Early today Telephone and Data Systems (TDS) called their 6.625% (TDI) baby bonds which have been callable since 2010.
Not unlike many other issues these $25/bonds were trading way above any reasonable level–closing last Friday at $28.21.
Not sure who was buying at these levels, but recent buys gave back almost $3/bond really quick early in todays trading–now trading at $25.40
This is not the 1st time–nor will it be the last, where new buyers were not paying attention to their level of risk when buying–oh well let’s just call it a ‘lesson’.
TDS USM and Qwest have all been higher interest with OK pricing over the years. Not surprising to see calls. I think I did a TDS this year that’s way up? Anyway my list of reinvestments is down to like a pool of 30-40.
I guess it depends on your crystal ball, risk tolerance, etc. I sold all but a few token share of TANNI (so I could watch the price) a few yrs back and have lost some juicy dividends. Same with a bunch of others with neg YTC issues. But at the moment I’m glad I sold half of my small portion of GAINL this morning.
There are a few other “searching for a greater fool” issues similar to TDI. These are trading roughly >=$2.00 more than breakeven to the first call date. I excluded convertible issues. If you own any of these, I suggest making sure you have a good case on why they will NOT be called, causing a major loss.
Ticker First Call Date
AGO-E 11/26/07
AGO-F 7/31/08
ASRVP 6/30/03
C-N 10/30/15
IIPR-A 10/19/22
MER-K 12/15/11
MTBCP 11/4/20
PUK- 9/23/09
PUK-A 9/23/10
TANNI 1/15/16
The longer securities go without being called, the more comfortable people get buying them at premiums. I’ve sold some of the securities you listed but way too early.
Yeah. I sold the last of my AGO-F on Friday at $27 and was happy to get it. Shows what I know.
How about shorting one or more of these overpriced preferreds – or those that seem more callable than others?
I guess you have to pay the dividend if you are short in addition to shorting fees – anyone have success shorting such preferreds?
MSquare, shorting some of these is highly problematic. As CR noted above, you can make a rational case why an issue should be called, yet it goes past the first call date literally for years. So you would be paying the dividend the whole time. But that is the least of your problems on some of these. I checked the loan rates aka “hard to borrow fees” on all of the issues. The poster child is TANNI which has a 220% ANNUAL interest fee to borrow! AGO-F is in second place with a 126% fee. If you shorted one of these expecting a call, it had better come in literally days. You sure do not want to be short say one year.
In addition, the owner of the prefs can call them back in at any moment. And when you see rates that high, it is a good indication that the number of shortable shares available is very limited. You could go short squeezed and it would be painful.
C-N and Puk-A only have 1% loan fees, so shorting them would be more reasonable.
Shorting these might fit some investors, but personally we would not do it in any of the portfolios we manage.
Tim; I have been saying this on certain issues now for quite a while. Thats why I had a good laugh last week when I got a few dislikes over it. Buyer beware. I have issues in my portfolio trading at $29+ and even $30+. People chasing things. Another perfect example is “IPLDP” which right now is trading at $25.95 with a coupon of 5.1% and is callable at anytime.
IPLDP has been callable for over three years. About a year ago I sold half in fear of a call, but wish I was still drawing the dividend. I will complain if the other half is called but I guess I will just hang on to it and see. Makes no sense to me why they have not called. I bought much lower.
What’s so special about IPLDP? You can get better yields on CEF pfds with similar (in many cases lower) call risk and less credit risk.
Jimbo:
Instead of offering a detailed explanation, I will defer to a comment from Gridbird back in February 2021 as to why IPLDP hasn’t been called (yet):
“IPLDP seems to have been issued as a compromise with regulators on capital stack. Regulators didn’t like expensive ROE common stock and company didn’t like too much debt for credit rating. So slap a preferred sliver stack in and presto its all under 50/50 and everyone was happy.”
Regulatory accounting of preferred securities means they are treated like equity for cost of capital calculations. This increases value to the issuer.
Rob,
Could you expand a bit on “Regulatory accounting of preferred securities means they are treated like equity for cost of capital calculations”? Not looking for anything too elaborate.
Thanks.
nhcoast:
Without elaborating too much, the value of the preferred securities to the issuer (in this case LNT Alliant Energy) is greater than normal due to regulatory accounting regarding rates and costs of capital calculations. Specifically, the regulators count these perpetual preferred securities as if they are equity in the cost of capital calculation.
As long as the regulatory agency overseeing the utility continues to view and count the preferred securities as equity in the cost of capital calculation, then the incentive will remain for the company to leave them outstanding.
Because the utility is essentially subject to an income tax on its return on equity, and gets an income tax deduction for interest payments on its debt, a higher share of equity quickly calculates to higher rates on consumers.
IPLDP is a large issue – 8 million shares.
Doesn’t mean it won’t be called soon, but the chances are less.
Thx
I have a passing familiarity with utility regulation, so I was curious.
Rob,
Thanks for the response.
If I can follow up, why does that increase the value to the issuer?