Not So Common Fixed-Income Preview

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Includes: BML.PG, BML.PH, GJO, LMRKN, PFF, PGF, PGX, PSK, PYS, SLMBP, SPLP.PA, TGP, TGP.PA, TGP.PB, TOO.PA, USB.PA, VRP
by: Arbitrage Trader
Summary

Floating rate preferred stocks.

Third-party trust preferred securities.

Trust preferred stocks.

Preferred units, K1.

What has changed this month?

In this article, I'll review the less popular fixed-income securities, sorted into several categories: floored preferred stocks, third parties, trust preferred stocks, and the preferred units, including those with K-1. This makes a total of 89 securities, half of which are part of the biggest ETF for fixed-income securities: the iShares U.S. Preferred Stock ETF (PFF).

As we can see in the chart below, despite the fact that just 15% of PFF's market capitalization consists of the aforementioned securities, which corresponds to 11% of the fund's holdings, we are talking for around $2B in general. As for the third-party trust securities, they are not part of any of the top 5 fixed-income ETFs' holdings (PFF, PGF, PGX, PSK, and VRP).

Source: Author's spreadsheet

Now that these products have our attention, we are continuously monitoring all preferred stocks by several groups and will reinstate our Monthly Review, publishing a recap of the groups of interest.

TNX - CBOE 10-Year Treasury Note Yield Index ($TNX)

Source: Tradingview.com

iShares Preferred and Income Securities ETF (PFF)

Source: Tradingview.com

SPDR S&P 500 ETF (SPY)

Source: Tradingview.com

The most essential thing for fixed-income investors lately is that TNX has settled at the 2.5% yield mark. Supported by the dramatically downgraded Federal Reserve expectations on the rate path, released by the Fed last month, followed by the dovish-than-expected Fed Chair speech at the press conference, the Treasury yields have settled close to their 1-year low. The fixed-income securities, as we can see in the second chart, are in a bull market since the start of the year.

Fixed-income securities have continued their New Year's rally with PFF, and PGX has risen 10% from their December 2018 lows. As for the equity markets, they had entered into a bear market, and the S&P 500 recorded its worst December since 1931. Everything seems to be behind us. Furthermore, investors may be happy with the New Year's rally and the S&P 500 trading close to its all-time high at the time of the US and China trade war tensions, the slowing economic growth, and the Brexit mess.

The Review

1. Floating-Rate Preferred Stocks

This group of preferred stocks pays a higher spread above LIBOR and sets a minimum nominal yield. Their current yield is their yield to worst, and if they trade below their redemption price, they have some extra value in their sleeping long-term call option on the LIBOR. Currently, almost all of the $25 par floating rate preferred stocks pay a fixed dividend because LIBOR is still too low to trigger their floating nature (the current 3-month LIBOR is sitting at its 10-year high at a rate of 2.58113%). The exceptions are SLMBP, BML-G, BML-H, and USB-A. Here, you can see their current yields and at what percentage of par they trade:

Source: Author's database

Here is the full list:

Source: Author's database

Later, I found a lot of arbitrage opportunities in this type of security. After looking at the charts above in the article, with the constantly increasing LIBOR rate, their 5% current yield is not as bad as it sounds, especially after they pay a qualified dividend. The big risk with these securities is that they are the lowest nominal yielders, and in a rising alternative yields environment, without their built-in LIBOR call option able to compensate, they have the highest duration and ironically enough are hit the hardest.

How have they moved for the last month?

Source: Author's database

For a clearer view, I've excluded USB-A as it has a par value of $1,000. What can be said about the group is that there were no big movements for the past month.

2. Third Parties ("TRuPS")

The Third Party Trust Preferred Securities - TRuPS - are actually debt instruments masquerading as a stock. A company creates a trust and issues a bond to that trust. The trust then issues TRuPS to the public, backed by the interest income the trust receives from the bond.

2.1 Floating

Source: Author's database

The only good thing about these is that they are term securities and will eventually go to their par value after 16 years (GJO after 12).

2.2 Fixed

Source: Author's database

The in-depth problems of JCP are keeping its securities at the 30% Yield-to-Worst level, and there is no perspective for improvement. The following price chart shows that, even on the 70% gain of JCP, the third parties remained flat.

Source: Tradingview.com

2.3 The full list:

Source: Author's database

How have they moved for the last month?

Source: Author's database

3. Trust Preferred Stocks (also known as hybrid securities)

The difference between the ordinary preferred stocks and the trust preferred stocks is that the latter offers a company the advantage of paying tax-deductible interest on the debt securities of the trust while they are somehow able to ignore the existence of the trust's debt on their balance sheet. Another important thing here is that the trust preferred's debentures generally rank senior to the company's traditional preferred stocks.

3.1 Call Risk, YTC < 0

Source: Author's database

3.2 No call risk:

Source: Author's database

Some more information about this and the other issues in the following picture:

Source: Author's database

3.3 One-month change:

Source: Author's database

4. Preferred Units

4.1 Fixed rate

Source: Author's database

For a better view, SPLP-A and TOO-A are excluded from the bubble chart because of their yield-to-call.

The list:

Source: Author's database

4.2 Fixed-to-Floating

  • By Years-to-Call and Yield-to-Call

Source: Author's database

  • By Yield-to-Call and Current Yield

Source: Author's database

  • The full list:

Source: Author's database

4.3 Floating-to-Fixed

Also, there is one issue that currently pays a floating dividend rate, and after 7 years, if it does not get redeemed, it will pay a fixed dividend rate: Landmark Infrastructure Partners LP Series C Floating-to-Fixed Rate Cumulative Perpetual Redeemable Convertible Preferred Units (LMRKN).

Source: Author's spreadsheet

LMRKN pays a floating dividend rate of the 3-month LIBOR rate plus 4.698% and has a minimum protection clause of 7%. With the current rate of the 3-month LIBOR, its current nominal yield is 7.28%. With the price of $24.65, this means it has a current yield of 7.38% and yield-to-call of 7.79%.

4.4 K-1 Only (including the preferred stocks)

The chart below contains all preferred units and stocks with Schedule K-1 with non-suspended distribution by their yield-to-call and current yield.

Source: Author's database

Furthermore, for a better idea, SPLP-A is also excluded from this chart because of its 212% yield-to-call.

Also, it is important to be noted effective January 1, 2019, Teekay LNG Partners LP (TGP) will be treated as a corporation, instead of a partnership for U.S. federal income tax purposes and common and preferred unitholders (TGP-A and TGP-B) will receive Form 1099s instead of Schedule K-1s relating to distributions taxable as dividends commencing in 2019.

4.5 One-month change

Source: Author's database

The low volatile last month is also confirmed by the preferred units.

5. Ex-Dividend Dates For The Next Month:

Which of the aforementioned securities are ex-dividend until the end of April? The date given is predicted on the base of the previous ones and may vary by a few days.

Source: Author's database

The ex-dividend dates are very useful for every fixed-income investor that practices the dividend capture strategy.

6. A Look At The Most Recent IPO:

There are 2 Series of preferred units issued for the past month: NGL Energy Partners LP 9.625% Class C Fixed-to-Floating Cumulative Redeemable Perpetual Preferred Units (NYSE: NGL-C):

Source: Author's spreadsheet

....and

Energy Transfer Operating LP 7.60% Ser E Fixed-to-Floating Cumulative Redeemable Perpetual Preferred Units (NYSE: ETP-E):

Source: Author's spreadsheet

It is still trading on the Grey market under the temporary ticker symbol ETPEP.

Conclusion

This is how our small world of these not so common fixed-income securities looks at the end of April 2019.

The issue, I still like and remains to be my biggest position is PYS. You can check my article about PYS where I explain in detail the logic behind the trade: PYS: The Biggest Arbitrage In Fixed Income At The Moment.

Note: This article was originally published on April 22, 2019, and some figures and charts may not be entirely up to date.

Disclosure: I am/we are long PYS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.