Regional Banker Valley National Bancorp Sells a Fixed-to-Floating Rate Preferred
By: Tim McPartland,
July 30, 2017
By Tim McPartland
The parade of issuers of preferred stock selling fixed-to-floating-rate preferreds is continuing with New Jersey regional banker Valley National Bancorp (NYSE: VLY) taking action by selling a four million share offering with an initial coupon of 5.50%.
This rate seems very low for a solid, but less than investment grade issuer. On the other hand, the never-ending thirst for yield continues to play out in favor of the issuer.
In the last year, the number of issuers of preferred stock selling fixed-to-floating rate shares has grown compared to all previous years. The reason for this is quite simply that such shares can be issued at a lower coupon than with a fixed rate perpetual preferred.
Investors expect that the floating-rate feature of these securities will provide them some protection against sharply higher interest rates in the future — meaning that their share price should remain somewhat higher in price and have less volatility than a fixed-rate perpetual preferred. Of 26 new issues ($25 issues) this year, 16 have been fixed-to-floating rate. This is unprecedented in the history of preferred stock issuance and it will be interesting to follow these issues for the next 5-10 years to see how they “play out” in terms of coupon resets and redemption.
The new issue from VLY has an initial fixed coupon of 5.50% and begins floating in September 2022 at the rate of the three-month LIBOR, plus 3.578%. If this issue was floating today at the three-month LIBOR (1.32%), plus the base of 3.578%, the coupon would be 4.898%. While we know that this issue will be readily purchased by investors, it goes to show the suspension of logic when these assets are being purchased. A perpetual security with a coupon this low will lead to a day of reckoning at some point (who knows when) in the future when investors realize the risk far outweighs the reward.
Shares of this new issue began trading on Friday under the temporary ticker symbol VLYYP and last traded at the sky high price of $25.81 a share. Needless to say, we have absolutely no interest in an issue with an inferior coupon and which does not even provide a good level of safety, since it is junk rated. We should note that Valley National has one other fixed-to-floating-rate issue outstanding. That issue has a fixed coupon of 6.25% until 2025, and is trading at $28.68 with a current yield of 5.45%.
Tim McPartland is a private investor with over 45 years of investment experience. His analysis, research and writing is devoted to the hunt for income producing securities of all types, but in particular specializing in preferred stocks, exchange traded debt and Master Limited Partnerships.