Preferreds - M&T Bank

[ValueMaven]

You can get some really attractive preferreds right now.  These are NOT risk-free, but given how safe some of these banks are, and the yield pick-up relative to Bills, they seem interesting.  One that has caught my eye is the M&T Series J $25 par preferreds with a YTM of 7.5%.  This is a $750M issuance, which is about 1M old in the market and very liquid.  They have a 5Yr redemption cause, and M&T Bank is one of the safeties regional banks with a very low efficiency ratio.  You can read more about the preferreds here: https://ir.mtb.com/node/38786/html  ... the one negative here is that the $25 par market is retail driven and could suffer from irrational selling, while $1000 par market is all OTC.

 

Interest is paid quarterly, and you could see people pay up for these given that M&T trades at 1.5x BV and is viewed as a very high quality bank.

 

Edited May 27 by ValueMaven

[Hektor]

@ValueMavenThank you. How do you find these preferreds? Do you look them up for the businesses that you track? Is there a place (e.g. like EDGAR) to look them up?

[ValueArb]

The one thing I've learned about preferred stock is to vet their rights very carefully. 

 

1. Can they force you to convert at unattractive prices?

2. What are your conversion rights in a change of control?

 

For example, SRG's preferred are trading just above $21, paying $1.75/year (> 8%) and likely to be redeemed in their liquidation within a year or so, offering a potential yield to maturity in excess of 20% annualized. 

 

But the reason its at such a big discount is the fear is that SRG will get acquired (and management has stated they are open to it). In a change of control preferred only has rights to convert to common at very unattractive ratio (1.2x), which at current prices easily be less than $10. Worst is that holding on hoping for full redemption might never happen, as the acquirer might choose to carry the preferred as cheap financing, and could even stop paying dividends, and accrued dividends don't earn interest. So you could be stuck with an illiquid preferred trading far below your basis for years. 

 

An example is Wheeler REIT, where IIRC they acquired a good REIT and kept the acquired preferred outstanding which plummeted in price because of Wheelers significantly worse financial position.