As expected U.S. Bancorp (UBS) priced a new issue of perpetual preferred stock with a very low coupon.
The issue priced with a coupon of 3.75%–even lower than the ‘yield talk’–which has become the norm lately. This is NOT the lowest coupon preferred the bank has outstanding as they have a $25 floater with a 3.50% minimum — USB-H which can be seen here.
The issue is non-cumulative and investment grade–and of course qualified for a lower tax rate.
Below you can see the details of the new issue from U.S. Bancorp.
The pricing term sheet can be read here.
I bought at $24.73. Its so hard to second guess these things now. But the pattern seems to be a fair discount to par on the first day or two and then a slow grind up to the mid $25 range.
Though today everything was down, equities, bond funds and preferreds
@24.69 it’s not exactly rocketing out of the starting gate. Nor should it. Better places to earn sub 4%.
Hi Bob…..I was wondering what you had in mind when you mentioned “better places to earn sub 4%”. Like many here I own some of the Libor linked older prefereds with a 4% floor on them.
To me the benefit of taking a slightly lower rate at USB is that I have a guarantee of 5 years without fear of having it called. Whereas, I’m constantly concerned some of the older preferred issuers will call all of these Libor linked preferreds once Libor actually disappears in 2021 or whenever it is.
USB Pr H is a better choice since you can buy it at approx 3.85% current yield and get the option value of the rate floating if Libor ( or its replacement) goes over 2.9%.
I know that right now that might seem far fetched but I am old enough to remember 14% t-bills and given the deficit amounts and growing debt it would not surprise me that we might get some inflation and higher rates in the not too distant future.
Rvert – Just thinking about USB-H differently, doesn’t its structure now mean that it’s essentially going to act like a fixed rate perpetual until LIBOR moves up over 250 basis points??? That means USB-H will go down like a fixed rate 3.50% during the first very large increases in rates before they benefit from the floating rate aspect which of course implies that when it does actually floats, it will be from a much lower dollar price than it’s present $23.08…
2WR, Not judging owning issue as guessing interest rates has proven folly even by the experts…Where are those promised 5%-6% Ten year US Bonds at Mr. Gundlach and Mr. Dimon? …. Ok, I digress, history has proven you correct 2WR, based on how these traded in the recent mini rate and yield cycle rises the past decade…. As one example, Fed refuses to raise short end, but long end takes off anyways (think 2013 Taper Tantrum). The then newly fixed perpetuals are issued with ever higher rates leaving the short end adjustables behind. And to compensate they have shown to drop to have a more competitive yield to stay within distant ear shout of the fixed rate issues.
This doesnt mean I am knocking them. I dont have any of these but I do like to buy issues that kind of fit into various risk and duration profiles. This is one example of such strategy.
Is anything safe?
Perhaps I’ve been so beaten down after 12 years of zero percent interest rates that 3.75% with minimal risk seems excellent. Corporate Bonds and CDs are all sub 1% and callable. There are a few dividend stocks like JNJ, VZ, MSFT, NEE, AEP, the largest Canadian Banks, Telus and BCE that are seemingly stable.
Other then a handful of ETFs which are yielding 2-3% what else is there?
Richard–the RiverNorth/DoubleLine preferred just issued at 4.375% is superior to this issue at A1 and you gain .625% in coupon.
It’s tough out there, Richard. I have recently devoted ~10% of my portfolio to a basket of CEFs, looking first of all at what they hold. I have to like that before I look further.
Some of my recent buys have been BUI, UTG, UTF, TEAF, EOS, and ETO. I’m holding UTF & TEAF at 1%, the rest at 2%. They pay monthly and have yields higher than what we generally talk about here. We’ll see.
JMO
to tim and others who commented previously: I talked about USB-h ”
price movement” a couple months ago all agreed it was “a sock drawer holding” as I considered it. My cost basis makes it way better than this new usb issue and many others considering this recent “rout” of rates. It at least seems to have a floor under it and should trade almost as high as this new issue. Only problem would be if this carnage on rates continues, then I just get my 15% capital gain if ever called. who would have thought? Been looking lately at commom stocks and etf’s with QDI my concern there is are any dividends safe out in the future ?