The Securities That Banks Are Backing Away From: Credit Weekly
(Bloomberg) -- US banks, among the few companies that still sell preferred shares, are following JPMorgan Chase & Co.’s lead and retreating from the securities, even as investors are eager to buy them.
Most Read from Bloomberg
-
Trump’s Gilded Design Style May Be Gaudy. But Don’t Call it ‘Rococo.’
-
Massachusetts to Follow NYC in Making Landlords Pay Broker Fees
Capital One Financial Corp. redeemed a $500 million preferred share this week, resulting in the market shrinking on a net basis this year, according to data compiled by Bloomberg. If the trend continues, this will be the second year in a row that the market for US bank preferreds has shrunk, something that hasn’t happened since the lenders were replacing obsolete capital after the global financial crisis.
At the same time, preferred managers have received more cash to invest this year, as investors pile into higher-yielding assets that can perform well when rates are cut. Assets under management in the 10 largest funds in the space have risen by more than 10% on average year-to-date, based on Bloomberg-compiled data.
Capital One’s redemption follows JPMorgan cutting its preferreds outstanding by more than a quarter last year. Banks are broadly paying off the securities because they don’t need as many of them anymore: capital regulations that made preferred shares attractive to issue, including the Basel III endgame rules, are being eased now in the US. The securities are expensive for banks, because they pay relatively high dividends.
But banks were among the few companies still selling preferred equities, a sort of equity with some debt-like characteristics, that helped finance the industrialization of America. For earlier generations of investors, the securities were an attractive source of income, offering more than a company’s notes would pay, but also coming with more risk. If the company fell on hard times, preferreds were close to the back of the line to be repaid, for instance.
Non-financial companies have been backing away from preferreds, in favor of securities known as “hybrid bonds.” Hybrids are among the last bonds to be repaid if a company runs into trouble, but aren’t as far back in line as preferreds, which are equity. Issuance became viable for companies once Moody’s Ratings changed its methodology in early 2024 and the securities quickly became one of the hottest sources of capital-raising in the US.
Content Original Link:
" target="_blank">
