UPDATED 6/05/09: I have a Gateway Post that contains links to my discussions about equity preferred floating rate securities and synthetic floating rate issues: Floaters: Links in One Post
Updated 1/19/2010: A more in depth discussion of the Aegon hybrids, and links to my posts on them, can be found at Aegon Hybrids: Gateway Post
Someone inquired about the Aegon floater. I do not believe that I provided a link to the prospectus at the SEC which needs to be reviewed prior to purchase. Here is the link:
I would have to say that the AEB prospectus is more convoluted than most that I have read. The prospectus says Aegon will file for a listing on the NYSE under the symbol AEO, which is the symbol for American Eagle Outfitters. I did check the Aegon web site before making my first purchase to confirm the symbol as AEB. Capital securities - AEGON Group
Since I am already familiar with the boilerplate prospectus language typical for most preferred stocks, AEB being an exception, which seems to originate from the same word processor irrespective of the issuer, I only glance at the general language now, focusing instead on the main issues contained in a preferred stock prospectus. Is it cumulative? When and how can the dividends be deferred? Is interest payable on a suspended dividend? Is there a maturity date or is it perpetual redeemable only at the issuer's option? (generally preferred stocks are perpetual for the most part, whereas securities called "Trust Preferreds" do frequently have a maturity date but they are really junior debentures, with Trust Preferred issues having different bond characteristics than the typical preferred) The issues contained in the four corners of the prospectus are not the main issue. The main issue is always and simply the ability of the company to pay the dividend now and in the foreseeable future. While the preferred stock is considered equity, a preferred stockholder has no real equity in the business. The only consideration outside the prospectus for me as a preferred shareholder then is the solvency and dividend paying ability of the issuer.
There are many floaters, and only some of them are discussed in these blogs. Bary's Column In This Week's Barron's: Floating Rate Preferred Stocks METPRA GSPRA HBAPRF BACPRE MERPRL/ Gross interview Forbes I generally only discuss what I own or have owned. I own close to 300 securities so I do not have the time to discuss all of them let alone what I do not own. The best floaters, right now, in my view are those that provide the greater of a minimum guarantee or a per cent above three month LIBOR. Possibly the most undesirable one which has a float tied to LIBOR, which I do not own, is UBSPRD which does not have a guarantee, which is most undesirable for this kind of issue, and it floats a mere .70 over one month LIBOR, which makes it even worse. That is why I have not discussed it. I have no plans to buy it when the alternatives are clearly better.
There are adjustable rate issues that do not provide a guarantee but float a certain per cent above CPI. I have discussed these in several posts.
There are others that float with the greater of a guarantee or some other rate other than 3 month LIBOR. I recently discussed one of those that I bought, PYV.Buys of a First Mortgage Bond EMO and a JPM TC PYV For that one, the likely rate will be the guaranteed rate until it matures in 2014, and the main reason for buying it was the combined return of the current yield and the spread between cost and par at maturity.
There are a few others similar to PYV that I will discuss in the event I decide it is worth an expenditure of my capital. There are many others that do not have a minimum yield and are tied to a narrow spread above some currently undesirable rate like the three month treasury bill. These are barely worth monitoring for me let alone discussing. How excited can one become about a 1/2% spread over a 3 month treasury bill which is now close to nil? I will just look at those kind of floaters once a month now. Only one is mildly interesting due to a substantial discount to par value, a solid issuer, but it generates nominal current interest with a distant maturity date.
When deciding to invest in a preferred stock, and this always bears repeating, remind yourself of what happened to investors in the floating rate preferred issue from Lehman and the investors in Fannie and Freddie preferred stocks. Sometimes, as Will Rogers said, the return of your money is more important than the return on your money.
ADDED AFTER AFTER ORIGINAL POSTING (at 12:02 p.m. 12/29/08):
I would add something else that I mentioned several times, floaters like AEB and METPRA have been known to me for some time, possibly extending back to their original issuance. I had no interest in them until late this year when the guarantee became enticing at the currently depressed prices. Of the ones that I discussed, only AEB still holds some interest for a possible add due to its extreme discount to par value which juices the guaranteed yield for a new purchaser. At 7, the guaranteed 4% is worth 14.2%. The LIBOR provision gives some protection against a surge in short rates caused by inflation or even a credit crisis when banks cease to trust each other, as shown a few weeks ago when this rate came close to 5% before falling back below 2 (now at 1.47% Markets Data Center Home - Market Data, Indexes, Stock Quotes & More - WSJ.com, indicating a relaxation in the credit crunch for inter-bank lending) If these securities had a maturity date, then they would be more interesting. (OSM and PFK have maturity dates which is a plus and the dates are 10 years or so in the future which is another plus, but they are tied to CPI with no guarantee.) The lack of maturity date may ultimately mean the current discount to par value has meaning only because it juices the yield, not because there is a realistic possibility of capturing the spread between the current price and the $25 par value. As mentioned earlier, the only way that one of these might be called is for the LIBOR to shoot so far up for an extended period of time, when the long term rate is lower than the short rate, so that it would make sense for the issuer to redeem the floater tied to 3 month LIBOR and replace it with other debt. This may happen, with an inverted yield curve, but this is not likely to happen anytime soon and certainly would not be a grounds for buying one now. I did not know about the Merrill floater discussed in Bary's column but look at this way. It is just as well. It was sold to the public last year at $25 and was trading below 9 last week. At last Friday's closing price, it might generate some interest in someone like myself, but I already own BACPRE and I underweight perpetual preferred stocks. If I was going to add to some position in this underweight category, why would I go with MERPRL, which has the same guarantee at 4% as the Aegon floater, but sells at a significantly higher price with a less advantageous Libor provision at 1/2% vs. 7/8%, unless of course you feel strongly that Bank of America is a much better credit than Aegon. But the Merrill and BAC floaters are clearly non-cumulative whereas I believe AEB is cumulative but it is a little hard to tell for sure given the convoluted nature of its prospectus.
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