Fixed-To-Floating Preferred Stocks And Units Complete Review
Summary
- Fixed-to-floating preferreds and units sorted into groups.
- How does the yield curve look?
- What has changed in the past month?
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Introduction
In this monthly article, I review the fixed-to-floating rate preferred stocks and units, sorted into several categories. There are 105 issues in our database that trade on primary exchanges. Out of all 105 securities, there are none that are callable, as there are only two issues' call dates that occur this year, CUBI.PC and NGLS.PA. 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 70% of the market capitalization of the fund, still, with $461M in preferred stocks, VRP has no analog with 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 $23.5B of preferred stocks and baby bonds, they are the benchmark of this market. 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.
CBOE 10-Year Treasury Note Yield Index (TNX)
Source: TradingView.com
Invesco Variable Rate Preferred ETF
Source: TradingView.com
SPDR S&P 500 Trust ETF (SPY)
Source: TradingView.com
Crude Oil Monthly chart
Source: TradingView.com
Currently, the main driving force for all exchange-traded securities continues to be the rapidly-expanding-around-the-world coronavirus, COVID-19, increasing the risk of a pandemic. After the turbulent last week of February, where the S&P 500 has dropped a total of 11.5% for the week, making its worst one since the Great Recession, markets continue to be nervous, as the only positive moment in the past week was the relief rally on Wednesday after the surprising lead of the former Vice President Joe Biden over Vermont Senator Bernie Sanders from Super Tuesday. However, investors have quickly changed their mood into a further selling of all equities, concerned about the danger that the virus will bring the world into a recession. Driven by the worry about the economic fallout from the spreading coronavirus and the latest oil price war (the crude oil is trading 33% lower after the weekend events), the market participants run away from equities, preferring to place their money into a safer alternative to stocks, bringing the U.S. Treasuries to their all-time highs. The most significant indicator for all fixed-income investors, the 10-year Treasury Note Yield (TNX), opened for trading the evening before the Monday trading session at its all-time below the rate of 0.50%, as the entire curve is trading below the 1% threshold for the first time in history. The fixed-income securities, in turn, seem to follow the common stock volatility, and as you can see in the second chart, Invesco Variable Rate Preferred ETF had declined 7% from its most recent peak, just before a 2% bounce back. The current constantly evolving events inevitably lead to a big change in the status quo that has taken place for months, and continue straight to the essence of the article, exploring all fixed-to-floating rate preferred stocks' returns.
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.
I want to start with a reminder about the issue that had its dividend suspended on December 2, 2019, Just Energy's JE.PA. The company suspends the dividend on its Series A Preferred Stock until its senior debt to EBITDA ratio is no more than 1.5-to-1 for two consecutive fiscal quarters. This is the reason JE.PA will not take part in any of the yield bubble charts but you will find it in the "High-Yield Ones" table and in the "How do they move?". At this point, this is the only security from this review that currently doesn't pay distribution.
1.1 Qualified Yield Curve
- 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 4.22%, while the rated ones are at an average YTC of 4.07%. There is a shift of 1.05% (↑) in the Yield Curve of the whole group since our previous article in January (also 1.41% (↑) for rated ones).
- By Years-to-Call and Yield-to-Call:
Source: Author's database
- By Yield-to-Call and Current Yield:
The upper right side stock is the one with the highest YTC and the highest CY at the same time. In this case, it is the speculative one, TECTP, as there is very little information available about the company that is private, and the risk in it is the uncertainty. Generally, together with MBNKP, the two are very far from the quality of the rest of the group securities. That's why I will exclude them from the YTC-CY bubble chart, but you can see more information about the two preferred stocks in the full list below. Furthermore, CUBI-C is the only issue with a negative Yield-to-Call and together with RY-T (1.05% YTC) will also be excluded from the bubble chart.
Source: Author's database
- The Full List
Source: Author's database
3. REIT Fixed-to-Floaters
Currently, all securities in this group are issued by a mortgage REIT. As such, they all pay a non-qualified dividend rate. The average Yield-to-Call of this group is sitting at a rate of 7.53% (there is a change of 1.11% (↑) in the Yield Curve of the group since the last month). For a clearer view of the main group, I'm excluding AI-C from the bubble charts, as it is the only one to trade below its par value, at an 11% discount. Still, it will take part in the table list below.
- 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 12.65% (a shift of 4.06% (↑) 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 4 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
This 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 who practices the dividend capture strategy.
7. A Look At The Most Recent IPOs
There are 4 new fixed-to-floating preferred stocks, with an average Nominal Yield of 6.475%, all issued by a mortgage REIT, for the past month:
Source: Author's database
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
Due to the last week's selling, there are almost no positive stocks for the past month (only 7 securities have capital gain for the last 30 days). The average loss of the group is worth $1.50 (6% for a $25 stock).
Conclusion
This is what our small world of fixed-to-floating rate preferred stocks and units looks like before the second Monday of March 2020. Just before February's last week all fixed-income securities were extremely overvalued, and if we take a look at VRP, we can see the ETF trading at its all-time high level. The average Yield-to-Call of all financial preferred stocks was 3.17% for all and 2.66% for the rated ones. The average return of the mREITs' securities was below 6.50% and the highest yielding group sat at the rate of 8.59%. There was almost no capital appreciation left on, it was almost impossible to invest without taking an extra credit risk, and my strategy was to keep most of my buying power free, seeking for better entries. Now when we have such strong panic selling, the yields have sharply risen to the range of over 4% for the rated financials, 7.50% for the mREITs and 12.65% for the highest yielding (mostly shippings and oil-related ones) that is a shift of 4% since the last month. I would really want to give perspective, but there are many global uncertainties now. My approach is to be perfectly hedged while the storm passes and to trade intraday. Being hedged is a must for me in this market. There is no cure for panic, and it does not matter what you hold.
Note: This article was originally published for our subscribers on 03/09/2020 and some figures and charts may not be entirely up to date.
Trade With Beta
The Trade With Beta team has been submerged in the universe of preferred stocks and baby bonds for almost a decade, and we decided to share our knowledge and expertise through the inception of this service. We attempt to cover all aspects of these products, from IPOs to pair trades and portfolio picks and, last but not least, issues. Additionally, once a month, we go through all different groups of fixed-income instruments to make sure that nothing has gone unnoticed.
This article was written by
Arbitrage Trader, aka Denislav Iliev has been day trading for 15+ years and leads a team of 40 analysts. They identify mispriced investments in fixed-income and closed-end funds based on simple-to-understand financial logic.
Denislav leads the investing group Trade With Beta, features of the service include: frequent picks for mispriced preferred stocks and baby bonds, weekly reviews of 1200+ equities, IPO previews, hedging strategies, an actively managed portfolio, and chat for discussion. Learn more.Analyst’s 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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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