New Preferred Stock and Baby Bond Issuance Continues at a High Rate

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Baby Bond

With interest rates continuing on a path of slowly moving lower companies are hurrying to issue $25/share preferred stock and baby bond while they can garner lower coupons.

Some recent issuances are reviewed briefly below.

Mortgage REIT AGNC Investment (NASDAQ:AGNC) has issued a new perpetual fixed-to-floating rate preferred with an initial coupon of 6.875%. This new preferred issue will have a fixed coupon until 2024, after which a floating rate coupon, which is reset quarterly, will kick in at a rate of three-month Libor (the London Interbank Offered Rate), plus a spread of 4.332%.

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Dividends received from preferred stocks of REITs are not qualified for preferential tax treatment, but they do pay cumulative dividends. This issue is now trading under ticker AGNCM  in the $25.02 area. Further details on the issue can be reviewed here.

 Giant self-storage company Public Storage (NYSE:PSA) has sold a very high quality perpetual preferred with a fixed rate coupon of 5.60%. This issue is rated BBB+ by Standard and Poor’s and A3 by Moody’s  — which are very high ratings for a REIT. As a REIT; the shares do not qualify for preferential tax treatment, but of course they will pay cumulative dividends.

As is typical for almost all preferred stocks, PSA will have an optional redemption period beginning March 11, 2024. Any time after that date, the company will be able to redeem the issue at a price of $25/share, plus any accrued dividends.

This issue is now trading in the $25.29/share area and is trading under the ticker symbol of PSA-H. Further details of this issue can be seen here.

 Giant utility company NextEra Energy (NYSE:NEE) has issued a new $25/share baby bond (exchange-traded debt). The issue is an investment grade issue and carries a fixed rate coupon of 5.65%. The issue is trading on the NYSE under the ticker symbol NEE-N and recently traded in the $25.21 area.

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This issue has an early optional call available to the company starting in 2024 and has a maturity date way out in 2079.

As a bond issue, interest is paid (instead of a dividend) and these payments are “ordinary income” taxed at your normal tax rate.

An interesting item, that is often overlooked with baby bond issues by utility companies, is that the prospectus contains a provision whereby the company can defer payment of interest for one year or more  than a 10-year period without defaulting on the bonds. For income investors, a deferral of interest payment would not only disrupt your income stream, but likely would devastate the price of the baby bond.

If a utility would defer payments of interest, the deferred payments would continue to accrue and interest paid on the deferred amounts. A deferral of interest must be paid prior to final maturity of the bonds, or a default would occur.

Further details of the NextEra baby bonds can be found here.

 All investors would be well advised to dig into the financial statement of the issuers to fully understand the risk that may be encountered.

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