The Southern Company (SO) has priced their previously junior subordinated debentures.
The coupon will be 4.20%–plenty low, but it will be strongly bought.
As announced the company will be calling all or a portion of the 6.25% Jr subordinated debentures (SOJA).
The issue is investment grade.
The pricing term sheet can be found here.
23 thoughts on “Southern Company Prices Baby Bonds”
This one is trading today under the symbol SOJE. Current price is $24.81.
Gridbird….so given that orientation which is similar to mine. I look at Southern Corp….and can vaguely remember the arrogance or overconfidence of their top management when they announced what’s turned into a nuclear fiasco over at Georgia Power.
And in terms of market sentiment, the hobbling of what were once not just the biggest but most powerful corporations in the world by what I see as a naive, misinformed Green Power lobby/Mass Media narrative which suggests that we can have a reliable Green Power grid with virtually no transition and no additional cost to the consumer. Its beyond absurd.
It makes me wonder with Exxon at $37 and borrowing money to pay their dividend, with the coal industry on the verge of extinction and Shale more leveraged and volatile then ever….if the Utility Industry regardless of how they transform themselves are going to be the next target and survive in anything like their current form out to 2060. Any thoughts?
Richard, yes there could be huge technological upheavals in the system. Batteries, micro power stations, “roof top” power, etc. is definitely there.
How these things are “fought” or implemented into the system progressively could affect a utes fate also.
The traditional triple vertical utilities are on the front lines of change and risk more the just transmission and distribution for now. Also what specific regulatory laws are in place to recover stranded assets? This is important also.
Solar is always a source of confusion. Many site its cheaper others say its more expensive. They both are correct but to their talking points. If a company decommissions a Coal plant with 20 years of life expectancy for solar installation, suddenly the rates go up, because the stranded asset cost is put in the bill besides the solar.
But many areas don’t have strong recovery systems in place. Southern has benefitted from strong regulatory pass through costs on the nuke boondoggle already. But laws can change. There has been more than one ute fall on their sword over nuke builds.
Gridbird and Bob…..thanks so much for the explanation. Its so nice to finally find a board that has intelligent conversation, no spam and like minded investors.
Richard, The only reason I really understand the deferred debt issue thing is because I was exactly where you were 8 year’s ago. Its good to have skepticism, as it keeps one out of needless trouble. And skepticism kind of backdoor keeps one in their strengths and in areas they trust.
Personally I have zero concern over a deferrable debt issue to buy in terms of its mechanics. My concern would always be the specific company and whether that yield is really worth the risk of capital to purchase it with.
Gridbird this has always been a sticking point for me and the reason I’ve avoided Utility Preferreds. So then you’re saying that in fact, the 40 quarter suspension period makes the Cumulative Preferred less safe then a comparable Preferred without that provision because there’s basically no pressure on the Issuer because they can continue to pay a dividend on the common stock during the suspension period….whereas….a “normal preferred” would not allow them to do that?
Richard, No you are misunderstanding a few things.. Southern has no QDI preferreds…They just have baby bonds with deferral clauses. Southern OWNS the subsidiaries but it isnt the subsidiaries (IE, owns the common stock of other companies such as Alabama Power, Mississippi Power, etc.). Alabama Power preferreds for example are Alabama Power’s obligation not Southern’s. Generally holding companys such as Southern are weaker and have lower credit ratings than the subsidiaries.
Southern is just a blood sucking tick off of Alabama Power. Alabama Power earns profits, the profits earned by Alabama Power will then be extracted by Southern via a dividend (after following legal ring fencing mechanisms that are in place to protect Alabama Power) as declared by Alabama Power board of directors (who are put in place by Southern management). However Southern cant get paid unless Alabama Power preferreds get paid.
Using Southern baby bonds as an example is confusing because in this situation the Alabama Power preferreds in theory sit above the baby bond debt of Southern. Because ignoring the other subsidiaries, Southern could not pay off its debts unless it receives the cash from Alabama Powers profits.
Now this is a better straight vanilla company situation…Lets take NuStar…It has common stock “dividends” actually called “distributions” being a K-1, preferred stock dividends, and NSS which is a deferrable baby bond like Southerns.
In order for NSS to defer interest payments, the preferreds must be suspended, and the common stock unit distributions suspended also…But see all of these issues are coming from NuStar the parent. None are subsidiary issuances. So in this situation the deferrable baby bonds sit above and higher claims priority than the commons and preferreds.
Does that help? I tried to keep it as basic as possible…What throws people off is some think Southern is Alabama Power…Its not. They just own all the common stock and control it, but it is a separate legal entity.
To answer somewhat differently than grid …..
In almost 100% of cases, if an issuer has failed to declare a preferred dividend, or failed to pay interest on a bond, it is precluded from paying dividend on the common. It’s in the indenture.
If the preferred is cumulative, the issuer must make up all missed dividends on the preferred before it can start paying dividends on the common. Exactly the same with missed interest payments on a bond.
In the case of a non-cumulative preferred the issuer need only restart making declarations ofn the preferred dividend before resuming a common dividend. No make up.
The above applies to same issuer situations. When you have a parent-subsidiary situation like Alabama Power and Southern Co., you have an additional consideration. Normally one thinks of bonds as being higher on the capital stack than preferred. But if the preferred is issued by the sub, and the bond issues by the parent, the preferred is actually higher ranking structurally. You will see that language in the SO prospectus.
Bob, you may have answered differently but in total 100% agreement with me.. I have read concerns such as Richards frequently enough to believe our explanations above arent answering the true question really being indirectly asked… The hidden question really is.. Why do they have deferral clauses and are they trying to screw me over somehow by using it… Richard using what we both said as a base, factor that into this…. This in laymans terms is really what a subordinated deferrable debt is..Its really a long dated perpetual QDI preferred stock masquerading as a debt instrument. Its “QDI” because the company retains the tax benefit via interest deduction and not given to you. A deferral clause is no different than a QDI preferred suspending and being cumulative.
Having the deferral feature also allows credit agencies to assign the issue as more “capital” than “debt” thus help protecting covenant ratios of senior debt above it and their actual credit ratings. So these instruments are not trying to screw anyone over, they are there for specific purposes. One must always know we are in the “covenant light” and lower end of company cap stack. If a company went into bankruptcy its always a reasonable assumption to assume any subordinate debt and preferred both will be worth nothing or pennies at most.
I am not understanding the value of purchasing this note verses purchasing Southern Company which has a higher current yield…..unless one is assuming the note will rise above par quickly and be a trade candidate.
For me it is the relative stability. The common stocks are too volatile my liking.
For anyone else that is interested, I was just able to buy this one through Schwab for $24.98. I called the bond desk (1-877-906-4670) and gave them the CUSIP.
The YTW I’m computing for SOJD is around 3.15%. It would seem like this new 4.2% issue could go to $26 and provide a better YTW than SOJC.
Thank you @Dick Whitman and this site posting about this baby bond.
I too bought some of this SO 4.2% baby bond at Schwab. Though have had accounts at Schwab for long, had never called their bond desk so far – quick and efficient.
Didn’t know they charge a $25 fee for it though I was quoted a price with it included in the ‘ask’ and price I paid…
I wasn’t charged the commission when I bought so it wasn’t top of mind. Sometimes they charge me and other times they don’t. I’m not sure why.
Ouch! This rate is too low for me to even consider the issue, although I like the company. While it appears that interest rates will stay low for the next several years, there are many unknowns at the present time. If interest rates ever return to “normal” in the next couple of years due to inflation, I could easily see this issue trading at $20 which would still then only provide a yield of 5.25%.
You think like me Lou.. to earn 2-3$ in income over a few years vs waking up and seeing a $5 capital loss or more that might stay for quite a while.. no thanx. Some crisis or another will come along as it has 3 times in the last 4 years (Dec ’16, Dec ’18, Mar ’20) where there is a big selloff and time to swoop in.
Of course our ‘friends’ at SA just put out a piece that preserving capital is stupid over income.. it took all I had not to comment, realizing it would just be deleted or attacked by their minions. Bea
Personal, Bea, I agree totally with you and Lou, I do participate SOME in the 4% old small float illiquid perpetual QDI though as they trade unrelated to liquids of that ilk and one can get out in relative ease if not asleep when the time comes.
Remember the 2013 Taper Tantrum when rates were believed to be going higher then on Fed changes as they got off near zero rates then and what it did to 5.5%-6% issues?
I think you may be somewhat kind and generous with a $20 handle. 🙂
Somehow the SA moderators have went to sleep on me and I have been bashing Pendynut for all I can today in between cleaning all the dust from my hardwood flooring installed past couple days.
Gee, Grid I thought you were going to say the dust was from overuse of your pepper mill filled with pendynuts…
Grid … I just got back from a trip to SA and I have to say you definitely had the napalm out. I really am surprised SA let the comments through.
What I wish the readers over at SA understood is how much the business model at Brad Thomas and Rida Mowa is built on the need to publish. As a business model, for them, I think it has worked, but as investment advice it pretty much stinks. They are constantly pumping whatever is hot. It builds readership and subscriptions but taken together it doesn’t make money. I doubt very much they eat their own cooking.
You mentioned earlier that the Company has the right to defer interest payments for up to 20 quarters. During such a deferral period, can the Company pay dividends? Thanks
Potter, this is a point where people get confused on. Some people see this and think a cumulative preferred stock is safer from same company because that 40 quarter deferral is not shown. Its actually the opposite. A preferred from same company cannot pay if the subordinated debt is suspended because it sits higher in cap stack. So, no, the common stock cannot receive a dividend until subordinated debt interest is paid in full. Now keep in mind this does not affect subsidiary preferreds which are not SO’s obligation, but the subsidiary. So in theory a SO subordinated debt could be suspended and say the Alabama Power preferreds continue to be paid though.
Great answer. Thank you
I was looking through some of the older $100 utility preferreds and saw that some of them still allow preferred shareholders to elect the board of directors after missing dividends for a certain number of quarters.
Potter, Here is something that doesnt sound as good though. I would bet a Kings ransom if I had one that for every preferred situation above you have found, the immediate holding company above it owns the majority of those preferreds…So in effect you are blocked each way. They are not going let a couple 6 pack beer drinking retirees who happen to have 50k in some old preferred wrestle control of a billion dollar subsidiary away from holding company just because they didnt get paid their dividends from short term financial trouble. If that would happen one could pack the board with friends, and family pay them a good salary and never declare a preferred dividend again, ha.
That is just how its done. They keep the shares purchased or from a previous tender and dont retire all of them. They just dont show up as part of the tradeable float. So in reality its really a false security…The one exception may possibly be IPWLK. The float is totally outstanding still. But its older sisters have had previous tenders in the 1990s and I dont know if those shares got retired or held by the company when purchased. Really more an academic question as they have paid unmolested for 80 plus years.