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Preferred Stock IPO: 5.50% From BancorpSouth Bank

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Introduction

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 BancorpSouth Bank (BXS). 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 8-K Filing by BancorpSouth Bank – the prospectus.

Source: FDIC.gov

For a total of 6M shares issued, the total gross proceeds to the company are $150M. You can find some relevant information about the new preferred stock in the table below:

Source: Author’s spreadsheet

BancorpSouth Bank 5.50% Series A Non-Cumulative Perpetual Preferred Stock (NYSE: BXS-A) pays a qualified fixed dividend at a rate of 5.50%. The new preferred stock has a ‘BB’ Standard & Poor’s rating and is callable as of 11/20/2024. Currently, the new issue trades above PAR at a price of $25.57 and has a 5.38% Current Yield and YTC of 4.98%

Here is how the stock’s YTC curve looks like right now:

Source: Author’s spreadsheet

The Company

BancorpSouth Bank is a financial holding company. The Company, through its principal bank subsidiary, conducts commercial banking and financial services operations in Alabama, Arkansas, Florida, Louisiana, Mississippi, Missouri, Tennessee, Texas and Illinois. The Company’s segments include Community Banking, Insurance Agencies, and General Corporate and Other. Its Community Banking segment provides a range of deposit products, commercial loans and consumer loans. Its Insurance Agencies segment serves as agents in the sale of commercial lines of insurance and full lines of property and casualty, life, health and employee benefits products and services. Its General Corporate and Other segment includes mortgage banking, trust services, credit card activities, investment services and other activities not allocated to the Community Banking or Insurance Agencies segments.

Source: Reuters.com | BancorpSouth Bank

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

Source: Tradingview.com

The company’s dividend on its common stock slightly increases every year, from $0.12 in 2013 to $0.62 in 2018. For 2019, the common stock is expected to have paid а $0.71 yearly dividend. With a market price of $37.19, the current yield of BXS is at 2.29%. As an absolute value, this means it pays $72.16M in dividends yearly. For comparison, the yearly dividend expenses for the newly issued Series A preferred stock is around $8.25M.

In addition, with a market capitalization of around $3.17B, BXS is one of the relatively largest ‘Regional – Southeast banks’ (according to Finviz.com).

Capital Structure

Below you can see a snapshot of BancorpSouth Bank’s capital structure as of its Quarterly Report in September 2019. You can also see how the capital structure evolved historically.

Source: Morningstar.com | Company’s Balance Sheet

As of Q3 2019, BXS had a total debt of $5.20M ranking senior to the newly issued preferred stock. The new Series A preferred stock rank is junior to all outstanding debt and equal to other future preferred stocks of the company. At this point, BXS-A is the only outstanding preferred stock.

The BXS Family

Except for the newly issued preferred stock, the company is issuing a $300M 4.125% Fixed-to-Floating Rate Subordinated Notes due November 20, 2029. However, the notes won’t be listed on any national exchange, but available information about the issue can be found in FINRA:

Source: FINRA| BXS4912283

BXS4912283, as it is the FINRA ticker, is rated an investment grade ‘Baa2’ by Moody’s (an analog of ‘BBB’ by S&P) and has a Yield-to-Maturity of 4.02%. This should be compared to the 4.98% Yield-to-Call of BXS-A, but when making that comparison, do remember that its YTC is the maximum you could realize if you hold the preferred stock until 2024. This results in a yield margin of around 1% between the two securities, which can be justified by the higher rating and also the higher rank in the capital structure of the company.

Sector Comparison

This section contains all preferred stocks, issued by a ‘Regional – Southeast Bank’ (according to Finviz.com), with a par value of $25, regardless of their type of dividend rate:

Source: Author’s database

The full list:

Source: Author’s database

The Banking Preferreds

In this section, I’ll compare the newly issued preferred stock with all other banks’ preferred stocks, with a par value of $25, that pay a fixed-rate dividend and have a positive YTC. It is important to take note that none of these preferred stocks are eligible for the 15% federal tax rate.

  • By Yield-to-Call and Current Yield

Source: Author’s database

Along with the new issue, all preferred stocks are currently trading above their par value, and the current yield is, in fact, their Yield-to-Best. That’s why the best way to compare the group is by their Yield-to-Worst (equal to their Yield-to-Call). This is a much more plausible yield curve.

  • By Years-to-Call and Yield-to-Call

Source: Author’s database

The Below-Investment Grade Preferred Stocks

The last charts contain all preferred stocks that pay a fixed dividend rate, have a par value of $25, a positive Yield-to-Call, and a ‘BB’, ‘BB+’, or “BB-” Standard & Poor’s rating. For a better idea, SCE-E, SCE-B, SCE-C, and SCE-D are excluded because of their hundredths yield.

Source: Author’s database

To see how the real Yield curve of these securities looks like, we’ll have to include some filters: the preferred stocks don’t have to be callable and have to trade above par value. The next chart will present the preferred stocks by their Years-to-Call and Yield-to-Call:

Source: Author’s database

Redemption Following A Regulatory Capital Treatment Event

We may redeem shares of the Series A Preferred Stock at our option, subject to regulatory approval, at a redemption price equal to $25 per share, plus any declared and unpaid dividends (without regard to any undeclared dividends) to, but excluding, the redemption date, (NYSE:I) in whole or in part, from time to time, on any Dividend Payment Date on or after November 20, 2024 or (II) in whole but not in part, at any time within ninety (90) calendar days following a Regulatory Capital Treatment Event (as defined herein).

Source: 8-K Filing by BancorpSouth Bank

Use of Proceeds

We intend to use the net proceeds of this offering of shares of Series A Preferred Stock for general corporate purposes, potentially including repurchases of shares of our common stock, future acquisitions and ongoing working capital needs.

Source: 8-K Filing by BancorpSouth Bank

Addition To The ICE Exchange-Listed Preferred & Hybrid Securities Index

With the current market capitalization of the new issue of around $150M, BXS-A is a potential addition to the ICE Exchange-Listed Preferred & Hybrid Securities Index during some of the next rebalancings. It will also be included in the holdings of the main benchmark, the iShares Preferred and Income Securities ETF (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.

Conclusion

As fixed-income traders, we follow every one preferred stock or baby bond, which is listed on the stock exchange. As such, BXS-A 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 is very lightly leveraged, as, in fact, it has currently only $5M of long-term debt, which will be increased with $300M of the newly issued fixed-to-floating subordinated notes due 2029. With the market capitalization of around $3.17B, the BXS’s Market Cap/(Long-term debt + Preferreds) ratio is at 7.04, which shows excellent coverage. Furthermore, BXS-A is currently the only preferred stock of the company, which pays $72M dividend expense on its common stock that is junior to the preferred stocks.

For comparison, the cost required for this liability in the amount of around $8M is 9x times less than the common stock distribution. As for the yields, the new IPO has the highest YTW from the sector and also one of the highest YTW when compared to all other fixed-rate preferred stocks, issued by a bank, lagging only behind BANC-D. Also, BXS-A is one of the best securities when compared to the other below-investment-grade-rated fixed-rate preferred stocks.

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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.

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