One Preferred Stock IPO In January – And It Yields 10% (RWT)

New offering summary:

Selecting preferred stocks

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. With just one new IPO to talk about this month, we thought we’d spend some time in this article reviewing the CDx3 Compliance Score criteria, established by Doug K. Le Du in his standard-setting book Preferred Stock Investing, 5th Edition. In the book, he writes:

To be considered a CDx3 Preferred Stock, a regular preferred stock must:

1) Pay a fixed dividend rate that is at least 0.50% above the “bottom of the barrel”;

2) Become callable five years after IPO;

3) Pay dividends quarterly;

4) Be rated “investment grade” by Moody’s Investors Service;

5) Be issued by a company that has a perfect track record of never having suspended the dividend payments on a preferred stock (and these are mostly decades old, multi-billion dollar companies);

6) Have a “cumulative” dividend obligation;

7) Be issued by a U.S. company;

8) Not be convertible to common stock in the future;

9) Have easy (online) access to the prospectus at IPO; and

10) Have a “par” value of $25.00.”

Here at CDx3 Notification Service, after discussions with Doug about criteria #4, since present-day preferred stock offerings are rated by Moody’s only a fraction of the time, we have expanded the criteria to encompass an investment grade credit rating from any of the NRSROs recognized by the SEC. (NRSRO stands for Nationally Recognized Statistical Ratings Organization, and SEC stands for the Securities and Exchange Commission).

About the new issue

This month’s new preferred stock offering was from Redwood Trust (RWT) a NYSE-traded specialty finance company focused on the housing market, with a common stock market cap of just north of $900 million currently (based on recent common stock prices around the $8/share mark at the time of this writing).

The company had convertible senior notes coming due in 2023 (and also has convertible notes coming due in both 2024 and 2025), and said it would use the new preferred stock offering proceeds to repurchase or repay a portion of these notes, with the balance of offering proceeds to go towards funding business and investment activity.

The offering was for 2.6 million shares of new Series A “fixed-rate reset” cumulative preferred stock, with an overallotment option for an additional 390,000 shares. A credit rating of BBB- was obtained from Egan-Jones Ratings Company. The dividend rate was set at an attractive 10% initial rate until April of 2028 (at which point the shares become callable by the company), and if not called the dividend will reset to the then-current 5-year US Treasury Rate plus a spread of 6.278%.

As a point of reference, the current 5-year Treasury rate at the time of this writing is 3.683%, which with a 6.278% spread would pencil out to 9.961%. The 5-Year treasury rate was under 2% a year ago, and above 4% in October. Thus the new yield for this preferred stock at the first reset in 2028 will depend greatly on what happens to the market for 5-year US treasury bonds between now and then. But until that time, investors are offered the initial fixed 10% dividend rate.

The new Series A preferred shares traded temporarily on the OTC under symbol RWTRP before moving to permanent symbol RWT-A on the New York Stock Exchange. During the temporary OTC trading period, shares were obtainable below their $25 offering price; as of this writing the shares last changed hands a hair above $25 in recent trading on the NYSE.

SEC filing for further information: RWT-A

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 Redwood Trust preferred mentioned above, RWT-A, traded temporarily on the OTC as RWRTP).

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.