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CMS Energy Corporation: A Safe New 5.875% Baby Bond IPO

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Introduction

In this article, we want to present a new Baby Bond issued by CMS Energy Corporation (CMS).

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

The New Issue

Before we submerge into our brief analysis, here is a link to the 424B2 Filing by CMS Energy Corporation – the prospectus.

Source: SEC.gov

For a total of 25.2M notes issued, the total gross proceeds to the company are $630M. You can find some relevant information about the new baby bond in the table below:



Source: Author’s spreadsheet

CMS Energy Corporation 5.875% Junior Subordinated Notes due 2079 (CMSD) pays a fixed interest at a rate of 5.875%. The new issue bears a ‘BBB-‘ Standard & Poor’s rating, is callable as of 03/01/2024, and is maturing on 03/01/2079. CMSD is currently trading above its par value at a price of $25.48 and has a 5.43% Yield-to-Call and a 5.76% Yield-to-Maturity. The interest paid by this baby bond is not eligible for the preferential 15% to 20% tax rate. This results in the “qualified equivalent” YTC and YTM sitting around 4.52% and 4.80%, respectively.

Here is the product’s Yield-to-Call curve:



Source: Author’s spreadsheet

The Company

CMS Energy is an energy company operating primarily in Michigan and is the parent holding company of several subsidiaries, including Consumers Energy Company (“Consumers“) and CMS Enterprises Company (“Enterprises“). Consumers is an electric and gas utility company serving Michigan’s lower peninsula. Consumers owns and operates electric generation, transmission and distribution facilities and gas transmission, storage and distribution facilities. Consumers serves individuals and businesses operating in the alternative energy, automotive, chemical, metal and food products industries, as well as a diversified group of other industries. Consumers provides electricity and/or natural gas to 6.7 million of Michigan’s 10 million residents. Consumers’ rates and certain other aspects of its business are subject to the jurisdiction of the Michigan Public Service Commission and the Federal Energy Regulatory Commission, as well as to North American Electric Reliability Corporation reliability standards. Enterprises, through its subsidiaries and equity investments, is engaged in domestic independent power production, the marketing of independent power production and the development of renewable generation. CMS Energy manages its businesses by the nature of services each provides and operates principally in three business segments: electric utility, gas utility, and enterprises, its non-utility operations and investments.

Source: 424B2 Filling by CMS Energy Corporation

Below, you can see a price chart of the common stock, CMS:



Source: Tradingview.com

For 2018, the common stock has paid а $1.43 yearly dividend. With a market price of $54.60, the current yield of CMS is at 2.62%. As an absolute value, this means it pays more than $405.16M in dividends yearly.

In addition, the market capitalization of CMS is around $15.37B.

Capital Structure

Below, you can see a snapshot of CMS Energy’s capital structure as of the time of its last quarterly filing in December 2018. You can also see how the capital structure evolved historically.



Source: Morningstar.com | Company’s Balance Sheet

The CMS Energy Family



Source: Author’s database

CMS has two more outstanding baby bonds:

  • CMS Energy Corp 5.625% Junior Subordinated Notes due 3/15/2078 (CMSA)
  • CMS Energy Corp 5.875% Junior Subordinated Notes due 10/15/2078 (CMSC)

The company also has a preferred stock – Consumers Energy Co $4.50 Series Cumul Preferred Stock (NYSE:CMS.PB). The better security for comparison is definitely the other baby bonds, so, here is a bubble chart comparison with the “older brothers”:

By years-to-maturity and yield-to-maturity



Source: Author’s database

By yield-to-call and yield-to-maturity



Source: Author’s database

If we compare the newly issued CMSD with the rest of CMS’s baby bonds, we can see that there is little difference of which one of the company’s baby bonds you will choose. The 3 baby bonds have a very close call and maturity dates, and YTM close to 6%. Still, one issue, CMSC, with its Yield-to-Worst of 5.02% seems to be the worst choice.

Furthermore, CMS has several Corporate Bonds:



Source: FINRA

The picture above contains only a part of all issues. For my comparison, I chose a fixed-rate bond that has the closest maturity date to the maturity date of the newly issued baby bond, the 2064 Corporate Bond. Some information about the bond could be found in the table below.



Source: FINRA | CMS4154065

CMS4154065, as it is the FINRA ticker, is rated an ‘A’ and has a Yield-to-Maturity of 4.218%. This should be compared to the 5.95% Yield-to-Maturity of the newly issued baby bond, but when making that comparison, do remember that its YTM is the maximum you could realize if you hold the baby bond until 2079. This results in a yield spread of around 1.7% between the two securities, which can be explained by the higher rating and the closer maturity date of the Corporate Bond.

Sector Comparison

The image below contains all baby bonds that pay a fixed interest rate in the ‘Electric Utilities’ sector (according to Finviz.com). It is important to take note that none of these and baby bonds are eligible for the 15% federal tax rate.

  • By Years-to-Maturity and Yield-to-Maturity



Source: Author’s database

  • By Yield-to-Call and Yield-to-Maturity



Source: Author’s database

Take a closer look:



Source: Author’s database

Fixed-Rated Baby Bonds

The next chart contains all baby bonds that pay a fixed interest, have a maturity date of between 50 to 70 years and also have a positive Yield-to-Call.

  • By Years-to-Maturity and Yield-to-Maturity



Source: Author’s database

  • By Yield-to-Call and Yield-to-Maturity



Source: Author’s database

Again, a closer look:



Source: Author’s database

Investment-Grade Rated Baby Bonds

This chart contains all baby bonds that pay a fixed interest, have a positive Yield-to-Call and carry an investment grade S&P rating.

  • By Years-to-Maturity and Yield-to-Maturity



Source: Author’s database

  • By Yield-to-Call and Yield-to-Maturity



Source: Author’s database

For a better idea, the main group:



Source: Author’s database

Special Considerations

The company may redeem the 2079 Junior Subordinated Notes at its option before their call date:

    • if certain changes in tax laws, regulations, or interpretations occur, at a redemption price equal to 100% of the principal amount of the Notes, plus accrued and unpaid interest, if any, thereon to, but not including, the redemption date.

    • if a rating agency makes certain changes in the equity credit criteria for securities such as the Notes. In this event, the redemption price will be equal to 102% of the principal amount of the Notes, plus accrued and unpaid interest, if any, thereon to, but not including, the redemption date.

Source: 424B2 Filing by CMS Energy Corporation

Use of Proceeds

We estimate that the net proceeds from the sale of the Notes, after deducting the underwriting discount but before deducting estimated offering expenses, will be $613,668,409.56. We intend to use the net proceeds of the offering of the Notes to repay the $180 million outstanding term loan under our Term Loan Credit Agreement dated as of June 11, 2015, to repay the $300 million outstanding term loan under our Term Loan Credit Agreement dated as of December 28, 2018, and for general corporate purposes.

Source: 424B2 Filing by CMS Energy Corporation

iShares Preferred and Income Securities ETF

The main benchmark, PFF, which is the ETF that seeks to track the investment results of the S&P US Preferred Stock iShares Index, is in progress of changing its investment objective. The fund is expected to change the underlying index, passing through a Transition index (“ICE Exchange-Listed Preferred & Hybrid Securities Transition Index“) during the period from February 1, 2019, to October 31, 2019, and after that will track the “ICE Exchange-Listed Preferred & Hybrid Securities Index“. Since the requirements for addition of the New Index are much likely the same as the old one (with the difference that the New Index will also include notes), which is why CMSD is now a part of the PFF holdings.

Conclusion

This is an informational article about the new baby bond issued by CMS. With this kind of articles, we want to keep you informed about all new preferred stock and baby bonds IPOs. I think CMSD offers good returns when compared to the other babies issued by an ‘electric utility’ company and with the securities with a close maturity date as the new issue. Overall, I believe CMSD is a good choice for the risk that you are taking.

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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.

Source:

Initial Public Offering & Preferred Stock News


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