AATRL - Preferred Updates: Eagle Point Offering Past IPOs Below Par

2023-08-01 20:00:22 ET

Summary

• Tightening financial conditions have led to a significant decrease in preferred stock offerings, with only one new offering in July.
• Eagle Point Income Company offered $28 million worth of 7.75% series B term preferred stock due 2028.
• CDx3 preferreds ranked 10 out of 10 are selling at an average discount to par of about 6% and offer an average current yield of 6.3%.

* Tightening financial conditions have drastically reduced preferred stock / ETD offering activity, with just one new preferred stock offered during the month of July.

* Collateralized loan obligation [CLO] investment company Eagle Point Income Company offered $28 million worth of 7.75% series B term preferred stock due 2028, rated BBB by Egan-Jones.

* Here is a comparison against the highest quality preferred stocks in our coverage universe, as ranked by our internal "CDx3 Compliance Score" metric:

* CDx3 preferreds ranked 10 out of 10 are meanwhile selling for an average discount to par of about 6% and offer an average current yield of 6.3%.

* Past preferred stock IPOs now trading below par: a look at recent par crosses.

New offering summary:

SEC filings for further information: Term Sheet ; Prospectus

Externally managed closed-end investment company Eagle Point Income Company (EIC), an investor in junior CLO tranches, priced an offering of about 1.13 million shares of new 7.75% series B term preferred stock due 2028. Investors often think of preferred stock as being perpetual, and while that's typically the case, we also sometimes see offerings with a required redemption date, as in this case.

In some ways, the redemption date makes this offering similar to exchange-traded debt [ETD] securities that have maturity dates, but with an important difference: in the capital structure of any company, preferred stock ranks senior to common stock, but junior to any debt.

And in the case of EIC, this new series of preferred stock will rank equally with its previously-issued series A preferred - also a term preferred, due 2026, which had been issued back in 2021 when the going rate of return allowed EIC to price that one at 5%. That series A preferred presently trades under the symbol EICA on the New York Stock Exchange, where it last changed hands around the $23.50 level (as of the time of this writing).

The new series B preferred will eventually trade under the symbol EICB on the New York Stock Exchange as well, after a temporary period trading over the counter as EICPB, where it last traded at 24.91 as of the time of this writing. Both series were given a rating of BBB from Egan-Jones Ratings Company.

Tough Environment for Preferred Stock IPOs

The 2.75% difference in dividend rate comparing Eagle Point Income Company's preferred A series (at 5%) and new preferred B series (at 7.75%) highlights how much tighter the conditions have become in the past two years, for preferred stock issuance in general.

CDx3-compliant preferred stocks (and ETDs) rated 10 out of 10 are still trading much lower than they were earlier in the year before Silicon Valley Bank's preferred went "poof" (along with the preferred from Signature Bank), and as of month-end now trade at a discount to par of approximately 6% as a group. However, on a year-to-date basis these stocks are still showing a gain.

Year-to-date CDX3-compliant preferred stock prices; source: CDX3 database .

This trading price range in turn has left the group at a current yield of approximately 6.3%:

Year-to-date CDX3-compliant preferred stock current yields; source: CDX3 database.

Another indicator we like to follow is our internal "bargain table" count, which we've been tracking since 2015. On a year-to-date basis, our count is hovering near all-time highs:

Year-to-date internal "bargain table" count; source: CDX3 database.

Buying new shares for wholesale

Preferred stock IPOs often involve a temporary period during which OTC trading symbols are assigned until these securities move to their retail exchange, at which time they will receive their permanent symbols. (For example the new Eagle Point Income Company preferred discussed above, is presently trading temporarily on the OTC as EICPB).

But there is no need to wait. Individual investors, armed with a web browser and an online trading account, can often purchase newly introduced preferred stock shares at wholesale prices just like the big guys (see " Preferred Stock Buyers Change Tactics For Double-Digit Returns " for an explanation of how the OTC can be used to purchase shares for discounted prices).

Those who have been following this strategy of using the wholesale OTC exchange to buy newly introduced shares for less than $25 are more able to avoid a capital loss if prices drop (if they choose to sell).

Your broker will automatically update the trading symbols of any shares you purchase on the OTC, once they move to their permanent symbols. A special note regarding preferred stock trading symbols: Annoyingly, unlike common stock trading symbols, the format used by exchanges, brokers, and other online quoting services for preferred stock symbols is not standardized.

For example, a given Series A preferred stock might have a symbol ending in "-A" at TD Ameritrade, Google Finance and several others, but this same security may end in "PR.A" at E*Trade and ".PA" at Seeking Alpha. For a cross-reference table of how preferred stock symbols are denoted by sixteen popular brokers and other online quoting services, see " Preferred Stock Trading Symbol Cross-Reference Table ."

Past preferred stock IPOs below par

In addition to covering new preferred stock and ETD offerings, here at CDx3 Notification Service we also track past offerings, with alerts when securities fall below their par values. To close this article, we would like to share with you some of the dips/crosses below par we recently observed:

Note: Any yellow highlighted entries indicate eligibility for the "CDx3 Bargain Table."

See you next time, and thanks for reading!

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