
Arlington has a couple of Baby Bonds. They are being bought by EFC. In regards to PMT, the prospectus did not support doing something else than fixing the rate – not good for investors.
Goldshoe–thank you–yes Arlington did (does) have some baby bonds.
Let’s organize a retail buyer strike on their baby bond.
I’ve never owned a PMT preferred (partly because I knew they were sleazy) but their entire screw-over of the FTF preferreds holders rubs me the wrong way. I’d like to see them suffer for that decision. Doing that was probably a breach of contract and definitely a breach of goodwill.
Call me a scab because I will be buying it, esp if the yield is juicy enough!
They are required to abide by the prospectus. And the prospectus doesn’t have the independent fallback language.
Agreed. Their badwill and posssible litigation mean I won’t pay as much for it. But if it’s on sale even a sleazy company can be a profitabe trade. Don’t invest based on emotion. Hell, I even bought Bud Lite when it went on sale because it wasn’t moving.
Not sure why people still don’t understand that they were just following the prospectus.
In any case, if the yield is attractive enough, I will buy it. Never invest on emotion
PMT issued and marketed the A and B preferreds as FTF when Libor was expected to be phased out. In the identified risks, they did not disclose, “The way we wrote the prospectus, there is a chance if not likelihood our FTF will never float.” Yes, they will be sued for that. A dirty move by management.
The new note has no such issue, and PMT is a solid company. Do you boycott anyway? Each to his own. Juicy from a tarnished management is still juicy, and dirty is still dirty.
Even if you’re not into boycotts over principles, as a matter of prudence, you should avoid doing business with fundamentally untrustworthy counterparties.
As a landlord, I can tell you that you’re always better off with a good tenant at a lower rent than a low-trust one at a higher rent. Never worth the headache renting your capital to someone you might have to sue.
Interesting considering the shenanigans they are playing with the preferred shares not floating.