Some time ago, I wrote an article on Annaly Capital Management's (NLY) preferred stock. My conclusion on the preferred was:
Bottom line: If you see hard times coming at Annaly in terms of its portfolio performance or dividend sustainability (recognizing the spread compression occurring within the portfolio, if they do not re-lever their portfolio, dividend cuts will continue), the Annaly's Series A preferred shares are a viable option for income sustainability. They can also be used to complement the shares where total exposure to the name takes place with both common and preferred shares. Either way, it makes sense to look at NLY-A as a portfolio holding.
One of the primary concerns raised by readers and investors was that the preferred was callable and traded at a premium. Well, starting today there will be an option that eliminates these concerns.
Annaly Capital has announced they will be issuing a new Series C preferred stock. Here are the details (any emphasis mine):
| Issuer | Annaly Capital Management |
| Security Type | Cumulative Redeemable Preferred Stock |
| Series | Series C |
| Par | $25.00 |
| Coupon | Roughly 7.6% (about 20bps wide to existing) |
| Optional Redemption Date | May 2017 |
| Dividends | Dividends will be payable quarterly in arrears on March 31, June 30, September 30 and December 31 of each year |
| Change of Control | Upon the occurrence of a Change of Control, Annaly may, at their option, redeem the Series C Preferred Stock, in whole or in part, within 120 days after the first date on which such Change of Control occurred, for cash at a redemption price of $25.00 per share |
| Conversion Rights | Upon the occurrence of a Change of Control, each holder of Series C Preferred Stock will have the right (subject to the company's election to redeem the Series C Preferred Stock in whole or part prior to the Change of Control Conversion Date) to convert some or all of the Series C Preferred Stock into a number of shares of our common stock. |
| Voting Rights | Whenever dividends on are in arrears for six or more quarterly dividend periods, whether or not consecutive, the number of directors constituting the board of directors will, subject to the maximum number of directors authorized under their bylaws then in effect, be automatically increased by two by reason of the election of directors by the holders of any other class or series of our preferred stock. |
| Use of Proceeds | NLY intends to use the net proceeds of this offering to purchase mortgage-backed securities. They also may use net proceeds from this offering for general corporate purposes, which may include the retirement of long-term indebtedness, additional investments and repayment of short term indebtedness. They are not taking out the Series A preferred. |
| Prospectus | Initial prospectus |
Note the definition of change of control:
A "Change of Control" is deemed to occur when, after the original issuance of the Series C Preferred Stock, the following have occurred and are continuing:
the acquisition by any person, including any syndicate or group deemed to be a "person" under Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, of beneficial ownership, directly or indirectly, through a purchase, merger or other acquisition transaction or series of purchases, mergers or other acquisition transactions of our stock entitling that person to exercise more than 50% of the total voting power of all our stock entitled to vote generally in the election of our directors (except that such person will be deemed to have beneficial ownership of all securities that such person has the right to acquire, whether such right is currently exercisable or is exercisable only upon the occurrence of a subsequent condition); and
following the closing of any transaction referred to in the bullet point above, neither we nor the acquiring or surviving entity has a class of common securities (or American Depositary Receipts representing such securities) listed on the New York Stock Exchange (or the NYSE), the NYSE Amex Equities (or the NYSE Amex) or the Nasdaq Stock Market (or Nasdaq), or listed or quoted on an exchange or quotation system that is a successor to the NYSE, the NYSE Amex or Nasdaq.
In other words, if they are taken out by a public company that continues to be listed, there is no change of control.
Relative Value
In order to get a feel for the relative value of the Series C, here are prices and yields of their existing preferred stock, MFA Financial's (MFA) Series A and American Capital Agency's (AGNC) Series A:
(Click to enlarge)
If the deal comes as I expect (about 20bps wide to existing or 7.6%), it has value relative to existing, but still trades inside AGNC (which has historically been the case).
Bottom Line: Based on my price thoughts of 7.6% (possibly a couple tighter), the Series C is very attractive relative to the NLY-A as it extends call protection and brings cost to par (for a positive yield-to-call). The swap from NLY-A to NLY-C (assumed ticker) makes absolute sense. This new Annaly Series C preferred stock should be considered by income investors as a compliment to an existing portfolio - either as a new addition or on swap from the existing Annaly preferred stock.
FYI:
Concurrently with the preferred stock offering, Annaly is offering $750.0 million aggregate principal amount of Convertible Notes due 2015 ($862.5 million aggregate principal amount if the underwriters fully exercise their over-allotment option with respect to that offering).
This convertible note will replace the April 3, 2012, conversion of all of its outstanding shares of 6% Series B Cumulative Convertible Preferred Stock (or Series B Preferred Stock) into shares of its common stock in accordance with the terms of their Series B Preferred Stock. In the conversion, 771,737 shares of Series B Preferred Stock were converted into 2,362,595 shares of common stock.
Disclosure: I am long REM.
Additional disclosure: This article is for informational purposes only, it is not a recommendation to buy or sell any security and is strictly the opinion of Rubicon Associates LLC. Every investor is strongly encouraged to do their own research prior to investing.
