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.

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Enbridge Simplification: A Slap In The Face To Shareholders

The simplification transaction announced by Enbridge (ENB) on Thursday, May 17, is a massive one, a nearly $10 billion deal in what will be all-stock consideration. It is also turning out to be a harsh lesson for shareholders of the company’s sponsored vehicles: Enbridge Energy Partners (EEP), Enbridge Energy Management (EEQ), Enbridge Income Fund (OTC:EBGUF), and Spectra Energy Partners (SEP). Such simplification transactions are getting more commonplace within the master limited partnership (MLP) space recently, and some parts of this deal were widely expected to occur over the next several years.

What was not expected was just how harsh the deal terms are for shareholders and the highly aggressive language taken toward its daughter firms. The reasons for the deal rationale represent a complete turn from statements made just a few months prior. While this deal certainly benefits Enbridge, it cripples any good will with shareholders of daughter firms. I suspect there are going to be some very irate shareholders sitting on large tax bills and shareholder lawsuits are probably inevitable. For those of us that avoided the firm, the proposal unfortunately might drive investor capital away from the subsector when it needs it most.

Management’s Take on Simplification

For Enbridge, management touted the transaction’s ability to simplify the corporate and capital structure, allowing Enbridge to have full ownership of core strategic assets. That’s a true statement. However, the tone toward its daughter firms was incredibly negative and is a complete turnaround from statements made recently. For perspective, within its presentation of deal economics, Enbridge stated it should see its own credit profile enhanced by “eliminating sponsored vehicle public distributions” (I’m sure Seeking Alpha income investors love that part) and that “sponsored vehicles are ineffective and unreliable standalone financing vehicles.”

The blame for this has been pinned on a weak market for public valuations of midstream firms, the change in FERC policy on cost recovery, and lasting impact from U.S. tax reform. This broad blanket statement on the MLP structure is an ignorant one in my opinion. There are more than a few MLPs out there – correctly run – that have very low costs of capital, even in this environment: MPLX (MPLX), Shell Midstream (SHLX), and Phillips 66 Partners (PSXP) are all examples. Instead of taking responsibility for its own poor decisions in building out the capital structure and getting itself into this mess in the first place, management has decided to shirk responsibility and cast blame elsewhere.

Source: Enbridge Partners Simplification Transaction, Slide 6

Some Seeking Alpha readers often chide me (or other contributors for that matter) for not listening to management guidance or taking statements made on conference calls as gospel. In other words, “management knows best.” For every company I research, I form my own opinion before reading or listening to a single sentence on a conference call. This Enbridge saga is yet another opportunity to show why shareholders need to do their own due diligence and come to their conclusions. Let us wind back the clock and see what Chief Financial Officer of Enbridge John Whelen had to say just two months ago on the Q4 conference call (paywall):

With respect to our sponsored vehicles, the good news is that the legislation maintained the competitive tax advantages of our MLPs relative to corporate structures through at least 2025.

This was followed by a statement, picked up by other Seeking Alpha contributors, that the losses faced at Enbridge Energy Partners would be balanced out by gains for Enbridge Income Fund. In other words, neutral to earnings across the firms.

Looking forward, on balance, the Fund Group will actually benefit modestly from tax reform. As I noted earlier, EEP’s FSM tolls will be reduced as a result of the reduction in U.S. tax rates. To the extent the EEP tolls go down, ENF will see a corresponding uptick in its Canadian Mainline toll revenue under the existing International Joint Tolling framework.

Just two months ago, the competitive tax advantage of MLPs had been maintained and the FERC policy change would have no real change on dollars flowing to the Enbridge family due to the Joint Tolling Framework. Compare those statements with the ones made as part of this deal announcement. It is startling. Make no mistake, nothing has materially changed in the past two months. Was the tone on the Q1 conference call a little more negative? Sure, but management was just one week out from dropping this bombshell on investors. In short, management was happy to assuage investor concerns before pulling the rug out from under them.

Premium? What Premium?

If a company is going to roll up assets that are not being valued correctly in the public market, the least most of these firms do is throw a bone to shareholders. Slap a 10, 15, or 20% premium on the deal and the acquirer is still getting a steal on the assets versus replacement cost. Further, this placates shareholders a bit who have undergone quite a bit of pain and helps aid the transaction in getting past the conflicts committee. As a result, hopefully the general partner avoids getting sued in the process. What did Enbridge offer shareholders?

  • SEP unitholders will receive 1.0123 common shares of Enbridge per SEP unit, representing a value of US$33.10 per SEP unit based on the closing price of Enbridge common shares on the NYSE on May 16, 2018 – equivalent to the closing price of SEP’s common units on the NYSE on such date.
  • EEP unitholders will receive 0.3083 common shares of Enbridge per EEP unit, representing a value of US$10.08 per EEP unit based on the closing price of Enbridge common shares on the NYSE on May 16, 2018 – equivalent to the closing price of EEP’s common units on the NYSE on such date.
  • EEQ shareholders will receive 0.2887 common shares of Enbridge per EEQ share, representing a value of US$9.44 per EEQ share based on the closing price of Enbridge common shares on the NYSE on May 16, 2018 – equivalent to the closing price of EEQ’s common shares on the NYSE on such date.

Investors won’t find that here. Not even a dollar. And that whole “EEQ shares are equivalent to EEP shares” thesis? The 10-K might say that they are equivalent, but management has certainly taken the stance that 1:1 does not mean 1:1. For all their trouble of forming an investor base for Enbridge to fund dropdowns, these investors will be locking in a massive loss, eating a major tax bill made worse by return of capital lowering their basis, and are being rewarded with Enbridge common stock and not cash.

While I’m sure some will try to spin this positively, even as a non-shareholder and someone who recommended against buying any of these companies in the past, it just leaves a sour taste in my mouth. Enbridge is a massive entity and the actions it takes have broad implications across the entire MLP space. Management teams that would never dream of trying to pull off a transaction like this due some sense of fiduciary duty will unfortunately have to deal with the consequences of an impaired investor base that might never invest a dollar in these types of assets again.

Disclosure: I am/we are long MPLS, SHLX.

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.

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Elon Musk Presents His Tunnel Vision to the People of LA

One day, if Elon Musk gets his way, the Leo Baeck Temple in Los Angeles’ tony Bel Air neighborhood will be just a hop, skip and a quick walk from the nearest Loop station.

The “Loop,” for the uninitiated, is what Musk calls his latest idea for moving people and things from one place to another. In his telling, you would bike or walk into a 16-passenger pod, or drive your car onto a street level elevator, which would ferry you onto an underground electric platform. For a measly $1, you’d be shot at 150 mph through a city-wide network of tunnels, until you reached whichever of the hundreds or thousands of stations fell closest to your destination, where another elevator would raise you back to the surface. This is different from the hyperloop, which would clock near supersonic speeds, and be used for long distances. But the goal is the same: no waiting, no gasoline, no traffic.

Elon Musk laid out his grand vision for a network of tunnels to a rapt crowd in Los Angeles, and promised a grand celebration when it’s all done. “I think a party in a tunnel would be kind of fun,” he said.

The Boring Company

Today, though, getting to the temple, where Musk hosted the Boring Company’s first public informational meeting, requires crawling through miles of hideous 405 rush hour traffic. Or an even longer ride on the public bus, the only accessible public transit option, which tortuously wends its way through the Los Angeles hills.

Still, an hour and a half before the event’s scheduled start, a small crowd of people were pressing against the yellow tape holding them back from the main entrance. The few hundred folks who managed to score a ticket fell into two camps: local residents, typically older couples living in this wealthy neighborhood, and Elon fans, most of them young men in their Boring Company hats and SpaceX hoodies. They waited patiently for the CEO, who took the stage thirty minutes late. Guess why. “We were stuck on the damn 405,” Musk said.

During the 45 minutes he spent on stage, Musk laid out out engineering details, talked specs, fielded carefully moderated questions, and defended his plan to build a 2.1-mile test tunnel adjacent to the 405 freeway. That project, he says, will allow the Boring Company to determine the specific challenges of tunneling in this part of LA’s soil and bedrock.

“Highways are at the outer limit of their capacity,” he said as Gary the snail, his company’s mascot, silently inched across its pineapple-shaped terrarium, sitting next to the CEO. (Musk wants his tunnel boring machine to beat Gary in a race.) “For tunnels, you can have hundreds of lanes. There’s no real limit.”

Musk says he wants to give rides in the new tunnel, to get public feedback, and to feed into plans for a much larger system under the city. “It’ll be like a weird little Disney ride in the middle of LA. Bring your flamethrower,” he said, to laughs and whoops from the very friendly crowd.

Tunnel Vision

Six months after Musk went on a Twitter tirade about LA traffic in December 2016, he had created the Boring Company, and was digging a tunnel under the parking lot at SpaceX’s headquarters in Hawthorne, California. The internet payment maven-turned-carmaker-turned-space enthusiast-turned-infrastructure baron has promised to completely change the way humanity bores tunnels, pledging make boring as much as 15 times faster, and reduce its cost by a factor of ten.

Thus far, the Boring Company is leaning on two used tunnel boring machines, and has yet to unveil any novel tech. But Musk did recently show off a completed, 2-mile proof-of-concept tunnel in Hawthorne, which begins in the parking lot of SpaceX’s headquarters.

Now, Musk wants to build this new, 2.1-mile tunnel, near LA’s Sepulveda pass. It’s all part of his broader vision of a sprawling network that could take riders from Sherman Oaks in the north to Long Beach Airport in the south, Santa Monica in the west to Dodger Stadium in the east—without all that troublesome traffic.

Boring has applied for a environmental review exemption for this tunnel, arguing no one will actually use it for transit. And while the LA City Council’s Public Works committee did approve the exemption late last month, it will need full approval from the entire council before the project can move forward.

Meanwhile, two neighborhood groups have sued the city over the exemption, arguing that it’s an illegal, piecemeal approval for the Boring Company’s larger ambitions—that whole network thing. (The Boring Company has pledged to cover any legal costs stemming from the project.) Culver City, to LA’s west, is mulling its own lawsuit, says Vice Mayor Meghan Sahli-Wells, even if the tunnel does not enter its territory. She decided against attending the event, however. “I don’t even think I’m going to try to bear the traffic,” she said Thursday afternoon.

Musk insisted the Boring Company is playing the good partner. “Sometimes people just wonder, ‘Are they just going and building this crazy tunnel, and seeking exemption from all oversight?’” he said. He insisted that isn’t the case, saying the company will have to fill out “something like 600 pages of permits” and complete a full environmental review before building a larger network.

Digging Deep

Musk took time to reassure people that they wouldn’t feel the tunnelling process beneath them, and that the trucks hauling dirt away would be limited to daytime hours. As for earthquakes, he explained that tunnels are actually quite safe, and built to endure seismic rumblings.

Still, mass transit and boring experts have pooh-poohed the project. They wonder if the layers of tunnels might run into the same induced demand quandary as lane-widening projects. They wonder if money and time wouldn’t be better spent on proven mass transit systems, like Bus Rapid Transit. They wonder how Musk intends to improve the speed of tunneling so dramatically. They wonder if the Boring Company intends to connect its stations with other forms of public transit. (Yes, Musk said on stage. He said the project will solve induced demand issues by tunneling layers upon layers deep underground.)

The Boring Company has at least one important ally in its corner. On Thursday evening, LA’s Metro said in a statement that it had agreed to a “partnership” with the Musk venture. Metro did not respond to WIRED’s requests for clarification Thursday evening.

The final question Musk faced concerned whether he’d celebrate when the Boring Company’s system launches. “Of course,” he said. “I think a party in a tunnel would be kind of fun.”

Then he left the stage to a standing ovation, cheered on by a roomful of people just waiting for him go and build the thing.


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