Our goal is to present to you our IPO analysis for every new fixed income security that enters the market and to find out if there is any trading potential. In this article, we want to shed light on the newest Preferred Stock issued by Synovus Financial Corp. (SNV). 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 FWP Filing by Synovus Financial Corp.
For a total of 14M shares issued, the total gross proceeds to the company are $350M. You can find some relevant information about the new preferred stock in the table below:
Synovus Financial Corp. 5.875% Fixed–Rate Reset Non‑Cumulative Perpetual Preferred Stock, Series E (NYSE:SNV.PE) pays a qualified fixed dividend at a rate of 5.875% before 07/01/2024 and then switches to paying a floating rate dividend at a rate of the Five-year U.S. Treasury Rate, plus a spread of 4.127%. The new issue has a ‘BB-‘ Standard & Poor’s rating, pays quarterly dividends, and is callable as of 07/01/2024. Currently, the new issue trades above its par at a price of $25.6. It has a 5.74% Current Yield and YTC of 5.32%.
Here is the product’s Yield-to-Call curve:
Synovus Financial Corp., incorporated on June 9, 1972, is a financial services company and a bank holding company. The Company provides integrated financial services, including commercial and retail banking, financial management, insurance and mortgage services, to its customers through locally branded banking divisions of its subsidiary bank, Synovus Bank (the Bank), and other offices in Georgia, Alabama, South Carolina, Florida and Tennessee. The Company also provides life insurance premium financing. As of December 31, 2016, the Bank operated through 28 locally branded bank divisions throughout Alabama, Florida, Georgia, South Carolina and Tennessee. The Bank offers commercial banking services and retail banking services. The Bank’s commercial banking services include cash management, asset management, capital markets services, institutional trust services and commercial, financial and real estate loans.
Source: Reuters.com | Synovus Financial Corp.
Below, you can see the market opinion of the common stock, SNV.
The yearly dividend paid by SNV is constantly increasing for the last 9 years from $0.28 in 2012 to $1.00 in 2018, which is a 257% increase. Also, with the Q1 and Q2 dividends of $0.30, the expected yearly dividend of the common stock for 2019 is $1.20. With a market price of $33.63, the current yield of SNV is at 3.57%. As an absolute value, this means $189M yearly dividend expenses for the common. For comparison, the yearly dividend for all preferred stocks (including the newly issued Series E Preferred Stock) of the company is around $33.16M.
In addition, with a market capitalization of around $5.21B, Synovus Financial Corp. is the third biggest ‘Mid-Atlantic Bank’ (according to Finviz.com).
Below, you can see a snapshot of Synovus’s capital structure as of its last quarterly report in March 2019. You can also see how the capital structure evolved historically:
Source: Morningstar.com | Company’s Balance Sheet
As of Q1 2019, SNV had a total debt of $2.96B ranking senior to the newly issued preferred stock. The new Series E Preferred Shares rank junior to all outstanding debt and equal to the other outstanding preferred stock, the Series D that totals $195M.
The Ratios Of Synovus Financial Corp., Which We Should Care About
Here is the moment where I want to remind you of two important aspects of the preferred stocks compared to the common stocks.
- Preferred shareholders have priority over a company’s income, meaning they are paid dividends before common shareholders.
- Common stockholders are last in line when it comes to company assets, which means they will be paid out after creditors, bondholders, and preferred shareholders.
Based on our research and experience, these are the most important metrics we use when comparing preferred stocks:
- Market Cap/(Long-term debt + Preferreds). This is our main criteria when determining credit risk. The bigger the ratio, the safer the preferred. Based on the latest annual report and taking into consideration the latest preferred issue, we have a ratio of 5,210/(2,959 + 545) = 1.48.
- Earnings/(Debt and Preferred Payments). This is also quite easy to understand approach. One can use EBITDA instead of earnings, but we prefer to have our buffer in what is left to the common stockholder. The higher this ratio, the better. The ratio with the 2018 results is 428/(49 + 33) = 5.22! which indicates that there is a solid buffer for the preferred stockholders and the bondholders and no need to worry about the payments.
The Synovus Financial Corporation Family
SNV has one more outstanding preferred stock: Synovus Financial Corp. 6.30% Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series D (NYSE:SNV.PD):
SNV.PD also pays a qualified fixed dividend, at a rate of 6.30% before 06/21/2023. Unlike, SNV.PE, ‘D’ then switches to paying a floating rate dividend at a rate of the Three-month LIBOR plus a spread of 3.3352%, while the Series E is related to the Five-year U.S. Treasury Rate, that is the main difference between the two. SNV.PD also carries a ‘BB-‘ Standard & Poor’s rating, pays quarterly dividends, and is callable as of 06/21/2023. Currently, with a price of $25.95, it has a Current Yield of 6.07% and YTC of 5.33%. With a Yield-to-Worst, the new IPO is fairly priced with the Series D Preferred stock. Still, it is very difficult to make a comparison between the LIBOR and the U.S. Treasury rate, and the uncertainty over the LIBOR future and its successor put some uncertainties.
In addition, in the following chart, you can see a comparison between the SNV’s older preferred stock, SNV.PD, and the fixed-income securities benchmark, the iShares U.S. Preferred Stock ETF (PFF). What we see is a close correlation between the two (SNV.PD is a part of the benchmark’s holdings, though), as the preferred stock outperforms the ETF quite distinctly. Still, during the massive sell-off at the end of the last year, when PFF had lost more than 11% of its value, there was some convergence between them.
Furthermore, there are three corporate bonds issued by the company:
For my comparison, I choose the bond that matures closest to the call date of SNV.PE, the 2025 Corporate Bond.
Source: FINRA | SNV4317428
SNV4317428, as it is the FINRA ticker, is rated a ‘BB+’, and has a Yield-to-Maturity of 5.27%. This should be compared to the 5.32% Yield-to-Call of SNV.PE, but when making that comparison, remember that SNV.PE’s YTC is the maximum you could realize if you hold the preferred stock until 2024. This result is a yield spread of 0.05% between the two securities, which seems insufficient against the backdrop of the higher rank in the capital structure and the higher credit rating of the Bond. At this point, the Bond is the better one, but it is the harder to trade.
The Banking Preferreds
As, together with CFG.PD, the Synovus preferred stocks are the only fixed income securities in the ‘Regional – Mid-Atlantic Banks’ sector, I’ll compare the newly issued preferred stock with all bank preferred stocks, with a par value of $25, that have a qualified fixed-to-floating dividend rate.
By Yield-to-Call and Current Yield
The upper right stock is the one the highest YTC and the highest CY at the same time. However, in this case, the Current Yield is practically the Yield-to-Best.
By Years-to-Call and Yield-to-Call
This is the yield curve of all fixed-to-floating (plus the new reset rate) preferred stock, as they all are still not callable, trade above their value, and all have a positive Yield-to-Call. The higher the YTC, the better the security, which is actually its Yield-to-Worst. With its 5.32%, SNV.PE is located in the top, just below TSCBP with its 5.61% Yield-to-Call. The other SNV’s preferred stock, SNV.PD, also looks competitive with its 5.30% Yield-to-Call with a year less to its call date than SNV.PE. Take note that all are either below investment grade or even not rated by S&P. The only investment-grade securities in this group are WFC.PR, WFC.PQ, and USB.PM, as WFC.PQ is the better of the three with its 4.89% Yield-to-Worst with 4 years to call date.
Here is the full list:
All BB- Preferred Stocks
Despite the specifics of the newly issued preferred stock, I’ll compare it to all preferred stocks that have a par value of $25 and a ‘BB-‘ Standard & Poor’s rating. With the newly issued preferred stock, there are a total of 7 issues that are all issued by a financial company. For a better idea, FHN.PA is excluded from the bubble charts because of its negative YTC but takes part in the table below.
The bubble chart shows the preferred stocks from the group by their Yield-to-Call and Current Yield.
To see how the real Yield curve of these securities looks like, I’ll present the BB- preferred stocks by their Years-to-Call and Yield-to-Call:
Again, the full list:
Redemption Following a Regulatory Capital Event
In addition to our ability to redeem the Preferred Stock on the First Call Date or any subsequent reset date, we may redeem all (but not less than all) of the shares of the Preferred Stock at any time after it is issued upon the occurrence of certain events involving the capital treatment of the Preferred Stock if we determine in good faith that a “regulatory capital treatment event,” has occurred. This redemption would be subject to the prior approval of the Federal Reserve.
Use of Proceeds
We estimate that the net proceeds from this offering, after deducting underwriting discounts and commissions and the estimated expenses of this offering payable by us, will be approximately $ million (or approximately $ million if the underwriters exercise their option to purchase additional shares in full). We intend to use the net proceeds of this offering for general corporate purposes, including share repurchases.
Addition to the iShares U.S. Preferred Stock ETF
With the current market capitalization of the new issue of around $350M, SNV.PE can be considered with a high probability as an addition to the S&P US Preferred Stock iShares Index during some of the next rebalancings. It will also be included in the holdings of the main benchmark, PFF, which is the ETF that seeks to track the investment results of this index, and which is important to us due to its influence on the behavior of all fixed-income securities. I’ll just remind you about the last year rally in the fixed-income borne from the redemption of the two “giants” HSEA and HSEB and the released cash of over $600M used from PFF to buy more of the rest of its holdings.
As fixed-income traders, we follow every one preferred stock or baby bond, which is listed on the stock exchange. As such, SNV.PE is no exception, and the homework we always do we share it with the public. It is not necessary for the IPO to be an arbitrage and a bargain, but in many cases, the new security happens to be better than the ones already trading on the market.
The company debt coverage is quite good. There is a huge buffer to support the preferred stock. The common stock yearly dividend is constantly increasing, and at this point, it is paying 3x more dividend than its preferred stocks that are senior to the company’s equity. Generally, the two preferred stocks of Synovus are one of the best comparing with all F2F banking preferred stocks, as TSCBP is the only with the highest return. If we look at the investment-grade securities in the sector, we’ll find only 3 issues with WFC.PQ being the best as it has 4.70% YTC for 4 years to call date.
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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.