Fixed-To-Floating Preferred Stocks And Units Complete Review

|
Includes: DLNG.PB, ETP.PE, JE.PA, PFF, PGF, PGX, VRP, XAN.PC
by: Arbitrage Trader
Summary

Fixed-to-floating preferreds and units sorted into groups.

How does the yield curve look?

What has changed for the past month?

In this article, I'll review the fixed-to-floating rate preferred stocks and units, sorted into several categories. There are 95 issues in our database that trade on primary exchanges. Maybe the most important ETF for this type of security is the Invesco Variable Rate Preferred ETF (VRP). As we can see in the charts below, despite the fact that more than half of the holdings are corporate bonds, which occupy 71% of the market capitalization of the fund, still, with $436 million in preferred stocks, VRP has no analog in regard to floating-rate securities.

Source: Author's spreadsheet

However, when we are talking about fixed-income ETFs, the influence of the iShares U.S. Preferred Stock ETF (PFF), the Invesco Financial Preferred ETF (PGF), and the Invesco Preferred Portfolio ETF (PGX) should not be underestimated, as with a total of $22 billion of preferred stocks and baby bonds, they are the benchmark of this market. I'll just remind you about last year's rally in fixed income borne from the redemption of the two "giants" HSEA and HSEB, and the released cash of over a billion dollars used from PFF, PGF, and PGX to buy more of the rest of its holdings.

We are continuously monitoring all preferred stocks by several groups and will reinstate our Monthly Review, publishing a recap of the groups of interest.

First, let's take a look at the main indicators that we follow and their behavior during the last month.

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

Source: TradingView.com

Invesco Variable Rate Preferred ETF (VRP)

Source: TradingView.com

The most significant indicator for all fixed-income investors, the 10-year Treasury Note Yield (TNX), has broken through the psychological 2% yield mark, and it has fallen to the rate of 1.45%, before making a slight bounce at the rate of 1.61%. With the iShares 20+ Year Treasury Bond ETF (TLT) being close to its all-time high this month, a 2-10 yield curve inverting was observed for the first time since 2007. All bond prices are rising as investors prefer to put their money into safer investments, pushing yields lower, and triggering a recession warning. An inversion for this part of the yield curve, where the 10-year yield slips below the 2-year yield, has preceded every recession in the last 40 years. The current yield of the 2-year Treasury Note is at 1.567% (lower from the 10-year). Despite the risk of recession, the fixed-income securities have followed the bond rally and remained slightly bullish, and as we can see in the second chart, VRP has continued its rise with a more than 11% gain from its December 2018 lows, supported mostly by the high expectations of a series of rate cuts between now and the end of the year. For information, the next FOMC meeting will be held on September 17 and 18, and investors are currently pricing a 64% probability for a rate cut after the two-day meeting. As for the equity markets, the S&P 500 is on the way to the $300 barrier after the U.S. and China have agreed to renew trade talks.

The Review

1. All Fixed-To-Floating Preferred Stocks And Units

Here, I will post the Yield Curve for all that are probably redemptions in the next 10 years. The point here is that their Yield-to-Call is the best you can get out of them, because after they become floating, they also become redeemable, which pins their price to par after their call date. If the stock trades higher than its par plus accrued dividend after the call date, it will have a negative Yield-to-Call, and to have such an expectation is financially unreasonable.

1.1 Qualified Yield curve:

For a better view, JE-A and DLNG-B are excluded because of their 30% and 23.5% Yield-to-Call, respectively.

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

Source: Author's database

  • By Yield-to-Call and Current Yield:

Source: Author's database

1.2 Not Qualified:

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

Source: Author's database

  • By Yield-to-Call and Current Yield:

Source: Author's database

2. Financials

Here is a close view of all high-quality financial preferreds, as their average Yield-to-Worst (Yield-to-Call) is at a rate of 3.98%, while the rated ones are at an average YTC of 3.72%. There is a shift of 0.11% (↓) in the Yield Curve of the whole group since our previous article in April (0.23%(↓) for rated ones).

  • 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

3. REIT Fixed-to-Floaters

They all pay a non-qualified dividend rate. The average Yield-to-Call of this group is sitting at a rate of 6.80% (there is a change of 0.41% (↓) in the Yield Curve of the group since the last month).

  • 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. The High-Yield Ones

This is a list of the Shipping, Energy-related and other high-yield preferred stocks, with an average Yield-to-Call of 11.10% (a shift of 0.60% (↑) for a month), mainly because of the shakedown of JE-A losing 30% of its value for a month.

  • 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

5. Fixed Reset Rate Preferred Stocks

In addition, a new group of preferred stocks is being formed: Fixed Reset Rate Preferred Stocks. Its features are almost the same as the Fixed-to-Floating Securities, as instead of the three-month LIBOR, they will pay a floating dividend at a rate of the five-year U.S. Treasury Rate plus allowance. At this point, only 3 are the stocks of this type, but this number is expected to grow as the current interbank lending rate benchmark, the LIBOR, will phase out by the end of 2021.

Source: Author's database

6. Ex-Dividend Dates

Which fixed-to-floating rate and fixed reset rate preferred stocks are ex-dividend until the end of the month? The dates given are predicted on the basis 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.

7. A Look At The Most Recent IPOs

There is one new security issued for the past month: Fortress Transportation & Infrastructure Investors LLC 8.25% Fixed-to-Floating Rate Series A Cumulative Perpetual Redeemable Preferred Shares (FTAI-A)

Source: Author's spreadsheet

FTAI-A is currently trading on the Grey market under the ticker symbol FRTRP until it starts trading on the NYSE.

8. How do they move?

Here is the general idea of how the fixed-to-floating rate preferred stocks and units moved for the last month.

Source: Author's database

JE-A had a disastrous month, losing 50% for its value just for a week, before bouncing to the current market price of $16, due to the company's crushing earnings. Just Energy has lost 2/3rd of its market capitalization after it suspended its common stock dividend and announced its intention to sell its UK business. At this point, the preferred stock, JE-A, is still paying distribution to its holders.

Take a clearer view of the rest of the securities:

Source: Author's database

Conclusion

This is what our small world of fixed-to-floating rate preferred stocks look like at the start of September. After the amazing New Year's rally is still going on, the prices of all fixed-income securities are reaching new highs. In fact, yields fell with each month and there has been no correction since December last year, as the fixed-income remained bullish, and it is still hard to find a worthy stock without adding some extra credit risk. As we can see, the highest-quality issues, the preferred stocks issued by a bank, are now below the threshold of 4% and the rates are even lower. The securities issued by REITs are at the average YTW of below the 7% now, and considering their not-qualified dividend, we get a qualified equivalent of 5.60%. As for the last group, there is a security that I still have my biggest position in ETP-E that still has upward potential with this constant rally, as long as one finds a way to deal with K-1. Other securities I find worthy are MBINO from the financials, as it is the second-highest yielder from the group, while the company is very low leveraged. When looking at the REITs, I find valuable XAN-C and NRZ-B that are still giving good returns, as XAN-C is a bit more speculative knowing the size of the company, while NRZ is one of the largest mREITs, paying a $800 million common stock dividend (30x times more than what it pays to the preferred stockholders that are senior) that makes its preferred stocks look tempting.

Note: This article was originally published for our subscribers on 09/09/2019 and some figures and charts may not be entirely up to date.

Disclosure: I am/we are long ETP.PE. 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.