Fixed-To-Floating Preferred Stocks And Units Complete Review

Introduction

In my second article for July, I review all exchange-traded fixed-to-floating rate preferred stocks and units, sorted into several categories. There are 106 issues in our database that trade on primary exchanges. Out of all 105 securities, there are none that are callable, as there is only one issue, whose call dates occur this year, NGLS.PA (in November). In our previous F2F Review in June, we noted that there were 2 issues, but the other one, CUBI.PC, passed its call date and it is now practically a floating rate preferred stock. This is also the reason, it is dropped from this analysis and will be included in our ‘Not So Common Review’ at the end of the month. 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 it is reducing its stake in the exchange-traded preferred stocks and now 74% of the market capitalization of the fund are corporate bonds, still, VRP has around $360M in variable-rate preferred stocks and has no analog as regards to the 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 $22.7B 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 (VRP)

Source: TradingView.com

SPDR S&P 500 Trust ETF (SPY)

Source: TradingView.com

Invesco QQQ Trust ETF (QQQ)

Source: TradingView.com

For some time, the most significant indicator for all fixed-income investors, the 10-year Treasury Note Yield (TNX), stands in a narrow range close to 0.70%, as now it is at the rate of 0.66%. The situation is also similar with the Invesco Variable Rate Preferred ETF, VRP, which is in a range since May. However, this is not a guarantee that the preferred securities are behaving in exactly the same manner because, as we have already seen, a smaller and smaller part is contained in this ETF. As for the equity market, in the face of the S&P 500, it is moving higher, gaining 4% for the month and being very close to its June peak, after this month’s unexpectedly good job report. The spreading global positivism even sends the tech sector to a new all-time almost every day, with Nasdaq 100, QQQ, being now 13% higher since its February level just before the COVID-19 panic sell-off. Still, the fixed-income securities continue to stay a little away from the overall sentiment, as currently, all eyes are on stocks like Tesla (TSLA).

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. Except, OCFCP and MBNKP, all other issues are related to the three-month LIBOR, while the two exceptions are linked to the three-month SOFR. However, it does not matter much as SOFR, which is published by the New York Federal Reserve, will be the LIBOR replacement for the dollar-denominated loans and securities after LIBOR termination in 2021.

I want to start with a reminder about the issues that had its dividend suspended. On December 2, 2019, Just Energy suspended the dividend on its Series A Preferred Stock, JE.PA, until its senior debt to EBITDA ratio is no more than 1.5-to-1 for two consecutive fiscal quarters. Also, Exantas Capital Corp.’s XAN.PC and AG Mortgage Investment Trust’s MITT.PC had their dividend suspended in March due to the turmoil in the financial markets resulting from the global pandemic of the COVID-19 virus. This is the reason they will not take part in any of the yield bubble charts but you will find it in the “High-Yield Ones” and “REIT Fixed-to-Floaters” tables and in the “How do they move?”.

New York Mortgage Trust’s NYMTN and NYMTM, whose dividends were also suspended, are now reinstated since June 15, 2020, and will again take part in be bubble charts below.

1.1 Qualified Yield Curve

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

Source: Author’s database

  • By % of Par and Current Yield:

Source: Author’s database

1.2 Not Qualified

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

Source: Author’s database

  • By % of Par 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-Call is at a rate of 8.73%, while the rated ones are at an average YTC of 5.48%. Compared to the yields at the beginning of June, the rated financials fixed-to-floating preferred stocks currently yields 0.42% higher, while the average for the whole group YTC has decreased by 0.91%.

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

Source: Author’s database

For a better view of the group and of the more quality ones, I’ll exclude those issues with a YTC of above 18%.

Source: Author’s database

  • By % of Par and Current Yield:

Source: Author’s database

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 14.38% (there is a change of 2.42% (↑) in the average YTC of the group since our previous article in June). However, since the whole group is trading below its par value, it is the Current Yield that is the issues’ YTW. Thus, all mREITs’ fixed-to-floating preferred stocks are trading at an average YTW of 9.19%. Note that the YTC and the Current yield of the two preferred stocks with a suspended dividend (MITT-C and XAN-C) are not taken into account.

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

Source: Author’s database

  • By % of Par and Current Yield:

Source: Author’s database

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 24.46% (a shift of 9.15% (↑) since last month). Like the previous group of REIT preferred stocks, here all high-yield securities also trade below their par value. Thus, their Yield-to-Worst is equal to their Current yield and, currently, the average YTW sits at 11.84%.

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

Source: Author’s database

  • By Yield-to-Call and Current Yield:

Source: Author’s database

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, there are 6 stocks of this type, as the group has increased with 6 new issues only for the last two months. Moreover, this number is expected to grow as the current interbank lending rate benchmark, the LIBOR, will phase out by the end of 2021. Note that except for WCC.PA, all other issues are eligible for the preferential tax rate. Currently, one of the fixed-reset rate issues, ARGO.PA, is still trading on the Grey market under the temporary ticker symbol ARGHF.

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 11 new issues, with an average Nominal Yield of 7.04%, issued this year: 4 mREITs’ fixed-to-floaters, a bank fixed-to-floating preferred stock, and 6 fixed-reset rate preferreds:

Source: Author’s database

8. The Deletion

As of the 15th last month, there is a deletion from the fixed-to-floating family – CUBI.PC is a floating preferred stock now, as it is also callable now.

Source: Author’s spreadsheet

9. 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

Conclusion

This is what our small world of fixed-to-floating rate preferred stocks and units looks like on the second Monday of July 2020. Despite the rapid recovery of all equities, we can see that the fixed-income securities ranging for the last 3-4 months, and when we take a look at the average yields, they are even going higher, which automatically means that the preferred stocks’ market prices are declining. Currently, 80 out of the 105 F2F preferreds sits below their par value, and only the highest quality financials are trading above their PAR. My overall opinion on the fixed-to-floating preferred stocks is to stay away from them and even to use them as a hedge for my fixed rate long positions. With the constantly lowering LIBOR (which will be replaced with SOFR) there is no guarantee that it will not go into negative territory. If this happens, it will be detrimental to all perpetual securities that are tied to it and do not have minimum nominal rate protection.

Note: This article was originally published for our subscribers on 07/13/2020 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.

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.

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