Who Issues Preferreds and Baby Bonds?

Just a bit of trivia into who issues $25 preferred stocks and baby bonds.

Below is a chart that breaks down the number of issues of $25 issues outstanding.

This is really nothing new for those that have been investing in these issues for years–but maybe newer investors aren’t aware of the breakdown.

This doesn’t show them by dollars–just by individual issues outstanding. The chart shows banks are the largest issuer–and if I listed by dollar value it would show banks are by far and away the biggest issuer since the big banks–i.e. JPMorgan and Bank of America tend to sell issues with 30, 40 or 50 million shares–while REITs etc are more in the 1-10 million area.

8 thoughts on “Who Issues Preferreds and Baby Bonds?”

  1. Thought REIT’s would be a bigger percentage, There are plenty of REIT preferreds but they are not as large as bank and insurance preferreds. Their smaller size gives them a smaller piece of the pie. More opportunity for short term trades so that’s where I do the bulk of my trading.

  2. Thanks. That is a really interesting pie chart.
    Companies in any industry can issue preferred stock. So the question is why banks lead the way, followed by insurance companies and REITs of various stripes. Is it fair to conclude that the answer relates to regulatory controls? I don’t see many preferreds from manufacturing companies or other large companies in unregulated industries. I believe the banks can count preferreds as Tier 1 capital. REITs are constrained in how much they can borrow. And I believe insurance companies have similar regulatory constraints. If that’s the case, It suggests to me that in the absence of regulation, these companies could probably issue more debt at lower coupons than they offer on their preferreds. (I’m not trying to start some political fight, or invite a debate about whether the regulation is good or bad in the scheme of the overall economy. I’m just asking whether it is correct that the regulatory schemes provide an incentive to issue higher coupon preferreds because there is a limit on the amount of acceptable debt). As much as I whine about the low coupons on bank preferreds these days, if this is true, perhaps the regulations essentially offer a bit of a gift to retail investors. Perpetual fixed rate preferreds from major banks carry lots of interest rate risk. But even subordinating to their debt, the credit risk is pretty reasonable given the return. It just seems to me that companies that do not face the same regulatory restraints have concluded there are cheaper sources of capital. I think that tells me this narrow part of the overall stock market is a good place to look for opportunities.

    1. Roger, you basically got it. Now I have seen preferred stock listings from the 1950s, and basically it was mostly industrial and utilities that issued them. They have of course long since been redeemed. A few smatterings from that era are still outstanding and trade once a blue moon.
      Yes, financials need regulatory capital, so issuing preferreds is a very common practice to satisfy the Tier 1 capital needs. Even private local small town banks will issue untradeable preferred stock to the local powers that be.

  3. Been searching high, low, east, west, north, and south and can’t find anything worth buying. Coupons either way too low for me or if they are high they are junk just waiting to fall off the cliff. Tough times for fixed income investors. I try to set my goal at a minimum of 5.75%. Very difficult to find anything and if you do you better jump all over it immediately before it gets bid up to well over $26 and even $27+.

    1. Chuck P–that’s why a lot of us are sitting with 30% cash and playing around with short term flip and dividend captures–just nothing worth adding to my base positions, but the time will come–sooner or later where better opportunities will arise.

    2. Chuck I hit that wall a few weeks ago and “finally” grabbed an oar in the SLMNP boat. IG, QDI and a 6% coupon. Last trade a $1,035 though with upcoming $15 divvy essentially a $1,020/share purchase. Hat tip to Grid for bringing this one to the front burner for all of us.

      The real conundrum with the current low coupons I think is that if we’re lucky enough to work our way to higher coupons, there’ll be a bit a capital depleting carnage along the way. I’ve been rolling off about 1% a week of my lowest-rung holdings and trading other holdings up the credit ladder. Probably more conservative (sounds like you too) than most here but my lowest IG is BBB, though am holding a few decent NRs.

    3. Am in same boat. One remedy is I get access to new issue prefs at $25, even though yields are between 5% and 7.5% (the latter often unknown smaller companies, gotto be selective). However, their yields have been dropping a lot.

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