Every now and then, the market throws a curve ball at investors. Some investors let it slide and others simply try to take a swing no matter what. The desperation of many income investors has caused companies to maximize profitability by lowering their borrowing costs. With Bernanke keeping rates low, investors don't want to be holding cash and would rather invest it in some assets instead.
PNC (PNC) issued its series R preferreds last month. The company will raise $500 million through this offering. Not a bad sum of money, but the real sweet deal for them is their yield on the preferreds. The yield is only 4.85%. Now I understand interest rates are low, but how exactly is PNC able to lock in that rate when JP Morgan (JPM) has a yield of 5.15% on its series Q?
The fact that PNC is able to lock in such a low borrowing cost compared to J.P. Morgan might be due to a few reasons. One is that J.P. Morgan could seem riskier due to an investment banking arm with a large focus on trading. However, I don't buy this story. JPM is the largest bank in the country with a strong balance sheet.
Seeing PNC's preferred made me chuckle, but then I became slightly disappointed when I saw that the preferreds were trading right near par value. So it seems investors are buying up the security. I also don't like the fact that the preferreds are not paid quarterly, they are bi-annually. As an income investor, I want to see a decent yield and a moderate payment frequency.
Some of you may argue that investors could be buying the preferreds since the rate will be adjustable in 2023. I wrote a recent article why these adjustable rate preferreds are not as attractive as many investors would think. This still doesn't really explain the fact PNC has such a low borrowing cost compared to a company like JPM.
Income investors should avoid PNC's preferreds at all cost. The mix of a low yield and bi-annual payment frequency is really unappealing, especially given that other banks have preferreds with much better terms. I would much rather see investors hold onto cash than be forced to buy a security like this. When interest rates rise, it's very likely that preferreds like this will be hit first. Don't fall for the trap.