Huge Issuance of New Preferreds and Baby Bonds Kept Coming in November

Zack Hu

The rush of new issues of preferred stocks and baby bonds that began in July continued through November as companies sought to refinance old borrowings at low rates while they are available.

For literally years, we have expected higher interest rates. Yet, despite short term rates moving up by over 1% and even the 10-year treasury up 80 basis points in the last year, coupons offered on income securities have remained extremely low. Preferred stock and baby bond issuers have chosen to refinance their higher-yielding preferreds into rock-bottom rates, while baby bond issuers have opted to refinance by existing maturities, even if there is no yield advantage in doing so.

In November 2017, there were 15 new issues in our universe of preferreds and baby bonds. Among those, six were baby bonds and nine were preferred stocks. Six of the preferreds were issued by real estate investment trusts (REITs), generally at coupons that are too low for the risk incurred. If (and who can say for sure) we get higher interest rates, lower coupon issues will bear the brunt of lower share prices. Our list of “new issues” can be found here.

First, we will take a quick look at the baby bonds that were issued during November 2017.

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