New Preferred Stock and Baby Bond Issuance Picks up
By: Tim McPartland,
December was a month that brought huge volatility to the preferred stock and baby bond arenas as prices gyrated in very wide price ranges with some issues falling as much as 20%.
January was a big rebound month as almost all the losses from December were regained. These sharp movements tend to rile investors, in particular conservative income investors.
In addition to the price volatility and the consternation it brings to investors, underwriters are hesitant to bring new issues to the market when they are unable to discern what an appropriate coupon will be at any given moment. The price movements brought new issue launches to a halt during December. Only once price stability returned in mid-January did we begin to see new income issues come to market.
Now with markets more settled, companies and underwriters are once again bringing new debt and preferred stock issues to the market to satisfy what seems to be a never-ending thirst for yield. Additionally, with the “dovish” interest rate tone conveyed by Fed Chair Jerome Powell, investors are again willing to step up and purchase long maturity (perpetual preferreds) securities with the belief that interest rates are not likely to move much higher throughout 2019.
In the last few weeks, we have had a number of new issues come to market and each has been from a different sector.
In late January, regional banker Citizens Financial Group (NYSE:CFG) sold a $25/share 6.35% fixed-to-floating rate non-cumulative perpetual preferred stock. The initial coupon of 6.35% will remain in effect until 4/6/2024, at which point the coupon will begin to float at a coupon of 3- month Libor plus a spread of 3.642%. This issue has traded strongly since issuance and is now priced in the $25.60/share area. Further details on the issue can be seen here.
Last week brought another fixed-to-floating rate issue from mortgage real estate investment trust (mREIT) Cherry Hill Mortgage (NYSE:CHMI). This issue was sold with an initial coupon of 8.25%, which remains until 4/14/2024. After that date, the coupon will float at a rate of 3-month Libor plus a spread of 5.631%. As you can see, the coupon on this mREIT is much higher than the Citizens Financial Group issue above as mortgage REITs are almost always perceived as being higher risk. This new issue has just started trading and is priced around $24.99. Details on this new issue can be seen here.
Also last week, a new $25/share baby bond issue was brought to market by business development company (BDC) Fidus Investment Corporation (NASDAQ:FDUS). This issue has a fixed rate coupon of 6% and has a shorter dated maturity in 2024. While the coupon is meager, the maturity date being in only 5 years makes this issue attractive to income investors. Shares are now trading on the NASDAQ market under the ticker FDUSZ and recently closed at $25.15. Full details on the issue can be found here.
All of the above new issues are less than investment grade, but the Citizens Financial Group issue is just one notch below investment grade with a rating of BB+ from Standard and Poor’s. Additionally, the Citizens Financial issue pays dividends that are qualified for preferential tax treatment, but one must forego the added perceived safety of cumulative dividends, because all banks now have non-cumulative dividends.
The Cherry Hill Mortgage issue carries cumulative dividends, but the dividends are not qualified for preferential tax treatment.
The Fidus Investment Corporation is a debt issue that pays interest (not dividends). Thus, payments are not qualified for lower taxation.