Bank Of America: This 6.00% Preferred Stock Has Begun Trading On The NYSE

In this article, we want to shed light on a new Preferred Stock issued by Bank Of America Corporation (BAC).

Our goal is purely to inform you about the product while refraining ourselves from an investment recommendation. Even though the product might not be of interest to us and our financial objectives, it definitely is worth taking a look at.

The New Issue

Before we get into our brief analysis, here is a link to the prospectus.

For a total of 48M shares issued, the total gross proceeds to the company are $1.2B. You can find some relevant information about the new preferred stock in the table below:

Source: Author’s spreadsheet

Bank of America Corporation 6.000% Non-Cumulative Preferred Stock Series GG (BAC-B) pays a qualified fixed dividend at a rate of 6.00%. The new preferred stock has a BBB- Standard & Poor’s rating and is callable as of May 16, 2023. Currently, the new issue trades close to its par value at a price of $25.09 and has a current yield of 5.98% and yield-to-call of 5.92%.

Here is what the stock’s YTC curve looks like right now:

Source: Author’s spreadsheet

The Company

As per Reuters:

Bank of America Corporation, incorporated on July 31, 1998, is a bank holding company and a financial holding company. The Company is a financial institution, serving individual consumers, small- and middle-market businesses, institutional investors, corporations and governments with a range of banking, investing, asset management and other financial and risk management products and services. The Company, through its banking and various non-bank subsidiaries, throughout the United States and in international markets, provides a range of banking and non-bank financial services and products through its business segments: Consumer Banking, Global Wealth & Investment Management, Global Banking, Global Markets and All Other.

As it is the one of the most famous and the second biggest U.S. banks, there is no need for a very in-depth presentation. So, it’s better to move on to the dividend and profitability information about the common stock, BAC.

Source: FastGraphs.com

And here’s the market opinion:

Source: Tradingview.com

The dividend paid by BAC is constantly increasing, from $0.04 in 2013 to $0.39 in 2017. There’s a bullish expectation for the next couple of years as well. As an absolute value, for the last year, the company paid an almost $4B yearly dividend. In addition, the market capitalization of the company is around $306B, which makes Bank of America the second largest money center bank.

Capital Structure

Below you can see a snapshot of Bank of America’s capital structure as of its last quarterly report in March 2018. You can also see how the capital structure evolved historically:

Source: Morningstar.com

As of Q1 2018, BAC had a total debt of $270.3B ranking senior to the newly issued preferred stock. The new Series GG preferred shares rank junior to all outstanding debt and equal to the other outstanding preferred stocks, which total $24.6B.

The Bank of America Corporation Family

The company has 16 more outstanding preferred stocks and a third-party security, listed on a National Exchange under the umbrella of BAC:

Source: Author’s database

Recently, the company announced the redemption of Merrill Lynch Capital Trust III (MER-P*) and Countrywide Capital V (CFC-B*) on June 6, 2018, and the redemption of its 6.625% Non-Cumulative Preferred Stock, Series I (BAC-I*) on July 2, 2018; as such, they will not be a part of the following bubble chart. Furthermore, Bank of America has submitted a redemption notice of approximately three-fourths of its 6.204% Non-Cumulative Preferred Stock, Series D (BAC-D).

Source: Author’s database

If we compare the newly issued Series GG preferred stock with the rest of BAC’s preferred stocks, we can see that it seems to be fairly priced vs. its closest “brothers,” BAC-A and BAC-C. Furthermore, there are a plethora of corporate bonds issued by the company; the picture below presents only a small part of it:

Source: FINRA

For my comparison, I choose a fixed-rate bond that matures almost the same as the call date of BAC-B, May 15, 2023.

Source: FINRA

BAC4126820, as it is the FINRA ticker, is rated an A- and has a yield-to-maturity of 3.676%. This should be compared to the 5.92% yield-to-call of BAC-B, but when making that comparison, remember that BAC-B’s YTC is the maximum you could realize if you hold the preferred stock until 2023. This result is a yield spread of 2.3% between the two securities. This yield margin seems to be a little high, despite the higher rank in the capital structure and the higher credit rating of the bond, especially given how well capitalized BAC seems to be. At these price levels, BAC-B looks like the better security of the two.

Sector Comparison

The chart below contains all preferred stocks in the money center banks sector (according to Finviz.com) that pay a fixed dividend rate and have a par value of $25. It is important to take note that none of these preferred stocks are eligible for the 15% federal tax rate.

Source: Author’s database

Take a look at the investment grades only:

Source: Author’s database

And look at these, with a positive yield-to-call:

Source: Author’s database

The Banking Preferreds

The chart below contains all preferred stocks issued by a bank with a par value of $25 that have qualified fixed dividend rate.

Source: Author’s database

Again, the investment grades only:

Source: Author’s database

And these have a positive yield-to-call:

Source: Author’s database

All BBB- Preferred Stocks

The last chart contains all preferred stocks that pay a fixed dividend rate, have a par value of $25, a BBB- Standard & Poor’s rating and a positive yield-to-call.

Source: Author’s database

The main group:

Source: Author’s database

Redemption Following a Regulatory Capital Event

As per BAC’s 424B5 filing:

At any time within 90 days after a capital treatment event, and at the option of our board of directors or any duly authorized committee of our board of directors, we may provide notice to holders of the Preferred Stock that we will redeem the Preferred Stock in accordance with the procedures described below, and subsequently redeem, out of funds legally available therefor, the Preferred Stock in whole, but not in part, at a redemption price equal to $25,000 per share (…) For purposes of the above, “capital treatment event” means the good faith determination by us that, as a result of any:

  • proposed changes in those laws or regulations that is announced or becomes effective after the initial issuance of any shares of the Preferred Stock; or
  • official administrative decision or judicial decision or administrative action or other official pronouncement interpreting or applying those laws or regulations that is announced or becomes effective after the initial issuance of any shares of Preferred Stock,

there is more than an insubstantial risk that we will not be entitled to treat an amount equal to the full liquidation preference of all shares of Preferred Stock then outstanding as additional Tier 1 capital (or its equivalent) for purposes of the capital adequacy guidelines or regulations of the Federal Reserve or other appropriate federal banking agency, as then in effect and applicable, for as long as any share of Preferred Stock is outstanding.

Redemption of the Preferred Stock is subject to our receipt of any required prior approvals from the Federal Reserve or other appropriate federal banking agency.

Use of Proceeds

We intend to use the net proceeds from the sale of the depositary shares representing interests in the Preferred Stock for general corporate purposes, including, but not limited to, the repurchase or redemption of outstanding preferred securities.

Addition to the S&P preferred stock index

With the current market capitalization of the new issue of $1.2B, it is a potential addition to the S&P U.S. Preferred Stock iShares Index (NASDAQ:PFF). If the average monthly volume of BAC-B after its first six months trading on the NYSE is more than 250,000, it would be eligible to be included in the S&P U.S. Preferred Stock Index. With fewer than six months of trading history, issues are evaluated over the available period and may be included if available trading history infers the issue will satisfy this requirement.

Conclusion

This is an informational article about the new preferred stock, BAC-B. With this kind of article, we want to keep you informed of all new preferred stock and baby bonds IPOs. I believe that BAC-B offers good returns when compared to other securities in BAC’s capital structure and to other preferred stocks in its peer group. The issuer company is well capitalized and is poised to increase its profitability in the coming year. Overall, I think that BAC-B offers nice returns for the risks that you are taking.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Related Posts:

  • No Related Posts