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Not So Common Fixed Income Preview

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Includes: ARES, ARES.PA, BEP.PA, BPY, BPYPN, BPYPO, BPYPP, CUBB, CUBI, CUBI.PC, CUBI.PD, CUBI.PE, CUBI.PF, DXB, GJH, HLM.P, JBK, JCPNQ, LMRK, LMRKN, LMRKO, LMRKP, NGLS.PA, OAK.PB, OSBCP, PFF, PGF, PGX, PIY, PSK, PYS, SLM, SLMBP, USB, USB.PA, USB.PH, USB.PM, USB.PO, USB.PP, VRP, WTRE, WTREP
by: Arbitrage Trader
Summary

A review of all floating-rate preferred stocks, third-party trust preferred securities, trust preferred stocks, and preferred units.

Yields stay almost unchanged since June.

What has changed for the last month?

Introduction

This month, we have already looked at the main groups of fixed income securities: the fixed rate preferred stocks, the fixed-to-floating preferred stocks and units, and all baby bonds into three separate articles. In our fourth monthly article, I review the less popular fixed income securities, sorted into several categories: floating rate preferred stocks, third parties, trust preferred stocks, and the preferred units, including those with a K-1. This makes a total of 82 securities, 50 of which are part of the largest primary exchange-traded fixed income ETF: the iShares Preferred and Income Securities ETF (PFF). As we can see in the chart below, despite the fact that just about 10% of PFF's market capitalization consists of the aforementioned securities, which also corresponds to 8% of the fund's holdings, we are talking around $1.33B in general. As for the third-party trust securities, they are not part of any of the top five fixed-income ETF 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 (NASDAQ:PFF)

Source: Tradingview.com

SPDR S&P 500 ETF (NYSEARCA:SPY)

Source: Tradingview.com

There is almost nothing new when looking at the main indicators. The 10-year Treasury Note Yield (TNX) has settled at its lows, at a rate of 0.59%. The fixed income securities, as seen in the second chart, continue to tick slightly higher, while the equities, in the face of S&P 500, are almost at their all-time high. Recently, the tech stocks are being the strongest sector, with the NASDAQ Composite Index gaining almost 17% for 2020. All this, in the background of the relentless pandemic, where the reported cases with COVID-19 in the US are already 1.3% of the whole population.

The Review

1. Floating Rate Preferred Stocks

This group of preferred stocks pays a higher spread above LIBOR and sets a minimum nominal yield. While they all trade below their redemption price, their current yield will be their yield to worst. 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 three-month LIBOR continues to drag lower, to a rate of 0.24675%, converging with its successor, the three-month SOFR. The three-month SOFR, which is published by the New York Federal Reserve and will be the LIBOR replacement for the dollar-denominated loans and securities, is currently at a rate of 0.10%. Currently, the only exceptions that do not have a minimum nominal yield are Sallie Mae's (NASDAQ:SLM) SLMBP, Watford Holdings' (NASDAQ:WTRE) WTREP, and Customers Bancorp's (NYSE:CUBI) CUBI-C. This means that the falling of the LIBOR immediately means lowering of their distribution rate. While SLMBP does not have a minimum nominal yield in principle, WTREP and CUBI-C are two fixed-to-floating preferred stocks, trading post their call dates that have switched their nominal yields from a fixed rate to a floating rate, related to the three-month LIBOR. CUBI-C is even a recent addition to this group after it had passed his call date last month, on 06/15/2020. So far, it had taken part in our Fixed-to-Floating Review. 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

The security with the highest current yield continues to be Watford's WTREP. Even though it trades the highest of all, at $25, it has a current yield of 7.25%, 0.70% higher from the second-highest yielder, the other ex-F2F preferred stock, CUBI-C. Despite its unenviable nominal yield of 1.95%, Sallie Mae's SLMBP comes third with a current yield of 6.19%, mainly due to the fact it trades at barely 31% of its PAR. If we look at the group more generally, the issues yield currently at an average current yield of 4.61% (0.10% lower than the previous month), while they trade on the average of 87% of PAR.

How have they moved for the last month?

Source: Author's database

For a clearer view, I've excluded USB.PA as it has a par value of $1,000.

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.

Since all TRuPS have a stated maturity date, meaning they are term securities, the best way to be observed is by their yield-to-maturity, which is also their yield-to-worst. These also are the fixed income securities with the lowest liquidity with issues of no more than 1-2M shares.

2.1 Floating (LIBOR and Treasury related)

Source: Author's database

2.2 Fixed

Source: Author's database

2.3 The full list:

Source: Author's database

The most significant change lately is definitely the delisting of all J.C. Penney's (OTCPK:JCPNQ) securities on May 20, along with the delisting of Frontier Communications' (PIY) on May 15. After long agony, JCP's issues were removed from the NYSE, after the company announced that it had filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. As for the rest, R.R. Donnelley & Sons' (NYSE:RRD) PYS is the highest yielding third-party trust security with a yield-to-maturity of 17.68% as the issue is trading at 52% of its par value. The rest TRuPS return significantly lower, as the next-highest yielders are United States Cellular's (NYSE:USM) GJH and Origen Phoenix LLC's JBK with a YTM of 6.69% and 5.29%, respectively. All other issues have a yield-to-worst of below the 5% threshold.

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

3.3 The full list:

Source: Author's database

Note that The Hillman Companies' HLM had its distribution payments suspended on April 3, 2020, as the company seeks to preserve liquidity due to the uncertainty of the financial impact of the COVID-19 pandemic. But, as you can see, this does not prevent the stock from trading with a premium above its par value. For the rest, the issues that do not carry any call risk are all trading below their par value, meaning their yield-to-worst is equal to their current yield. Currently, these trust preferreds are giving an average current yield of 6.74% (0.17% lower for a month) while trading at an average of 90% of their par value.

How have they moved for the last month?

Source: Author's database

4. Preferred Units

4.1 Fixed rate

Source: Author's database

Only the investment-grade units, ARES-A, OAK-A, OAK-B, and BEP-A, are located above $25 and their yield-to-worst is equal to their yield-to-call, while for the rest, they sit below PAR and have a YTW equal to their current yield.

The list:

Source: Author's database

4.2 Fixed-to-Floating

All fixed-to-floating preferred units are issued by an oil-related company (including shippings). Like most of the fixed-rate units above, the fixed-to-floaters are trading below PAR with a YTW equal to the current yield. Out of the 18 issues, there is none that is callable, but there is an issue with its call date occurring this year in November, Targa Resources Partners' NGLS-A. If the company does not redeem it, NGLS-A will start paying a dividend at the rate of the three-month LIBOR plus 7.71%.

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

Source: Author's database

  • By % of PAR and Current Yield

Source: Author's database

  • The full list:

Source: Author's database

4.3 Floating-to-Fixed

Also, there's one issue that currently pays a floating dividend rate, and after a little more than five 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 three-month LIBOR rate plus 4.698% and has a minimum protection clause of 7%. With the current rate of the three-month LIBOR, its current nominal yield is at its minimum rate of 7.00%. With the price of $24.94, this means it has a current yield of 7.02% and a yield-to-call of 7.06%.

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 % of PAR and current yield.

Source: Author's database

4.5 One-month change

Source: Author's database

5. Ex-Dividend Dates For The Next Month:

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

Source: Author's database

6. A Look At The Most Recent Redemptions:

There are only 2 trust preferred stocks called for redemption this year:

Old Second Capital Trust I, 7.80% Cumulative Trust Preferred Securities (OSBCP):

Source: Author's spreadsheet

And...

Deutsche Bank Contingent Capital Trust II 6.55% Trust Preferred Securities (DXB):

Source: Author's spreadsheet

7. A Look At The Most Recent IPOs

There also are two new series of preferred units issued since the new year:

Brookfield Property Partners L.P. 5.750% Class A Cumulative Redeemable Perpetual Preferred Units Series 3 (BPYPN)

Source: Author's spreadsheet

And...

Brookfield Renewable Partners L.P. 5.25% Class A Preferred Limited Partnership Units, Series 17 (BEP.PA)

Source: Author's spreadsheet

Conclusion

This is what our small world of not so common fixed income securities looks like at the end of July. Basically, there is nothing I really like, as, after more than 3 months of recovering, I don't see any real bargains. The liquidity in all fixed-income securities has decreased significantly, while all the attention is focused on stocks like Tesla (NASDAQ:TSLA), Amazon (NASDAQ:AMZN), and etc. Still, this week is the monthly two-day meeting of the FOMC, where there is an opportunity for things to move a bit.

Note: This article was originally published for our subscribers on 07/27/2020 and some figures and charts may not be entirely up to date.

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.