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Heavy Issuance of Income Securities in March

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By Tim McPartland

After only four new income issues were sold in February, March turned out to be a much busier month with the sale of eight new issues.

There were two baby bonds sold by utility companies, and both issues were investment grade. Six new issues were perpetual preferreds, including three that were fixed to floating rate and sold by different companies.

Specialty Insurer WR Berkley (NYSE:WRB) sold a $175 million dollar $25 subordinated note offering. The notes carry a fixed coupon of 5.70% and have a maturity date way out in 2058. Since the offering was completed, the notes have traded somewhat weakly and are now around $24.68 to boost the current yield to 5.77%. The notes are investment grade, but with the long-dated maturity they carry substantial interest rate risk, which is the risk that rising interest rates will send the note price lower.

The other baby bond issue sold in March was from Michigan utility CMS Energy (NYSE:CMS). The 5.625% subordinated notes have a fixed coupon of 5.625%. The notes do not mature until 2078 and obviously carry huge interest rate risk with a maturity date 60 years out. Like the WR Berkley notes, the CMS notes are trading below $25 at $24.77.

Diversified manufacturer Compass Diversified Holdings LP (NASDAQ:CODI) sold a fixed-to-floating rate perpetual unit with an initial fixed coupon of 7.875%. The coupon will start floating in 2028 at a rate of 3-month Libor plus 4.985%. Despite what appears to be decent financials, the shares are trading much lower than the $25/share issuance price. Shares last closed at $23.10 for a current yield of 8.52%. This issue generates a K-1 at tax time instead of the easier to deal with Form 1099, so investors recently have been very reluctant to purchase some partnership preferreds.

Data center real estate investment trust (REIT) QTS Realty (NYSE:QTS) sold a 7.125% cumulative perpetual preferred, which has traded firmly since issuance and closed April 4 at $25.30. While QTS is a minor data center player, this issue appears to have been priced just about right.

Apollo Global Management LLC (NYSE:APO) has sold a large 6.375% preferred unit offering. The offering is firmly investment grade, but investors are lukewarm as the units are trading at $24.97. Apollo will issue a K-1 at tax time as the company is a partnership.

Pennsylvania banking company Tristate Capital Holdings (NASDAQ:TSC) has sold a 6.75% fixed-to-floating rate non cumulative preferred issue. The coupon will begin to float in April 2023 at a rate of 3-month Libor, plus a meager 3.985%. Shares are trading very strongly at $25.90, despite being junk rated and offering a paltry floating rate starting in 2023. Preferred shares from regional banks have been very well accepted in the last year and this obviously is continuing.

Large container and railcar leasing company CAI International (NYSE:CAI) has sold an issue of preferred stock with a fixed-to-floating rate initially fixed at 8.50%. Beginning in April 2023, the coupon will begin to float at 3-month Libor, plus a spread of 5.82%. Dividends on this issue will be qualified distributions. CAI has been very profitable lately, but the company carries a huge amount of debt, which likely will be harmful if we move into a recession at some point in the future.

Lastly, insurance company Allstate (NYSE:ALL) has sold a fixed coupon preferred with a coupon 5.625%. This issue is investment grade and is now trading at $25.15. Since Allstate is an insurance company, the dividends are non-cumulative, but are qualified for preferential tax treatment.

Despite higher short-term rates, longer-term rates have been stubborn to rise and thus these coupons are lower than what we believe is the risk inherent in baby bonds and preferred stocks.  On the other hand, for the conservative investor who is not overly concerned with net asset values, the insurance company baby bonds of Allstate and WR Berkley may be attractive as they provide a safe income stream.

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