BACRP - Allstate: New 7.375% Preferred Shares

2023-06-05 17:30:35 ET

Summary

• Allstate issued new 7.375% preferred shares, which started trading under the symbol, ALL.PJ.
• We examine the yield in relation to other similar rated instruments and also to other Allstate preferred shares.
• We give our buy under price for the ALL.PJ shares.

In our recent piece, we examined the fundamentals for Allstate ( ALL ) and its secondary securities. We specifically looked at ( ALL.PB ) as it was floating at a very high rate and likely to be called by Allstate. Specifically we said,

If we are wrong and the Fed does indeed shower us with an armada of rate cuts, you could be left holding a very poorly yielding security. In an era of ZIRP, ALL.PB would give you close to 3.5% on par. There would be substantial downside in that case and ALL.PB could trade 25-35% lower. For those convinced in the "higher for longer" outlook, this could be an excellent income security with a short maturity.

Source: Allstate 8% Yielding Debentures: Higher For Longer Vs. A Fed Pivot

We resume our coverage today looking at a newly issued security from Allstate, The Allstate Corporation 7.375% DEP PFD J ( ALL.PJ ).

The IPO

Allstate issued these in the middle of May. A whopping $600 million of par value was sold. The stock traded on the OTC market for most of the time since and only last week came on the regular exchanges. The coupon here was fairly intriguing. Allstate was forced to pay 7.375% which is a fairly huge amount. Investors may wonder why we think this is really large and the answer lies in where the existing preferreds were trading just prior to this going public. The Allstate Corporation 5.1% DP SH PFD H ( ALL.PH ) was trading near $23.65 before the rug was pulled out from under it.

Taking into account the accrued dividends, the yield was about 5.42%. ALL.PI with its slightly lower coupon was even more expensive at a silly 5.20% stripped yield.

Finally, its longer dated bonds (10-30 years out) were all averaging near 5.3-5.5% at the time. So the 7.375% pricing was out of the blue.

Current Pricing & Valuation

For those that got in on the IPO or bought it cheap on the OTC market, congratulations. The shares are now trading at a $1.48 over par and yields approximately 6.98% on a stripped basis.

The shares are callable in five years, on June 15, 2028.

They may also be redeemed earlier in case of a "rating agency event" at $25.50.

"rating agency event” means that any nationally recognized statistical rating organization as defined in Section 3(a)(62) of the Exchange Act, that then publishes a rating for us (a “rating agency”) amends, clarifies or changes the criteria it uses to assign equity credit to securities such as the Preferred Stock, which amendment, clarification or change results in the shortening of the length of time the Preferred Stock is assigned a particular level of equity credit by that rating agency as compared to the length of time it would have been assigned that level of equity credit by that rating agency or its predecessor on the initial issuance of the Preferred Stock; or the lowering of the equity credit (including up to a lesser amount) assigned to the Preferred Stock by that rating agency as compared to the equity credit assigned by that rating agency or its predecessor on the initial issuance of the Preferred Stock.

Source: ALL-PJ Prospectus

Similarly, it could be redeemed earlier in case of a "regulatory event" as defined in the IPO prospectus. So there is a small capital loss risk here by paying over par.

That risk aside, ALL.PJ is still yielding remarkably higher versus the ALL.PH (5.95% stripped) and ALL.PI (5.31% stripped). Assuming it is called under a regular 5-year scenario, the yield to call is still higher than either of those two issues.

Of course neither ALL.PH nor ALL.PI have an early call risk where investors would lose capital. That is because they are both trading under par and an early call would be a welcome event.

Looking outside the same company comparatives, we have to examine both BBB rated and BBB- rated securities. That is because while Allstate preferreds have been assigned a BBB rating, they are on negative credit watch by both Moody's and S&P.

RenaissanceRe Holdings Ltd. DPSHS RP PFD F ( RNR.PF ) is a good comparative for a fixed rate BBB rated security as it is from the same industry. It yields slightly over 6% and is trading under par.

AXIS Capital Holdings Limited DEP SHS PFD E ( AXS.PE ) is another BBB security yielding 6.2%. From a BBB- rated perspective, we don't have any good comparatives in the insurance sector. Brighthouse Financial ( BHF ) preferreds are rated BBB- by S&P but Moody's has a radically different opinion. Many big bank preferred shares like those from JPMorgan Chase ( JPM ) and Bank of America ( BAC ) are rated BBB- but they have a radically different underlying company profile. If we did have preferred shares from the insurance segment that were rated BBB-, we would estimate that they would yield between 6.5% to 6.75% today.

Verdict

ALL.PJ yields are quite strong relative to other preferred shares from Allstate. This is slightly offset by the small risk of early redemption and the radically lower yield to call vs the current yields. It is also impossible to envision buying either ALL.PH or ALL.PI at current prices with what we are getting on the risk-free rate. Despite the big price over par, ALL.PJ is still the best among the Allstate preferred shares.

In the world of preferred securities though, ALL.PJ does not offer anything special. On a relative basis we think AXS.PE for example, with a chance of a credit upgrade, would be a better pick.

If one is indifferent to the taxation aspect (ALL.PJ offers qualified dividends), then a lot of short term investment grade bonds from BDCs give you a far stronger yield with significantly lower risks. See two examples here and here . At present we rate ALL.PJ at a hold and would consider buying it under par.

Please note that this is not financial advice. It may seem like it, sound like it, but surprisingly, it is not. Investors are expected to do their own due diligence and consult with a professional who knows their objectives and constraints.

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