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Will CHS Preferred Holders Get Whacked?

NOTE–this was written over the course of the last 2 weeks and some items (prices) may have changed. Some of the below is speculation on my part–based on a lot of history of following CHS.

Starting in 2006 or 2007 (I am kind of guessing) I wrote on the 8% perpetual preferred (CHSCP) from giant ag cooperative CHS Inc. (previously Cenex Harvest States) and at the time pointed out that shares were being used to buy back patrons (members) equity. No one had paid much attention to the details of this issue until I began writing about it—now every writer anywhere points this out. It is always amazing to see a small seed grow into a tree. I believe the last time they used it to buy back patrons equity was 3/2010–here. There are over 12 million shares currently outstanding and I believe that over 75% of outstanding shares were used to buyback patron equity between 2003 and 2010.

CHSCP is now trading at $32.12–a current yield of 6.23%– yield that is below all other preferred issues from CHS which have current yields of 7.12%, 6.56%, 7.17% and 6.74%. Worse yet the CHSCP issue became redeemable on 7/18/2023–which is a date approximately 15 years after the 1st original 1st redemption date (in 2008) which was extended by the board of directors in 2013.

So why are folks willing to hold this issue (CHSCP)? Are they fools? Maybe.

Do the board of directors (all farmers and ranchers) and executives hold boatloads of this high yielding issue which could motivate them to not call the issue? NO–the board of directors and senior executives do NOT hold boatloads of this issue–in fact directors own a total of 3,120 shares and named executives own a total of 1,876 shares as of 10/18/2023. On 8/31/2010 the directors and named executives owned 32,810. Interesting. Does this imply that the general membership (we are talking member coops–not individuals) maybe have reduced their holdings over the years by 80-90%? Obviously we don’t know.

So we know that the 8% issue (CHSCP) was primarily issued to redeem patrons equity—but did you know that virtually all of the 7.875% CHSCO issue also was primarily used to redeem patrons equity? Something over 50% of this issue was issued to redeem equity. Here is a whopper of an example of this issue from 2014 being used to redeem equity where almost 7 million share were used.

Now something that hasn’t been discussed is ‘who are the patrons having their equity redeemed?’ 70% of the redemptions go to NON INDIVIDUAL members–so this means other smaller cooperatives which are members (mostly). Normally individuals can’t receive their equity redemptions until they are age 70. For detailed information here is an excerpt from the 2014 prospectus mentioned above.

The balance of the 3 preferred stock issues were issued primarily for construction of the proposed Spiritwood North Dakota nitrogen fertilizer plant and other major capital investments (refineries). The nitrogen plant never came to fruition. Also some of the cash from these transactions may have been used to redeem patrons equity—redeemed for cash instead of using preferred stock.

Do the CHSCP and CHSCO have ‘special rights’ that are lacking in the other 3 preferred issues? NO–every share of preferred outstanding is pari passu (equal in all respects). If some folks believe that the P and O issues are ‘special’ they would be wrong.

All of the preferred shares outstanding rank higher in the capital stack than everything except debt—higher than patrons equity—from a safety perspective a member of CHS is better off owning preferred shares than patrons equity.

Now we can see from a review of over 20 years worth of data that the sole reason preferred stock was used to redeem equity was that the company simply didn’t want to use ‘cash’. They were willing to commit to large future dividend payments instead of ‘paying the piper’ (the patrons) with cash. Honestly, and with the benefit of hindsight, it was a foolish road to go down–it presented substantial problems after shares were issued.

So what were those problems and why did the board of directors approve the extention to 2023 the 1st call date for the CHSCP issue in 2013 when it was originally 2008?

Likely not considered when redemption of patrons equity was made was that the equity redemption had to be made at the current market price of the preferred–NOT $25/share plus accrued. For instance when the 8% CHSCP for the last time (I believe in March, 2010) the share price was $28.30–see below for details.

The amount of patrons’ equities that will be redeemed with each share of preferred stock issued will be $28.30 which is the greater of $25.32 (equal to the $25.00 liquidation preference per share of preferred stock plus $0.32 of accumulated dividends from and including January 1, 2010 to and including February 26, 2010) or the closing price for one share of the preferred stock on February 22, 2010. 

Recall that these preferred shares when issued for equity redemption ARE ALREADY REDEEMABLE. This creates a great problem for the cooperative management–how can you be issuing shares at a value of $28.30 to redeem $28.30 worth of equity and even consider calling the issue for redemption at $25? Obviously you can’t consider this and it would be a very quick way to lose your job when you screw your members out of $3/share. Of course we now know why the 1st redemption was extended into the future–why 2023 was chosen is not known–but my suspicion is that it simply was a safe date–far enough into the future so that a call made on or after this date could made without accusations that management was screwing membership.

So here is what I think will happen in the future. If we get interest rates, as represented by the 10 year treasury, down in the area of 3%, the cooperative will call the CHSCP issue. I suspect that after 13 years (since last used for equity redemption in 2010.) most of the membership shares have been sold–farmers are not stupid. Most of the shares now reside with ‘dumb money’ holders (ETFs and CEFs–for instance iShares Preferred and Income (PFF) has near a million shares). After the CHSCP issue is redeemed the 7.875% issue will be next up for redemption.

So—if you think I am wrong on this—that if fine—I may well be. My question would be WHY WOULD ANYONE accept a current yield of 6.32% and a yield to call of -28%? All 4 other preferreds outstanding are SUPERIOR to this issue–higher current yields and substantially less risk of a call.

There is no advantage to holding the CHSCP 8% issue – less yield, higher risk of a giant loss on a call. The shares are ‘pari passu’–no advantage to hold these shares. So the smart money gets out of the 8% CHSCP issue and buys any of the others–they are all better buys with MUCH less risk.

32 thoughts on “Will CHS Preferred Holders Get Whacked?”

  1. Good information. I have owned both CL ($25.60) and CO ($26.20) for about 9 years and also CoBank preferred for many of those years. Always loved the Coop model as I worked for one of the largest ones for 30 yrs in financial management. CHS has a long history of not calling preferred issues and I doubt that is going to change especially if they are pursuing growth through merger.

    My Coop underwent no less than 40 mergers during my 30 years. It’s part of the coop fabric.

  2. I cleared out the remainder of my double position in CHSCL. Too much risk of a call less than a year away. Once it goes ex div tomorrow many may get off the train all at once. Who knows? I will take the money and run!

    1. I think that’s a smart move. If you still want to be in the position, you can switch to CHSCM where a call would be a lot less painful.

      1. Dick,
        Plenty of fish in the sea. I picked up a couple hundred CNKQP at $99.00. A nice 7.2% yield to call or YTW. Thanks.

          1. Private,

            CoBank preferred shares. Trades OTC but can buy and sell on Fido. See details on Quantumonline. It is rather illiquid and trades only a couple thousand per day. Rated A- at time of issue. Hope this helps.

            1. Thanks Fryman
              I had forgotten. I owned cobank preferreds in the past. I used to make a few bucks flipping them when I had an account at scottrade, but they got bought.

              I had some shares at Schwab but they are real jerks about cobank shares (you can buy, but no practical way to ever sell). since schwab is where my accounts are, I quit following cobank.

  3. Series L doesn’t get a lot of respect when it comes to pricing…N sometimes prices higher and O is sometimes a dollar higher…

  4. Very informative article which must have cost you considerable time to research and put together. Highly appreciate your efforts!

    Re: CHSCP: It baffles me why someone would pay ~$1.25 for a $1 note….

    From the other preferreds the only other I maybe possibly might consider on a stupid day is CHSCL as its market yield (~7.13%) and coupon (7.5%) pass my threshold, though barely, but a call protection of 10 months and YTC of less than 1.5% isn’t worth it.

    Again thanks for this!!

  5. Tim—how would you rate CHS? Is it investment grade quality? I think so, but I’m not much of a financial analyst.

  6. Tim; THANK YOU very much for your great dive & DD into CHS. As I mentioned a while back I own a huge position in CHSCL & obviously like others wonder why its trading at $26.40 with a “call date” of JAN. 21st, 2025. Kinda crazy. I agree that if you sold now you would be miles ahead of the game. BUT, BUT, BUT with the track record of CHS my gut tells me they could easily go several years past the call and I would rather just hold and see what they do. Plus its harder than hell right now to find any bargains with a decent sized coupon and decent call protection. THANK YOU again Tim.

    1. I too have decided to hold onto my very modest position of CHSCL, bought some time ago at $25.48.
      CHS will have to call the P & O series before they they touch this one, so if they decide to call one or both this year, that would be something to take note of.
      Otherwise, I still enjoy the dividend stream, plus the reasonable chance they will not call CHSCL at first opportunity.

  7. I totally agree regarding CHSCP. Heck, if I owned CHSCL, I’d be hitting the sell button today at $26.40.

    I think some people are math challenged or don’t understand how YTC calcs work.

    1. With CHSCL call date still approx 1 year away and with CHSCP outstanding I will take the continued risk of holding CHSCL. On top of that CHSCO would, in a perfect world as Tim mentions above, would be called before L. It is the 7.875% issue and it is currently callable. L is 7.5%.

      If CHS starts grubbing around for fresh cash at lower rates then these preferred in a sizeable amount that would change my perception of L as time ticks by.

      1. I come up with a yield to first call of 2.9% on CHSCL at $26.40. There’s no guarantee it won’t be called at the first opportunity. There’s also no guarantee it will hold a price of $26.40 if interest rates creep back up.

        I would sell today and sit in a money market until another opportunity came along. Alternatively, swapping CHSCL for CHSCM makes some sense too.

        1. Dick,

          You make perfect sense. Except when it comes to CHS. Then nothing makes sense except their track record of letting preferred stay outstanding.

          With that said I just bought like 1500+ shares of SGOV today. I guess I am too lazy to roll my own t-bills. I really do not find the options out there right now terribly enticing.

          Tim, does CHS even have cash sitting around to call 1 or more of these preferred?

    2. you have obviously never met an IIPR-A investor who happily exchanged this issue for $40.

      Getting high got a new meaning.

  8. Can you say, if it’s too good to be true it probably is.
    This is why people here have made many comments on PFF. I complain a lot about the effort I put into putting together my own personal ETF , but I have more skin in the game and pay more attention than just throwing my money into a ETF or Mutual funds that picks holdings probably using AI

    1. L will drop after the dividend date and can be bought again for a flip. CHS is still exploring the merger. If it happens I bet that there will be more shares issued in exchange for the equity the other co-op has. I doubt they will issue common to call the P.
      I would be interested in how much cash on hand they have. I would be on the lookout for a debt or a preferred issuance after the merger is complete if it does happen to raise money for the call. Just my 2 cents

      1. Charles, if you are tracking the progress of the merger, I would appreciate if you gave occasional updates. Perhaps there is a link where one can track it?
        Otherwise, guess I will have to visit the CHS website from time to time and check.

        1. Inspbudget, my ears perked up when I heard about it and I researched it to see what the co-op was about and if they had similar outstanding preferred like CHS. All I found out was they have propane and fuel business that would match up with CHS their lubricant specialty division seemed like it wouldn’t be that profitable from the pictures on the website. Otherwise I haven’t followed it to see current status

          1. there’s another rumor floating around that CHS is going to buy a 1.2 Billion dollar revenue Coop in northern Minnesota. The papers are being finalized soon.

            1. (DTN) — CHS and Growmark won’t pursue new collaborations after undergoing formal discussions into a potential merger or other joint business ventures in early 2024. A CHS spokesperson told DTN the exploratory conversations have concluded, and “it was determined that no new opportunities will be pursued at this time.Apr 3, 2024

              1. I’m not talking about the Growmark deal that fell through. Chs is trying to buy out the coop called West Central Ag Services. Price tag is rumored at 0.5 to 1 billon in payout for member equity.

    2. For shits and giggles, I actually programmed an ETF (actually 4 of them)
      (see my bank portfolio that Tex the 2nd put together for $838 bucks for one of them)
      They were
      1. Bank preferreds
      2. Exchange traded debt
      3. Preferred stock issues
      4. REIT’s
      They would be geared to the following investors.
      1. Opportunistic
      2. Non-residents of the US
      3. US investors
      4. IRA’s

      All of them worked on program trading where they would buy and sell based on the price deviation from the initial buy at par (or way below par in the case of the financials) , and offset realized gains/losses equally automatically.

      1. I’m curious to see what you did. How do we find your portfolio? Still learning navigation on the site.

        1. it isn’t here. I used data from a reference database at work, but you can easily replicate it using the google sheets on this site.
          #1, when I created this one, see Tex the 2nd’s portfolio that he did for $838.00. it was all banks that had tanked after the failure of Signature
          for portfolio’s 1-3
          85% of the portfolio in any priced between par and par- 2 quarterly payments. (e.g. if it pays $.50 quarterly, it would be all that trade between $24.00 and $25.00 of the particular type.
          put the remaining 15% in issues that trade at $20-$21 a share or 75% of par, if it is not a $25.00 issue

          filter on BB for #2 so it is only debt issues-Same price criteria

          #3 is the remaining preferred stock that are not in #1 or #3 with the same 2 criteria. if this list is less than 20 total, go above par by 1/2 a quarterly dividend
          #4. is the same with REIT Preferreds

          None of the portfolio own MLP preferreds because I like to file my taxes early and not wait for the K-1.
          (Same reason why I would only buy #4 in an IRA)

          Sell 25% of any position when it gets to 2 dividend payments above par, and sell the remaining 50% -half when it gets to 3 payments above and the remainder when it gets to 4 payments above
          When any gain is realized, sell the worst performing performer in the portfolio in a number of shares that will cause the realized gain and the realized loss to be within $1.00 of each other.

          1. #3 should say “Preferreds-No REIT and no Banks
            #4 is just REIT preferreds (all kinds, just based on price criteria above)

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