Our goal is to present to you our IPO analysis for every new fixed-income security that enters the market and to find out if there is any trading potential. In this article, we want to shed light on the newest preferred stock issued by Federal Agricultural Mortgage Corp. (AGM). Even though the product may not be of interest to us and our financial objectives, it definitely is worth taking a look at.
The New Issue
For a total of 4M shares issued, the total gross proceeds to the company are $100M. You can find some relevant information about the new preferred stock in the table below:
Federal Agricultural Mortgage Corp. 5.70% Non-Cumulative Preferred Stock, Series D (NYSE:AGM.PD) pays a qualified fixed dividend at a rate of 5.70% and has a par value of $25. The new preferred stock is not rated by the Standard & Poor's and is callable as of 07/17/2024. Currently, the new issue trades above its par value at a price of $25.60, has a 5.57% current yield and a 5.33% yield-to-call.
Here is the product's Yield-to-Call curve:
"Federal Agricultural Mortgage Corporation (Farmer Mac), incorporated in 1987, provides a secondary market for a range of loans made to borrowers in rural America. The Company's segments include Farm & Ranch, USDA Guarantees, Rural Utilities, Institutional Credit and Corporate. Its secondary market activities are purchasing eligible loans directly from lenders; providing advances against eligible loans by purchasing obligations secured by those loans; securitizing assets and guaranteeing the payment of principal and interest on the resulting securities that represent interests in, or obligations secured by, pools of eligible loans; and issuing long-term standby purchase commitments (LTSPCs) for eligible loans. The loans eligible for the secondary market provided by Farmer Mac include mortgage loans secured by first liens on agricultural real estate, including part-time farms and rural housing (comprising the assets eligible for the Farm & Ranch line of business); agricultural and rural development loans guaranteed by the United States Department of Agriculture (USDA) (comprising the assets eligible for the USDA Guarantees line of business), and loans made by lenders organized as cooperatives to finance electrification and telecommunications systems in rural areas (comprising the assets eligible for the Rural Utilities line of business)."
Source: Reuters.com | Federal Agricultural Mortgage Corporation
Below, you can see a price chart of the common stock, AGM.
Farmer Mac has performed well after the peak of the Great Recession in 2008, and especially in the last 4 years after the common stock has been on the rise from $20s in the second half of 2015 to almost cross the $100 barrier in the mid of 2018.
For 2018, the common stock has paid а $2.32 yearly dividend. With the current market price of $71.82, the current yield of AGM is at 3.23%. As an absolute value, this means it pays $21.2M in dividends yearly. For comparison, the yearly dividend expenses for all outstanding preferred stocks (with the newly issued series H preferred stock) of the company is around $13.7M.
In addition, Farmer Mac's market capitalization is around $747M.
Below you can see a snapshot of Federal Agricultural Mortgage Corporation's capital structure as of the time of its last quarterly filing in March 2019. You also can see how the capital structure evolved historically.
Source: Morningstar.com | Company's Balance Sheet
As of Q1 2019, AGM had total debt of $18.8BM ranking senior to the newly issued preferred stock. The new Series D preferred stock rank is junior to all outstanding debt and equal to the other preferred stocks of the company that totals $205M. However, it must be noted that this enormous debt is guaranteed by the U.S. Department of Agriculture.
The Farmer Mac Family
AGM has 3 more outstanding preferred stocks:
- Federal Agricultural Mortgage Corp 6.875% Non-Cumulative Preferred Stock Series B (AGM.PB)*
- Federal Agricultural Mortgage Corp 6.00% Fixed-to-Floating Non-Cumulative Preferred Stock Series C
- Federal Agricultural Mortgage Corp 5.875% Non-Cumulative Preferred Stock Series A (AGM.PA)
*On May 13, 2019, the company announced the redemption of all outstanding shares of its 6.875% Non-Cumulative Preferred Stock Series B (AGM.PB) on June 12, 2019. As such, it will not be part of the following bubble charts. I'll compare the newly issued Series D preferred stock with the rest of its "brothers":
By Years to Call and Yield to Call:
By Yield to Call and Current Yield:
With yield-to-worst (equal to its YTC) of the newly issued preferred stock of 5.54%, AGM.PD is slightly better than the other preferred stocks of the group but it doesn't seem enough. AGM.PB was higher than the others, and expected to get the call considering the expectation of lowering interest rates. AGM.PA is the other preferred stock that is already trading post its call date, but with the nominal yield spread of 0.18%, the probability of redemption is insignificant. Which automatically makes it a little better the newly issued AGM.PD, as only after the first dividend received, you will be "in the money". As for the last but not least, AGM.PC, it is the best choice from the family. It will become the highest yielding one, with interest hike protection (the fixed-to-floating element), and even if the rates drop, it will be most likely redeemed on its call date, and the worst you can get is its Yield-to-Call of 5.43%. As a conclusion, I give my preferences to the Series C Preferred Stock.
In addition, in the following chart, you can see a comparison between the AGM's securities and the fixed-income securities benchmark, the iShares U.S. Preferred Stock ETF (PFF). What we see is a very close performance to PFF of AGM.PC and a slight outperforming of the callable AGM.PA.
Furthermore, there is a whole plethora of Agency Debt Bonds issued by the company, but it is difficult to make a good comparison. The picture below contains only a small part of all and is intended to show the lack of essential information about them.
This section contains all preferred stocks, issued by a 'Credit Services' company (according to Finviz.com) regardless of their type of dividend rate:
Except for the preferred stocks, issued by Capital One, the other preferred stock in this group is the floating rate SLMBP. I will try to make the most meaningful comparison by looking at their Years-to-Call and Yield-to-Call:
Source: Author's database
The higher the YTC, the better the security, which is also their Yield-to-Worst. The only one preferred stock that competes with AGM.PD and AGM.PC is COF.PG with its YTC of 5.25% for 2.5 years to its call date. However, its nominal yield of 5.20% and the fact it's the lowest one, makes it not good enough and too sensitive to interest rate changes. Besides its YTW of 5.20%, it is also the best we can get from this issue.
Addition to the iShares U.S. Preferred Stock ETF
With the current market capitalization of the new issue of over $100M, it was an addition to the S&P US Preferred Stock iShares Index during the last rebalancing in May. It is also included in the holdings of the main benchmark, PFF, which is the ETF that seeks to track the investment results of this index, and which is important to us due to its influence on the behavior of all fixed-income securities. I'll just remind you about the last year rally in the fixed-income borne from the redemption of the two "giants" HSEA and HSEB and the released cash of over $600M used from PFF to buy more of the rest of its holdings.
As fixed-income traders, we follow every preferred stock or baby bond, which is listed on the stock exchange. As such, AGM.PD, is an exception, and the homework we always do we share it with the public. It is not necessary for the IPO to be an arbitrage and a bargain, but in many cases, the new security happens to be better than the ones already trading on the market. In this case, in terms of returns, the new IPO seems to be fairly priced, compared mostly with its "brothers". However, if I have to choose, I will pick up AGM.PC as an extra insurance against any possible future rate hikes.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.