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Shareholder Protections for Latest New Preferred Issues

The has been plenty of talk and concern of preferred issues being ‘delisted’ after mergers/acquisitions lately. Of course there are delistings that have occurred not related to mergers/acquisitions–simply because of management deciding to delist (i.e. AmTrust Financial). Management can be labeled thieves and criminals–but in the end we all need to protect our interests by understanding potential protections in prospectuses or at least understanding our risk up front.

Today I was reading (more closely than normal) the prospectuses from the last 2 new issue preferreds. This would be the new Lincoln Financial Group 9.00% preferred (LNC-D) and the new issue from Athene Holding–a 7.75% fixed rate reset preferred (ATHLL)

Athene is owned 100% by Apollo Global Management (APO) which complicates the situation even further.

I found NO particular protection on either of these issues for the preferred stock holders. NOTHING requiring redemptions in the event of a merger/acquisitions. NO conversion requirement. NOTHING.

So my point is that investors should be aware of the situation and if they are uncomfortable either don’t buy the issue or keep the position on the smaller side. I own the Lincoln Financial preferred, but simply will keep my position at a modest level. I will not buy the Athene issue–although I already own a little of another Athene issue and may simply unload it.

I now will post my findings on the individual security pages–IF anyone finds protections I have overlooked please let me know as this is not always a cut and dried interpretation.

Below is what I will add to the security page for LNC. If I find protections I will list them.

29 thoughts on “Shareholder Protections for Latest New Preferred Issues”

  1. I’m going to show my ignorance and/or naiveté- never stopped me before. I have worked very hard over the past several months, upgrading the quality of my portfolio, seeking quality issuers, reading carefully the prospectus, quarterly & annual reports, etc. In the preferreds I have focussed to a large extent on investment grade issues. Have I wasted my time? Do the ratings play any role in this? Obviously, I never thought it was a guarantee of safety. But ratings were never mentioned in your discussion.
    But I believe both of the preferreds you are discussing are investment grade, leading me to ask if the rating is meaningless except as a predictor of the company’s bankruptcy and not predictive of other types of non-payment?

    1. George, Reading your note makes clear you’ve done the homework, and recognize the oft-overlooked idea that spending equal time on the risk side of the equation does matter.

      Do ratings matter? Yes. Absolutely. 100% they matter. Are they 100% reliable? Absolutely not. However, for larger data pools over time, they are highly predictive of outome. Early on, I read through one of S&P annual missives – a very lengthy, wordy – though incredibly informative document. Never looked back. When it comes to ratings – they are my number 1 criteria, yield is 2nd and sometimes 3rd.

      If you’ve been reading here for some time you’ll have noticed in the last year an increasing frequency and severity of problem issues. Everyone needs to find their own lane. Just me, not embracing financial or management drama, gambling, “seeing how it goes”, endless interpretation of italicized footnotes on page 149 of an IPO, rate predictions, guesses on whether an issue will pay, go dark, call or rely on a ouja board. All this noise (risk) seems an asymmetrical trade for a slight bump in yield. Adding “other types of nonpayment” to the above, yes, it’s been a growing concern.

      While having no specific data to support the contention, it is observable that boring higher-IG issues have a strong tendency to avoid many of these pitfalls. As for risk v return: Last year I did a back of envelope regression on yield v rating. Surprisingly, or maybe not surprisingly, for every rating tier, the higher the rating, the higher the ultimate/risk-adjusted yield – and as we know, a heck of a lot less drama.

  2. Question—which industries/sectors would you consider to be safer than others regarding protection from delisting, etc? Financials?

    1. My eyeball opinion is banks. As typically stronger banks buy weaker ones. And they tend to make acquired “Bank B” become who the acquiring “Bank A” is; new name signs in front of the building and all. They dont do any of that weak walled off subsidiary thing. Sometimes the acquiring preferreds do get delisted though for a while. I have seen it before. That being said, Im more aware, but it isnt going to drive what I buy. I only have two banks anyways. Anything can happen intentional or not.

  3. LNC did a sister offering 1000 structure with LNC.D. Wonder if the “institutional” structures offer better/different protections than the retail $25…?

    1. Good question Jerrymac–I am going to look at that, although I seldom consider $1000 issues.

      1. Tim, Companies can issue solid protections, as you well know they wont. But here is an example of an issue with progressive terms… CEQP-…Of course its genesis was an original private deal that later were assigned a ticker.
        It cant be redeemed and only force converted after common price rises almost 4x what it presently is at about. A change of control triggers conversion at common units or cash. If payment is missed even once its distribution goes up from .2111 per quarter to .2567. Any unpaid or accrued distribution will be increased by 2.81%.
        ….Of course none of the above means anything if you dont like the company or its credit quality.

        1. So Grid, this preferred gets a K-1 how are you dealing with that? Keeping the shares you own below a certain threshold?

          1. Im not. After Camroc’s private prodding last year of K-1s are no big deal and pull your big boy pants out of the drawer, I found him to be 100% correct with Turbo. So for me, I dont think anything of it. Just plug in a couple numbers and Turbo does the rest. I find pairing up my socks after taking them out of the dryer to be more difficult.

              1. I cant remember Irish, as I had 4-5 of them last year. But they definitely do.
                Does an investment in the Crestwood 9.25% preferred units generate UBTI (Unrelated Business Taxable Income)?
                Yes, the income allocated to the 9.25% preferred units generates UBTI and will be reported on your Schedule K-1. As Crestwood cannot provide tax advice, we encourage unitholders to reach out to their tax advisors to discuss their personal tax situation.
                For additional questions regarding the 9.25% preferred units, please reach out to investorrelations@crestwoodlp.com.


  4. To TIM & EVERYONE ELSE; I too bought some of the new 7.75% ATHLL. Thats the permanent symbol on my Schwab account. Here’s my question which I consider very important. Lets say that Athene (Apollo) did decide to delist that new issue. Wouldn’t that pretty much kill their chances of ever listing anything new down the road??? Why would anyone buy something from them in the future????

    1. Chuck P – yes I have given thought to that as well. The Athene issue is only an obligation of Athene–not Apollo–so don’t know for sure how that affects things. Would they suspend if Athene had some poor quarters (since Apollo has made it clear it is not the issuer nor guarantor)?

  5. More than an average number of my individual preferreds have gone into the delisting Twilight Zone. Sometimes abruptly. I missed HMLP only by chance. In addition to instantaneous and permanent haircuts on principal, I worry about potential loss of income on individual preferred or baby bonds issues that are non-cumulative or deferrable.

    Individual preferreds were once a place of sunny days, declining rates that propped up prices and no nasty SEC rules. The expert market is not in my retirement travel plans. The back alleys there are dark, dangerous and dimly lit. Lately, I run , not walk when I sense trouble coming. Just my opinion.

  6. Potentially this is a serious issue to III type preferred investors that might hold say 20 to 40 different preferreds. It is similar to a default on a bond. So if you had a 2.5% or 5% allocation to a single issuer that defaulted, it would have a material impact on your total return. Contrast that to say PFF which currently has 501 different issues with the largest one being a Wells Fargo @ 1.94% allocation. Obviously on average, one of PFF’s holdings is 0.20% of the portfolio. If that defaults, it is not as material as it is to small investors holding less issues. Maybe if we want to continue holding preferreds, it drives us away from holding individual issues into holding ETF’s. Blasphemous to even think like that around here, but we all have been playing the game long enough to know “they” can change the rule(s) on us. We know we can expect 0.000% support from the SEC/FINRA on this. We are on our own. IIRC, the folks that field lawsuits on the Wheeler/Cedar fiasco lost. So even if you wanted to spend a lot on legal fees, your odds are not good. How many small investors are going to write $1 million legal fee checks when the odds are way less than 50/50 fighting the next battle?

    Even more serious implications for RIA’s and brokers that recommend any issue that gets delisted.

    1. Im certainly going to be a bit more aware Tex. But I am not giving those dolts any of my money. The gap between what I make and what they lose is just to wide a river to cross for me. Like Petosky said below, keep a more aware eye on the bond market. I already have been doing that some already when some good deals popped up a couple months ago.

      1. The thing about ETF’s and Mutual funds is it gives the bad actors a place to hide. It also leads to investors having a false sense of security and leads to complacency. Until something happens then the herd affect kicks in and you have clueless investors panicking like lemmings all selling trying to get out the door at the same time.
        This kind of investing keeps my mind sharp. I feel like the SEC has taken us backwards not forwards in the investing world.

    2. Tex..Good point about a limited number of holdings exposing you to individual issuer risk. With zero commission trades, however, it does not have to be a choice between an etf or high concentration risk. In my own case, although I suspect my overall portfolio is smaller than most, it has hundreds of tiny positions as a risk limiting strategy.

      1. Lucky, a point about zero commission trades: they MIGHT go away! Gary Gensler, head of the SEC does not like “Payment for Order Flow” aka PFOF. This is where large firms like Citadel and Virtu pay brokerages to send their orders to them. Citadel/Virtu pay a fraction of a penny back to the brokerage for each share that trades. TD Ameritrade set the record in 2021 by receiving $1.4 BILLION in rebates. This is the main way that brokerages can let you trade for free, but still make enough money to keep their doors open.

        If Gary is able to kill PFOF, there is widespread belief that commissions will return. And this is an active topic inside the SEC. Matter of fact, there is a hearing this Wednesday where it will indirectly be one of the topics. I will not handicap how this ends up, but there is finite non-zero chance that Gary prevails. If he prevails and commissions re-appear, it will definitely affect how many people trade. Old timers remember paying something like $170 per trade before Charles Schwab pushed through discounted trades. I would not expect to go back there, but maybe we get back to $5 to $8 per trade. . . .

        And there are MANY, MANY small trades on preferreds every day when I look. Today there were 185 trades of <=5 shares on JPM-M for example. There were 26 one share trades on BPYPM. Try doing that with $5/trade and see how it works. . .

        1. Tex, It hurts the guy on the other side of the trade too! I dont know about the trying to buy 1-5 share buying thing myself, but I have been nipped selling and buying with those tiny lots thrown at me.

          1. Grid, it most likely does NOT hurt the guy on the other side of the 1-5 share trade. Some percent of the time, it likely is the Citadel/Virtu PFOF guys. Other times it is likely commercial traders that pay pennies per share to trade and do not pay the $5 to $8 minimum. Let’s say you have the only “lit” buy order at 20.00 and they want to buy it at a lower price. They can sell you a single share at 20.00 and make you pay the $5. We all used to get some of those trades. It is relatively easy to have an automated program that does trades like this. Also recall that the Citadel/Virtu market makers can do naked shorting, so they don’t have to have the shares to sell. How many of those would it take for you to cancel your order?

            1. Tex it certainly does for ME, I assure you. I put out a 100 share bid on a $6.95 OTC issue, and some Ahole sells me 5 shares. So now not only is my lead bid not showing anymore, the market closes ; the trades closes. Or if I add back 5 more shares to make the bid show again that is a new $6.95 transaction. So I paid over a dollar a share more for my bid order. And trust me it works vice versa when I am trying to sell also. It does happen, in fact it did yesterday. Fortunately I paid $10 less, so it didnt net lose me anything, but still… It doesnt happen enough for me to avoid OTC but its still annoying. If it goes back to costing to transact liquid exchange issues I may start doing AON trades.

              1. Just so everybody knows where Gary Gensler stands, he gave a recent speech that covered market structure including PFOF:
                What’s more, 90-plus percent of retail marketable orders are routed to a small, concentrated group of wholesalers that pay for this retail market order flow.
                . . .

                Last, let me turn to the topics of payment for order flow, exchange rebates, and related access fees.

                Payment for order flow can raise real issues around conflicts of interest. As described in the Commission’s settled enforcement action against Robinhood in 2020, payment for order flow can distort routing decisions. Certain principal trading firms seeking to attract Robinhood’s order flow told them that there was a tradeoff between payment for order flow and price improvement for customers.[15]

                As the staff wrote in the GameStop report, payment for order flow may incentivize broker-dealers to use digital engagement practices, such as gamification, to increase customer trading.[16]

                The European Union is actively considering banning payment for order flow,[17] potentially joining regulators in the United Kingdom, Canada, and Australia.

                Exchange rebates also may present conflicts.

                Exchanges give rebates to traders. High-volume traders benefit more from these arrangements, and retail investors don’t directly benefit from those rebates. Just as payment for order flow presents a conflict of interest in the routing of marketable retail orders, exchange rebates may present a similar conflict in the routing of customer limit orders.

                Therefore, I’ve asked staff to make recommendations around how we can mitigate conflicts with respect to payment for order flow and rebates.



                1. Tex…In the days of commissions, I didn’t make the tiny trades, and was nicked by partial fills going in or out, only to have the majority of the order not fill, but still paying the commission, as Grid described. But you play the cards you’re dealt to what you perceive to be your advantage. Not only is that scenario not a problem now, for exchange traded issues, but between being able to reduce your individual issue risk, odd lot transactions let you probe around inside the bid/ask spread without it showing up in the best bid/ask quotes. Schwab lured me over from Scottrade, and I am supposed to get free trades till 2036, but they might change their minds about that if PFOF is eliminated. Enough things can and have happened when money is involved, that the motto “trust no one” is hard to ignore IMO. That is where this whole conversation got started

  7. Protections are only as good as the document they are written in. I can’t think of a time the management went “above and beyond” the minimum requirement of the prospectus/debenture/etc.

    Anything beyond that is just how much the the management team needs to protect the company’s reputation so they can come back to the market to sell shares/debt in the future.

    1. Yes Private I agree. The Athene issues have an ‘option’ for a early buy back n the preferreds at $26 in change of control–‘at the option of the issuer’–fat chance that would happen.

  8. If we did comprehensive research Tim, we would probably find most dont have a solid change of control. Its funny, one “built in protection” can actually create a negative result if the wrong suitor acquires it. Here is one I own that was issued noncallable, and that could be a blessing or curse depending on who acquired it.
    Nothing herein contained shall be construed to prohibit the retirement of 8.48% Preferred Stock by purchase, and neither the purchase of 8.48% Preferred Stock, nor a merger, consolidation, arrangement or reorganization of the corporation, nor a sale or transfer of the property or business of the corporation as an entirety, shall be considered a liquidation, dissolution or winding-up of the corporation within the meaning herein contemplated.

    1. Yes Grid–you are correct. That same wording is in the Lincoln Financial issue.

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