ArcelorMittal Subordinated Notes MTCN (CUSIP L0302D178) closed at $20.46 yesterday. At that price MTCN offers just over 7¼% per share. Originally offered at $25.00 per share, MTCN can now be purchased well below the offering price. It is designed to pay distributions of 6% per annum ($1.50 per annum or $0.375 per quarter) to be paid quarterly on 1/15, 4/15, 7/15 and 10/15 to holders of record on 1/1, 4/1, 7/1 and 10/1 respectively. (Quantomonline.com) This is another preferred stock that must be arbitrarily converted into common stock similar to the one offered by Cliffs Natural Resources CLV that I wrote about in April.
The shares of this preferred must be converted to common stock on 1/15/2016. The conversion rate is based upon a formula that returns the offering price of $25.00 if the selling price of the common is between $16.75 and $20.94. If the selling price of the common is less than $16.75, one will get less value than the $25.00 offering price. If the selling price of the common is greater than $20.94, one will get common shares valued more than $25.00.
Moody's rates this preferred Ba3 and S&P rates it B+. So the question is, "Why the discount from the offering price?" The discount is a consequence of the arbitrary conversion to common that is due to occur in the future. The common is currently quoted at $12.30 per share. If a conversion were to take place today, owners of MTCN would incur a substantial loss from the issue price. Furthermore if the common stock price of ArcelorMittal MT does not increase in the future, than the arbitrary conversion would be a loser even at the current low price of MTCN. On the other hand if the steel industry revives as the economy perks up, MT should rise accordingly.
This preferred offers a good return on investment if the economy revives over the next 2 years. Greater steel use would increase the profits of MT. MTCN represents a genuine bargain if that occurs. One collects over 7% interest while one waits and later reaps the capital gains when the economy revives. On the other hand, if the economy sinks, so will the profits of MT. This would lead to more capital losses for MTCN. In this case the dividend would provide scant relief when the forced conversion takes place.
It appears that the economy will continue to grow over the next 2 years. This will give one ample opportunity to sell MTCN at a gain over that period of time. I would not wait for the conversion in 2016, but take profits if the economy is doing well in 2014 - 2015. If real dark clouds appear on the horizon for the economy during this period of time, exit quickly from this stock. There is the danger of the dividend being suspended if the economy really turns sour. So if one decides to buy this stock, be prepared to keep constant vigil on the economy and the steel industry in particular.
Additional disclosure: I am long MTCN.