HROWL - Tough Preferred Stock IPO Environment Continues: 6 December 2022 Offerings

Summary

• As December 2022 comes to a close, we observe six new preferred stock / exchange-traded-debt (ETD) offerings during the month, offering annual yields ranging from 6.75% to 11.875%.
• 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 10% and offer an average current yield of 6.41%.
• Past preferred stock IPOs now trading below par; a look at recent par crosses.

New offerings summary:

State of the preferred stock market

Tough conditions in the preferred stock IPO market continued into year-end, with previously-issued US-traded preferred stocks trading at an average discount to par value of approximately 18% and an average current yield of about 9.1%.

Our internal CDx3 “bargain table” count remains near all-time-high levels since we began tracking the metric in 2015, at a current 156. Here is a YTD chart of our bargain table count:

To further help illustrate the state of the market, we at CDx3 maintain what we call the "CDx3 Perfect Market Index," which reacts to preferred stock market events. A CDx3 Perfect Market Index value of 100 is a theoretical 'perfect market' for CDx3 Preferred Stocks. When the preferred stock market is 'perfect' the average market price of a specifically defined sample of CDx3 Preferred Stocks will be $25 per share. A value greater than 100 indicates a market favoring buyers (average prices are less than $25) while an index value less than 100 indicates a market favoring sellers. Over the past five years, the CDx3 Perfect Market Index has reached or exceeded 100 during just three times: in December of 2018, in March of 2020, and this year.

About the new issues

Moving on to the new issues, despite the tough environment for new preferred stock and ETD IPOs, we tracked six new preferred stocks and ETDs during the month, summarized below:

Athene Holding Ltd, which became part of Apollo ( APO ) earlier this year, completed an offering of 20 million shares of new non-cumulative series E preferred stock, under a fixed-rate reset structure. The new shares will offer an initial dividend rate of 7.75% until December 2027, after which the rate resets to the then-current 5-year US Treasury rate plus a spread of 3.962%, and resets again every five years thereafter. The new shares were rated by all three of Moody’s, S&P, and Fitch, at Baa3, BBB and BBB respectively. Trading took place during a temporary period on the OTC under symbol ATHLL before moving to permanent symbol ATH-E on the New York Stock Exchange.

Two externally managed Business Development Companies [BDCs] issued ETDs since our last update, with Runway Growth Finance Corp. ( RWAY ) pricing a $45 million offering of 8% notes due 2027, which began trading this month under symbol RWAYZ. The notes were given a BBB+ rating by Egan-Jones Ratings Company. And then about a week later Saratoga Investment Corp. ( SAR ) priced an offering of $52.5 million of new 8.125% notes due 2027, which began trading under symbol SAY. Those notes also received a BBB+ rating from Egan-Jones.

Eyecare pharmaceutical company Harrow Health ( HROW ) came to market with an offering of $100 million worth of new exchange traded senior notes due 2027, offering a coupon of 11.875%. The company said proceeds would fund a portion of the purchase of a previously announced acquisition. The new notes received a credit rating of BB from Egan-Jones Ratings Company, and trade on the Nasdaq under symbol HROWM.

mCloud Technologies ( MCLD ) raised $10.5 million from the sale of new series A cumulative preferred stock plus common stock warrants, with proceeds used in part to pay off convertible debenture debt. The preferred stock and warrants have been listed separately on the Nasdaq, with the warrants trading under symbol MCLDW and the preferred stock trading under symbol MCLDP. The warrants are exercisable from issuance until November 29, 2026, at an exercise price of $4.75 per common share. The $25 public offering price was allocated in the prospectus as $24.75 towards the preferred shares and $0.25 towards the warrants, but the liquidation preference of the preferred was listed in the prospectus at $25.00, with a fixed dividend rate against that liquidation value of 9% (or $2.25 annualized) for the first five years, after which the prospectus indicates the annual rate will increase 4% per calendar quarter until it reaches a maximum of 25%; but the shares become callable by the company after just one year from issuance.

And then finally we saw global equipment manufacturer Chart Industries, Inc. ( GTLS ) price an offering of mandatory convertible preferred stock, which was offered simultaneously with common stock, where proceeds were used to complete the company’s acquisition of Howden . The common shares priced at $118.17 per new GTLS share issued, whereas the new preferred shares priced at $50 each and will be paid a fixed dividend rate of 6.75% until they convert to common stock through a mandatory conversion in December of 2025 at an initial price of $118.1754 subject to adjustments based on future common stock value and with a threshold appreciation price and a floor price.

SEC filings: ATH-E , RWAYZ , SAY , HROWM , MCLDP , GTLS-B

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 Athene preferred, ATH-E, mentioned earlier).

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. Here are some of the recent dips/crosses below par we observed:

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

Until Next Time…

Here at CDx3, our typical articles will provide month-end preferred stock (and ETD) IPO summaries, plus a look at selected past preferred stock IPOs that are now trading below par. Whether you are the kind of investor who sticks with preferred stocks with a CDx3 Compliance Score rated 10 out of 10, or whether your portfolio has room for 9-score-and-lower securities, stay tuned for future articles recapping new IPOs and interesting preferred stock activity that we notice here at the CDx3 Notification Service . Thanks for reading!

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