SPNT - SiriusPoint Offers Extremely Undervalued 9.3% Bond And An Excellent Preferred Stock

2023-09-25 12:00:00 ET

Summary

• We first revisit our recommendation of SiriusPoint preferred stock from May of this year.
• Although SPNT-B has been a big winner for us since May, it is still the most undervalued among “qualified” BB+ rated preferred stocks plus it has a massive reset rate.
• At the current 5-year treasury note yield, the reset yield on SPNT-B will be 12% and it trades below par.
• SiriusPoint also offers an extremely undervalued bond with an investment grade BBB rating and an approximate 9.3% yield-to-maturity (YTM).
• A typical BBB bond has a YTM of around 6.3% making this 9.3% YTM bond the most undervalued bond in the market based on credit rating (in my opinion).

SiriusPoint

SiriusPoint ( SPNT ) is a property/casualty insurance company that was formed from the merger of Sirius Group and Dan Loeb’s Third Point Reinsurance. Here is a description of the company’s operations from Yahoo Finance:

SiriusPoint Ltd. provides multi-line insurance and reinsurance products and services worldwide. The company operates through two segments, Reinsurance, and Insurance & Services. The Reinsurance segment provides coverage to various product lines, which includes aviation and space, casualty, contingency, credit and bond, marine and energy, mortgage, and property to insurance and reinsurance companies, government entities, and other risk bearing vehicles. The Insurance & Services segment offers coverage to various product lines comprising accident and health, environmental, workers' compensation, and other lines of business, including a cross section of property and casualty lines.

The company performed poorly during the 2022 market selloff due to the fact that it had a lot of its investments in common stocks. New management has made SPNT a much safer company by moving most of their investments into quality fixed-income as well as by unloading its riskier insurance policies. Since then, SPNT has exploded higher. Over the last year it has gone from a low of $4.41 to its current price of $10.13.

SPNT Preferred “B” Stock

Back in May, Dan Loeb announced that he was exploring buying SPNT. That brought a lot of fear into the preferred stock as investors saw visions of SPNT-B ( SPNT.PR.B ) be coming a preferred of a private company. And worse, there was fear it could be delisted. This caused SPNT-B to trade as low as $20.88. It was after that I published the article “ SiriusPoint Preferred “B” May Be The Best Preferred Stock In The Market ” debunking the irrational fears that made this preferred stock ridiculously cheap. Since then, it has traded all the way back to par and has been a huge win for SPNT-B buyers.

Not too long ago, Dan Loeb announced a standstill agreement that he would not seek to buy SPNT as its new management was doing so well that there was no longer a reason to take this company private. Thus, the fears of a takeover have now disappeared as the current management strongly opposed selling the company.

To show how undervalued SPNT-B was back in April/May, even after it has moved up to par, it is still the best value among qualified dividend paying BB+ fixed-to-floating rate and reset-rate preferred stocks as the chart below shows. This chart eliminates preferred stocks selling above par and those that are already floating.

As you can see, SPNT-B has the highest current yield among BB+ qualified dividend payers but what really sets SPNT-B above the others is its enormous reset rate. If you look at the “Float Rate %” column in the above chart, you can see that the floating rate of the 5 year T-note plus 7.3% puts to shame all of its peer’s floating rates. If the 5-year note yield is where it is today, the yield on SPNT-B will reset to 12%, far and away better than its BB+ rated peers.

A 7.3% spread over treasuries in enormously good for a qualified dividend paying preferred stock from an investment grade company. So no matter where interest rates go in the future, SPNT-B’s reset-rate will be super. And you don’t have the LIBOR issue where some companies (like PMT) are opting to not reset the rate due to LIBOR’s disappearance which generally hurts these preferred stocks.

What this means is that SPNT-B will likely be called for an 8.6% YTC at its current price of $24.86 (stripped price $24.64). And very importantly, this means that SPNT-B has much less downside price risk than its peers due to its huge reset rate. This gives SPNT-B a huge level of safety as if it moves much below par the reset-rate and YTC will become even better making it a huge bargain. Fair value of SPNT-B should be well above par .

At our Conservative Income Portfolio service, we very much focus on finding high yielders that also offer a high level of price safety like SPNT-B. Risk management is crucial as we focus on total return and not simply on current yield as some others do. So we hate taking capital losses.

SiriusPoint 9.3% YTM Bond

Not only do we cover all baby bonds at Conservative Income Portfolio, but we also cover all traditional bonds where you can also find great values. SPNT has a traditional bond that I think that very few people are aware of. The CUSIP for this bond is G8201FAA7. For some reason, the CUSIP is USG8201FAA78 at Interactive Brokers. This bond is enormously undervalued for its BBB investment grade credit rating. Its approximate 9.3% YTM is head and shoulders better than any other BBB bond that I am aware of, and even more so given that the bond has only a little more than 3 years until maturity.

As you can see, at Friday’s close the bid/offer is $86.75/$87.75 which provides a YTM of 9.2% to 9.61%. Par is $100 the way they are quoted but really the par is $1000. So for each bond you purchase, it will cost you around $870. Below are a list of all BBB baby bonds that are not floating for comparison.

There are not a lot of BBB baby bonds out there, but as you can see, their YTM’s are nowhere near the SPNT bond’s approximate 9.3% YTM. Additionally, many of these much lower yielders don’t mature for decades. ZIONL is the only one with a relatively short duration but I wouldn’t touch that one. I checked it out and besides being in the troubled banking sector, it is one of the most leveraged banks I have ever seen. I would never give this company a BBB rating and a downgrade would not surprise me.

I also did a scatter plot of Moody's Baa2 rated traditional bonds which you can see below. Moody's Baa2 rating is the same as S&P’s BBB rating.

As you can see, of the 100s of traditional bonds with Baa2 ratings (same as BBB from S&P), they tend to average around 6.00% and even when you go out 18 years in maturity, you still have nothing over 8%. So this is another documentation of how good this SPNT 9.3% YTM BBB bond is.

Unfortunately, there are some major discount brokers who will only sell you bonds that are in their inventory. I consider this pitiful laziness that they are unwilling to call a market maker to get an offer price. Nagging them might or might not work. While I have no financial interest in Interactive Brokers, its bond trading platform is super. You can definitely buy this bond there and their bond trading platform makes trading bonds as easy as trading stocks.

For those who can’t get this bond, buying SPNT-B is certainly not a bad second choice as its 8.6% YTC is “qualified” providing you with an after tax equivalent as good or better than this bond although with a bit less safety.

Summary/Conclusion

In this article, we offer 2 very undervalued fixed-income ideas. One is SPNT-B preferred stock which has the highest current yield among “ qualified dividend paying” BB+ rated preferred stocks and by far the best reset-rate. Using the current 5-year treasury note yield, SPNT-B would reset to a yield of 12% which none of its BB+ peers can come close to. This super high reset rate gives SPNT-B a huge level of price safety that its peers can’t match as any drop in price of SPNT-B will mean an even bigger reset-rate but also a very high YTC (and this security is very likely to be called in February of 2026). Price safety is very important to us at our Conservative Income Portfolio service as we are total return investors and not simply dividend yield investors.

Since we cover all traditional bonds in addition to all baby bonds, the other security we are recommending is an under the radar traditional bond with an investment grade S&P rating of BBB. The CUSIP for this bond is G8201FAA7. For some reason, the CUSIP is USG8201FAA78 at Interactive Brokers. This bond, with a 9.3% YTM, is the most undervalued bond in the market, as far as I can see, given that BBB bonds tend to average closer to 6.3%. A YTM of 3% above its BBB peers is rather extraordinary.

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