Outlook 2014: Rates dip pre-taper talk; issuers seek fixed-to-float structures; CoCos eyed

By Stephanie N. Rotondo

Phoenix, Dec. 31 - The landscape of the primary preferred stock market was a little different than usual in 2013.

Especially at the beginning of the year, coupons were lower than they have been in some time, sources said, given the low interest rate environment. Many market players were surprised by deals that were coming around that time with coupons under 6% or even under 5%.

One market source said being able to get such low rates on new securities was "kudos to the issuer, not so much for the investors" who were searching for yield.

The source noted that it was General Electric Capital Corp.'s $750 million of 4.7% $25-par notes due 2053 that was "the low tick."

That deal came at the beginning of May, before the Federal Reserve started talking about tapering its economic stimulus program.

Entergy Louisiana LLC was also able to get a 4.7% rate on its $100 million issue of $100-par first mortgage bonds due 2063.

Like the GE Capital deal, it came mid-May, ahead of the tapering chatter.

Another preferred stock source pointed to issues that came with 5%-handles, such as BB&T Corp.'s $450 million of 5.2% series G noncumulative perpetual preferreds, which priced April 24.

After the Fed began talking about the taper, rates began to stabilize a bit, with most coming in a 6% to 7% range.

In terms of size, most of the larger deals - $1 billion or above - also came ahead of the taper confusion.

General Electric Capital managed to come in under the wire with a $1 billion sale of 5.25% series C fixed-to-floating rate noncumulative perpetual preferreds on May 29. The only large deal to come after the taper talk was a $1.5 billion offering of 6% series R fixed-to-floating rate noncumulative perpetual preferreds from JPMorgan Chase & Co. on July 22.

Deal structures eyed

Those latter two deals bring up another aspect of the primary preferred market that was a new trend. With new regulations under Frank-Dodd and Basel III, many financial institutions were having to call trust preferreds, as they no longer qualified for Tier I capital. The banks and insurance companies were then replacing those issues with a fixed-to-float structure.

"[That structure] is more friendly when rates are rising," one market source said. By basing the floating rate on Libor plus a spread, it "allows investors to shorten duration" and makes their investments less sensitive to interest rate risk.

"That will continue to be the flavor du jour," the source said.

"It's a good play against future rising rates," said a second source. "I expect to see a lot more of that."

More contingent convertibles

Last but not least, the market saw the beginning stages of a CoCo market - contingent convertibles that are issued as debt but are automatically converted to equity under certain circumstances.

"It's a new market," a source said. He noted that such deals were starting to pop up particularly in Asia, and while there hadn't really been any CoCo deals in the United States, he said it "could be a huge wild card" come 2014.

"Demand on the issuer side is going to be huge," he predicted. However, investor demand for such a product might not be as high.

"There's going to be a lot of traditional preferred investors that won't like those securities," he said. "That will limit issuance."

Still, he opined that the CoCo market could begin to pick up as development of the securities moves forward.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.