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Telecom Italia mulling spin-off, IPO of data center business – source

ROME, Oct 8 (Reuters) – Italian phone group Telecom Italia is considering the possible spin-off and listing of its data center business, a source close to the matter said on Tuesday, confirming an earlier report by Bloomberg.

(Reporting by Elvira Pollina, editing by Silvia Aloisi)

Source: IPOs

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WeWork’s financing lifeline hinges on SoftBank talks

Signage is seen at the entrance of the WeWork offices on Broad Street in New York.

David ‘Dee’ Delgado | Bloomberg | Getty Images

WeWork is locked in negotiations this week with its largest shareholder, Softbank Group, over a new $1 billion investment to enable the shared office space company to go through a major restructuring, according to sources familiar with discussions.

If the talks are successful, WeWork, which had to abandon an initial public offering last week because of investor concerns about how it was valued and its business model, will seek to negotiate a $3 billion debt deal with JPMorgan, the sources said.

SoftBank founder and CEO Masayoshi Son publicly backed WeWork in an interview with Nikkei Business magazine this week, saying in 10 years the company would be “making substantial profits.”

WeWork and SoftBank did not immediately respond to requests to comment.

However, SoftBank and its Vision Fund, which controls about 29 percent of WeWork after investing or committing to invest $10.65 billion, are facing unusual crosscurrents as they seek a new deal.

SoftBank wants to renegotiate a $1.5 billion warrant deal, which was agreed in January based on WeWork being valued at around $47 billion, before providing the additional $1 billion, one of the sources said. WeWork’s valuation estimates had fallen to as low as $10 billion to $12 billion around the time that it decided to abandon the IPO, Reuters reported last month.

Normally, SoftBank would be expected to seek as low of a valuation as possible for the renegotiated and new investments so that it can pick up a bigger stake.

But securities analysts say that if it invests in WeWork at a valuation below about $24 billion-$26 billion, which is the estimated basis for its entire stake, then SoftBank and its Vision Fund could suffer on-paper losses. Those would be large if the valuation were closer to $10 billion.

The success of the talks with both SoftBank and Wall Street is essential if WeWork is going to survive in anything like its current form.

The company was already expected to pare back its ambitions significantly and to cut several thousand jobs, according to a source familiar with the matter.

WeWork lost $1.9 billion in 2018 and burned through $2.36 billion in cash in the first half of this year, and it could run out of money in the second quarter of 2020 at its current burn rate, according to an analysis last week by securities house Sanford C. Bernstein & Co.

Hopes for deal next week

WeWork hopes to complete the talks with SoftBank and JP Morgan as early as next week, the sources said, cautioning the plans are subject to change and timetable may still shift.

The bank does not want to get into intensive negotiations over the debt deal until it is sure that SoftBank has reached a new financing deal, one of the sources said.

It was unclear what kind of collateral the bank would demand.

Originally, a group of banks was prepared to provide WeWork with a $6 billion line of credit provided it raised $3 billion in the IPO.

JPMorgan declined to comment.

SoftBank has been reluctant to plow more cash into WeWork but now concludes that a fresh investment is necessary in order to have any hope of salvaging the investment it has already made, according to one source.

In the run-up to the planned IPO, investors raised concerns about WeWork’s ballooning losses and the potentially risky way in which it operates by signing long-term leases and then renting out spaces short term.

In recent weeks, global credit rating agencies Standard & Poor’s and Fitch Ratings have also downgraded WeWork’s credit ratings deeper into junk territory, while the company’s junk bond is trading at a record low.

WeWork last month replaced co-founder Adam Neumann as CEO with insiders Artie Minson and Sebastian Gunningham taking on the joint CEO roles.

The pair have talked about the need to return to WeWork’s core business of renting out trendy office space to freelancers and enterprises. That would pull the company back from the fringe activities Neumann had forayed into, such as a school, apartment buildings and various businesses.

The firm expects to tell staff about jobs cuts and planned divestments as early as next week, hoping the news will coincide with a new financing deal being in place, the sources said, again cautioning that the timeline is subject to change.

Source: IPOs

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‘Just say no to IPO’ — Cramer says new offerings are a bigger threat to the market than China – CNBC

CNBC’s Jim Cramer said Monday that too many initial public offerings coming to Wall Street pose a greater risk to the stock market than the U.S.-China trade war.

“Just say no to IPO,” Cramer said on “Squawk on the Street.” “The market can’t handle another IPO. There’s just no money around.”

Earlier Monday morning, the “Mad Money” host tweeted that IPO oversupply is a “bigger threat to the U.S. markets than China.” High-level trade negotiations resume in Washington later this week, with reports that Beijing may want to narrow the scope of the negotiations.

It’s classic economics: The higher the supply (more shares), the lower the price. And it doesn’t help that many of these new stocks are getting cool receptions on Wall Street after billion-dollar-plus private valuations fail to hold up under public market scrutiny — count shares of Lyft, Uber and Peloton among them.

WeWork felt the wrath of potential public investors — enduring weeks of negative news on concerns about slashed valuations, confusing corporate governance, and a more than $900 million loss for the first six months of 2019, before pulling its IPO last week.

Earlier Monday, former Nasdaq CEO Bob Greifeld warned on CNBC that this year’s IPO climate feels similar to the late 1990s dot-com bubble.

“In a sense, it reminded me back of the dot-com era, when you had companies going public that had no known path to profitability,” said Greifeld, chairman of high-speed computerized trading firm Virtu Financial.

CNBC’s before the bell news roundup

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Source:

“ipo” – Google News

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UPDATE 2-SmileDirectClub tumbles after IPO banks give thumbs up

(Updates stock move, adds background on short seller report,)

Oct 7 (Reuters) – Several “buy” ratings from SmileDirectClub’s IPO banks failed to stop its stock from dropping 7% on Monday, reflecting Wall Street’s deepened distaste for money-losing startups in the wake of WeWork’s botched attempt to go public.

Underwriters of SmileDirectClub’s Sept. 11 initial public offer, including JPMorgan, Bank of America Merrill Lynch and UBS, launched analyst coverage of the Nashville, Tennessee-based company, with all recommending investors buy the stock.

Most brokerages assigned price targets below SmileDirectClub’s $23 IPO price. Including Monday’s drop, SmileDirectClub has tumbled 40% from that level.

Monday’s recommendations stand in contrast to a report on Friday from short seller firm Hindenburg Research that accused SmileDirectClub of “carelessly cutting corners” and “putting customer safety at risk.” The same day, SmileDirectClub denied those accusations, as well as allegations in a class action lawsuit in Nashville Federal court.

The company, which sells teeth aligners directly to customers, is among several large, money-losing startups whose IPOs this year have been received coolly by investors doubtful about their valuations and business models.

Last month, office-sharing startup WeWork’s parent company was forced to abandon its much-anticipated IPO due to skepticism about its burgeoning losses and corporate governance problems. Endeavor Group Holdings, the U.S. entertainment and talent agency company backed by Hollywood powerbroker Ari Emanuel, also pulled its listing plans.

JPMorgan was the most bullish of the new recommendations, with a price target of $31, while Credit Suisse was the least enthusiastic, with a target of $18. Shares traded at $13.95 in early afternoon on Monday.

Analysts at Credit Suisse said SmileDirectClub’s partnerships with drug retailers CVS Health Corp and Walgreens Boots Alliance Inc would allow it to expand its footprint.

J.P. Morgan analysts wrote that, “SmileDirectClub’s clear aligners and the direct-to-consumer business model the company employs solve many of the issues in the orthodontics market that have remained unaddressed for several decades high costs and a significant time commitment.”

Unprofitable companies holding IPOs in 2019 have seen a median return of 0%, compared to a median stock increase of 6% for profitable companies since their IPOs, according to a Reuters analysis.

Uber Technologies, 2019’s most hotly anticipated public listing, has tumbled 32% since its May IPO. Most analysts covering Uber recommend buying its shares, according to Refinitiv.

(Reporting by Noel Randewich in San Francisco and Akanksha Rana in Bengaluru Editing by Nick Zieminski)

Source: IPOs

Posted on

UPDATE 1-SmileDirectClub tumbles after IPO banks give thumbs up

(Adds detail on analyst ratings, updates stock move, adds background and PIX available)

Oct 7 (Reuters) – Several “buy” ratings from SmileDirectClub’s IPO banks failed to stop its stock from dropping 5% on Monday, reflecting Wall Street’s deepened distaste for money-losing startups in the wake of WeWork’s botched attempt to go public.

Underwriters of SmileDirectClub’s Sept. 11 initial public offer, including JPMorgan, Bank of America Merrill Lynch and UBS, launched analyst coverage of the Nashville, Tennessee-based company, with all recommending investors buy the stock.

Most brokerages assigned price targets below SmileDirectClub’s $23 IPO price. Including Monday’s drop, SmileDirectClub has tumbled 40% from that level.

The company, which sells teeth aligners directly to customers, is among several large, money-losing startups whose IPOs this year have been received coolly by investors doubtful about their valuations and business models.

Last month, office-sharing startup WeWork’s parent company was forced to abandon its much-anticipated IPO due to skepticism about its burgeoning losses and corporate governance problems. Endeavor Group Holdings, the U.S. entertainment and talent agency company backed by Hollywood powerbroker Ari Emanuel, also pulled its listing plans.

J.P. Morgan was the most bullish of the new recommendations, with a price target of $31, while Credit Suisse was the least enthusiastic, with a target of $18. Shares traded at $13.95 in early afternoon on Monday.

Analysts at Credit Suisse said SmileDirectClub’s partnerships with drug retailers CVS Health Corp and Walgreens Boots Alliance Inc would allow it to expand its footprint.

J.P. Morgan analysts wrote that, “SmileDirectClub’s clear aligners and the direct-to-consumer business model the company employs solve many of the issues in the orthodontics market that have remained unaddressed for several decades high costs and a significant time commitment.”

Unprofitable companies holding IPOs in 2019 have seen a median return of 0%, compared to a median stock increase of 6% for profitable companies since their IPOs, according to a Reuters analysis.

Uber Technologies, 2019’s most hotly anticipated public listing, has tumbled 32% since its May IPO. Most analysts covering Uber recommend buying its shares, according to Refinitiv.

(Reporting by Noel Randewich in San Francisco and Akanksha Rana in Bengaluru Editing by Nick Zieminski)

Source: IPOs

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Urstadt Biddle Properties: A Good Preferred Stock IPO In A Problematic Sector



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 Urstadt Biddle Properties Inc (UBA). 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 424B5 Filing By Urstadt Biddle Properties Inc. – the prospectus.

Source: SEC.gov

For a total of 4M shares issued, the total gross proceeds to the company are $100M. You can find some relevant information about the new preferred stock in the table below:



Source: Author’s spreadsheet

Urstadt Biddle Properties Inc. 5.875% Series K Cumulative Redeemable Preferred Stock (NYSE: UBP.PK) pays a fixed dividend at a rate of 5.875%. The new preferred stock has no Standard & Poor’s rating and is callable as of 10/01/2024. Currently, the new issue trades a little above PAR at a price of $25.28 and has a 5.76% Current Yield and YTC of 5.69%. The dividends paid by this preferred stock are not eligible for the preferential 15-20% tax rate on dividends. They are also not eligible for the dividend received deduction for corporate holders. This means that the “qualified equivalent” current yield and YTC would be 4.80% and 4.74%, respectively.

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



Source: Author’s spreadsheet

The Company

Urstadt Biddle Properties Inc. (NYSE: UBA) is a self-administered equity real estate investment trust (“REIT”) founded in 1969. We provide investors with a means of participating in the ownership of income-producing properties with ready liquidity. We are a proven leader in the ownership, operation, and redevelopment of high quality retail shopping centers predominantly located in the suburban, high demographic, high barrier to entry communities surrounding New York City. We take a disciplined, conservative approach to every aspect of commercial retail real estate. Whether its redevelopment, property management, or acquisitions, we make sound, strategic decisions based on solid demographics, broad experience, and stable resources. This has led many real estate experts to consider our property portfolio to be one of the highest quality portfolios of assets in our industry.

We have two Classes of Common Stock that are traded on the New York Stock Exchange under the ticker symbols UBP and UBA. These stocks are virtually identical in their rights except UBA receives at least a 10% higher dividend than UBP and has 1/20th of the vote that a share of UBP has. The majority of the UBP shares are owned by management who tend not to sell or trade their shares. Thus, UBA is much more liquid and is the stock that most institutions choose to invest in. We also have two classes of Preferred Stock, which trade on the New York Stock Exchange under the ticker symbols UBPRG, and UBPRH.

Source: The company’s website | Corporate Overview

Below, you can see a price chart of the two common stocks, UBA and UBP.



Source:
Tradingview.com

For 2019, the company is expected to pay a yearly dividend of $1.12 for UBA and $1.00 for UBP. With the current market price of $23.82 and $19.03, respectively, the current yield of UBA and UBP sits at 4.70% and 5.25%. As an absolute value, this means Urstadt Biddle Properties pays $43.45M in dividends yearly. For comparison, the yearly dividend expenses for all outstanding preferred stocks (with the newly issued series K Preferred Stock) of the company is around $18.12M.

In addition, with a total market capitalization of the two common stocks of around $1.09B Urstadt Biddle is one of the smallest Retail REITs (according to Finviz.com).

Capital Structure

Below you can see a snapshot of Urstadt Biddle Properties’ capital structure as of the time of its last quarterly filing in June 2019. You also can see how the capital structure evolved historically.



Source: Marketwatch.com | Company’s Balance Sheet

As of Q2, the company had a total debt of $323M ranking senior to the newly issued preferred stock. The new Series K preferred shares rank is junior to all outstanding debt and equal to the other preferred shares of the company, which total $190M.

The Ratios We Should Care About

Our purpose today is not to make an investment decision regarding the common stock of UBP but to find out if its new preferred stock has the need quality to be part of our portfolio. 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 1090/(323 + 290) = 1.78, indicating a very good level of debt and preferred stocks coverage.
  • 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 TTM financial results from the Income Statement data is 24/(14 + 18) = 0.75 which shows that the net income is not enough to cover all interest and preferred payments.

Urstadt Biddle Properties Preferred Stocks

The company has two more outstanding preferred stocks:

  • Urstadt Biddle Properties 6.75% Series G Cumulative Redeemable Preferred Stock (UBP.PG) and
  • Urstadt Biddle Properties 6.25% Series H Cumulative Redeemable Preferred Stock (UBP.PH)

In the table below, you can see some relevant information about all of Urstadt Biddle Properties’ outstanding preferred stocks:



Source: Author’s spreadsheet

Here is the moment to mention the company uses the proceeds of the UBP-K’s offering to redeem all of its Series G Preferred Stock on October 31, saving itself a yearly dividend expense of 0.875%. This is why the only suitable for comparison with the new IPO, is the second preferred stock, UBP-H.



Source: Author’s spreadsheet

UBP-H also pays a fixed dividend, at a rate of 6.25%, and it is also not rated by Standard & Poor’s. With the current price of $26.90, the Series H Preferred stock has a current yield of 5.76% and Yield-to-Call of 3.60%. As regards to the current yield of the newly issued security and its “older” brother, there is no big difference between the two. If we look at their Yield-to-Worst, with 5.69%, the Series K Preferred Stock rewards 2% more than the “D”. Moreover, something we have to keep in mind that UBP-H has a little more than 3 years to its call date, while UBP-H has two years more of call protection.

In addition, in the following chart, you can see a comparison between UBP-G and UBP-H and the fixed-income securities benchmark, the iShares Preferred and Income Securities ETF (PFF). Two radically different behaviors are observed: UBP-G trading with fewer fluctuations with a close performance to the ETF (still, passing much more quietly during the last year’s recession) and UBP-H that overwhelming outperforms the benchmark.



Source: Tradingview.com

Sector Comparison

The chart below contains all preferred stocks in the “REIT – Retail” sector (according to Finviz.com) that pay a fixed dividend and has a positive Yield-to-Call. It is important to take note that none of these preferred stocks are eligible for the 15% federal tax rate. For a clearer view, the preferred stocks issued by CBL & Associates Properties (CBL), Washington Prime Group (WPG), and Pennsylvania Real Estate Investment Trust (PEI) are excluded from the bubble chart.



Source: Author’s database

Here is the full list of all securities:



Source: Author’s database

All REIT Preferred Stocks

In the charts below, I’ll compare all REIT preferred stocks with a par value of $25 that pay a fixed dividend rate, excluding the preferred stocks issued by CBL & Associates and Washington Prime Group.



Source: Author’s database

The next chart presents only the preferred stocks with a positive yield-to-call:



Source: Author’s database

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



Source: Author’s database

Special Optional Redemption

Upon the occurrence of a Change of Control (whether before or after October 1, 2024), we may, at our option and subject to certain conditions, redeem the Series K Preferred Stock, in whole or in part, within 120 days after the first date on which such Change of Control occurred, for a cash redemption price per share of Series K Preferred Stock equal to $25.00 plus all accrued and unpaid dividends thereon (whether or not declared) to, but not including, the redemption date.

Source: 424B5 Filing By Urstadt Biddle Properties Inc

Use of Proceeds

We intend to use a portion of the net proceeds of this offering to fund the redemption of all of the outstanding shares of our Series G Preferred Stock. We intend to use the remaining net proceeds for other general corporate purposes, which may include the repayment of outstanding indebtedness, the funding of capital improvements to our existing properties and the acquisition of additional properties. Pending the use of the net proceeds as described above, we may use the net proceeds to make investments in short-term income-producing securities that are consistent with our qualification as a REIT.

Source: 424B5 Filing By Urstadt Biddle Properties Inc

Addition To The iShares U.S. Preferred Stock ETF

With the current market capitalization of the new issue of around $100M, it is a potential addition to the S&P US Preferred Stock iShares Index during some of the next rebalancings. If so, 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.

Conclusion

As fixed-income traders, we follow every one preferred stock or baby bond, which is listed on the stock exchange. As such, UBP-K 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 new preferred stock has quite an advantage over its closest relative, UBP-H, mainly due to the relatively low YTW of the “older” issue and its call date, 5 years (as a standard clause for each IPO of this type), compared to the 3 years to the call date of the “H”. Also, as a positive, it can be added the well historical performance of UBP’s preferred stocks against the benchmark, PFF. Moreover, being part of a very delicate sector where a few companies stand out in very poor current conditions and high volatility. It’s about Pennsylvania Real Estate Investment Trust, Washington Prime Group, CBL & Associates Properties, and even Cedar Realty Trust (CDR). As for the rest, with its 5.69% YTW, it is the best preferred stock in the sector by this indicator.

Trade With Beta

Coverage of Initial Public Offerings is only one segment of our marketplace. For early access to such research and other more in-depth investment ideas, I invite you to join us at ‘Trade With Beta.’

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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Use These 3 Tests To Pick The IPO Winners – Forbes

Venture capital investment rises and falls with the public’s appetite for IPOs. And with 2019 venture-backed IPOs falling way below the market averages, it looks like the cycle is about to head south.

That does not mean there are no recent IPOs worth investing in. Only that you could profit from knowing how to distinguish the winners from the losers. The losers are Uber and Lyft while the winners are Pinterest and Zoom Video.

(I have no financial interest in the securities mentioned).

2019 is proving to be a record year for U.S. venture capital investment – with $55 billion raised through the first half – well above the mid-point for 2018, which ultimately saw $116 billion raised – close to the record $120 billion raised in 2000, according to the PWC MoneyTree Report.

But will that flood of VC money keep pouring in if the companies disappoint investors after they go public? That disappointment must be growing. After all, “shares of technology startups and other companies that went public in the U.S. this year are trading roughly 5% above, on average, their prices at their initial public offerings, well short of the 18% gain in the S&P 500 index,” reported the Wall Street Journal.

Goldman Sachs reported that this is the worst IPO-stock performance since at least 1995. And that has replaced the fear of missing out with the fear of losing everything. Rick Kline, the co-chair of law firm Goodwin Procter LLP’s capital-markets practice, told the Journal, “I don’t see a lot of deals that are likely to go out the rest of this year. The market sentiment has changed.“

Not all of the 158 companies which have raised $53.1 billion on U.S. exchanges this year are poor performers. What makes the difference between Uber and Lyft – which have punished investors who bought into their IPOs by falling 29% and 50%, respectively – and the winners like Pinterest and Zoom Video which have risen 11% and 23%, respectively, since their IPOs?

Why the Winners Win And the Losers Lose

My guess is that investors have had it with decelerating companies that burn through cash to sell easy-to-copy services at a price that is way below their costs. Instead, they favor fast-growing companies that can make money – or at least are on a clear path to profitability.

Uber and Lyft are growing more slowly, losing money, and burning through cash. For the first half of 2019, Uber’s revenues grew a modest 19% to $5.4 billion while it posted a whopping $6.2 billion loss and burned through $450 million in cash from operations.

During the same period, Lyft’s revenues grew— up 82% to over $1.6 billion— while its net loss popped a whopping 331% to $1.78 billion as its operations consumed $70 million in cash.

Pinterest grew fast and is getting closer to cash flow break-even. Its revenues for the second quarter of 2019 increased 62% to $261 million while its cash flow burned from operations fell from $29 million to $16 million. Its net loss for the second quarter of 2019 of $1.1 billion included $1.1 billion in share-based compensation, according to its latest quarterly statement.

And Zoom Video is doubling and making money. For the six months ending July 2019, Zoom’s revenues nearly doubled to $268 million while it made a profit of $5 million and threw off $53 million in cash from operations, according to its latest quarterly statement.

How To Screen For Winners

If your ambition is to make money buying into IPOs, don’t make the same mistake as people who bought Uber and Lyft did.

They let their emotional connection to these services convince them that their stock would be a good investment. My advice is to figure out how a company got to an IPO before deciding whether to invest.

As I wrote in my book, Scaling Your Startup, there are four stages to scaling from an idea to a large, fast-growing public company.

  1. Winning the first customers (which is self-explanatory),
  2. Building a scalable business model (selling, marketing, and servicing more efficiently so you will be able to grow revenues while controlling costs),
  3. Sprinting to liquidity (expanding rapidly with the help of outside capital), and
  4. Running the marathon (sustaining over 20% cash-flow positive revenue growth after going public).

Don’t invest in companies that skip from the first to the third stage of scaling.

Only invest in IPOs of companies that completed the second stage of scaling before pouring gasoline on their businesses. How can you tell? Here are three tests:

  • Is the company simplifying its business processes — such as sales, marketing, customer service, and product development — so they are faster, better and less costly?
  • Has the company hired executives who’ve done this successfully in previous jobs?
  • Is the business cash flow positive or at least getting less cash flow negative as it grows?

It’s too late for Uber, Lyft and WeWork to make their business model scalable. But if Zoom can sustain its rapid, profitable growth and Pinterest can become cash flow positive while growing fast, their shares are likely to rise.

Source:

“ipo” – Google News

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Fifth Third Bancorp: A Preferred Stock IPO Priced Below The 5% Barrier



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 Fifth Third Bancorp (FITB). 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 424B5 Filing by Fifth Third Bancorp – the prospectus.

Source: SEC.gov

For a total of 10M shares issued, the total gross proceeds to the company are $250M. You can find some relevant information about the new preferred stock in the table below:



Source: Author’s spreadsheet

Fifth Third Bancorp 4.95% Non-Cumulative Perpetual Preferred Stock, Series K (NASDAQ: FITBO) pays a qualified fixed dividend at a rate of 4.95%. The new preferred stock has a ‘BB+’ Standard & Poor’s rating and is callable as of 09/30/2024. Currently, the new issue is trading a little below PAR at a price of $24.89. This translates into a 4.97% Current Yield and a YTC of 5.07%

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



Source: Author’s Spreadsheet

The Company

Fifth Third Bancorp is a bank holding company and a financial holding company. The Company conducts its principal lending, deposit gathering, transaction processing and service advisory activities through its banking and non-banking subsidiaries from banking centers located throughout the Midwestern and Southeastern regions of the United States. It operates through four segments: Commercial Banking, Branch Banking, Consumer Lending, and Wealth and Asset Management. It diversifies its loan and lease portfolio by offering a range of loan and lease products with various payment terms and rate structures. It offers commercial and industrial loans, commercial mortgage loans, commercial construction loans, commercial leases, residential mortgage loans, home equity, automobile loans, credit card, and other consumer loans and leases. It offers various types of deposits, such as demand deposits, interest checking deposits, savings deposits, money market deposits and transaction deposits.

Source: Reuters.com | Fifth Third Bancorp

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



Source: Tradingview.com

For 2018, the common stock has paid а $0.74 yearly dividend. With a market price of $28.06, the current yield of FITB is at 2.64%. As an absolute value, this means it pays $541.75M in dividends yearly. For comparison, the yearly dividend expense for all outstanding preferred stocks (with the newly issued Series K Preferred Stock) of the company is around $99.5M.

In addition, the market capitalization of the company is around $21.04B, which makes Fifth Third Bancorp the second largest bank in the ‘Regional – Midwest Banks’ sector (according to Finviz.com).

Capital Structure

Below, you can see a snapshot of Fifth Third Bancorp’s capital structure as of its Quarterly Report in June 2019. You can also see how the capital structure evolved historically.



Source: Morningstar.com | Company’s Balance Sheet

As of Q2 2019, FITB had a total debt of $15.78B ranking senior to the newly issued preferred stock. The new Series K Preferred Stock rank is junior to all outstanding debt and equal to the other preferred stocks of the company that totals $1.33B.

The Ratios Which We Should Care About

Our purpose today is not to make an investment decision regarding the common stock of FITB but to find out if its new preferred stock has the need quality to be part of our portfolio. 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 21,040/(15,780 + 1,900) = 1.19, which shows good coverage of all debt and preferred stocks.
  • 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 TTM results is 2,130/(512 + 99) = 3.48, indicating that there is a solid buffer for the preferred stockholders and the bondholders.

The Fifth Third Bancorp Family

The company has 4 more outstanding preferred stocks, but only two are listed on the Stock exchange:

  • Fifth Third Bancorp 5.10% Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series H
  • Fifth Third Bancorp 6.625% Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series I (FITBI)
  • Fifth Third Bancorp 4.90% Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series J
  • Fifth Third Bancorp 6.00% Non-Cumulative Perpetual Class B Preferred Stock, Series A (FITBP)



Source: Author’s database

The first listed preferred stock, FITBI, is fixed-to-floating security, paying a nominal yield of 6.625% before its call date on 12/31/2023 and then switches (by prospectus) to a rate of the three-month LIBOR plus a spread of 3.71%. With the current rate of the LIBOR of 2.04%, it means that the potential post-call date nominal yield is at 5.75%, quite below the current. With a price of $27.98, FITBI has a 5.92% Current Yield and a Yield-to-Call of 3.57%.

The second, FITBP, was listed in place of the voluntarily delisted MB Financial Inc 6.00% Non-Cumulative Perpetual Preferred Stock Series C (MBFIO) (as a result of the acquisition of MB Financial by Fifth Third Bancorp). The new Fifth Third Bancorp 6.00% Non-Cumulative Perpetual Class B Preferred Stock Series A is designed with the same characteristics of the delisted security. It is a fixed-rate preferred stock, like the newly issued IPO, and is callable as of 11/25/2022. FITBP has a nominal yield of 6.00%, and with the current market price of 26.97, its Current Yield and YTC sit at a rate of 5.56% and 3.69%, respectively.

With Yield-to-Worst of the newly issued Series K Preferred Stock of 4.97% (equal to its Current Yield), it is better, compared to the YTW of 3.57% and 3.69% of the other preferred stocks of the group. The new IPO is also the one that is trading at a discount, unlike its relatives that are trading at a significant premium over PAR and their Yield-to-Call is the most probable return one can get. However, the Series K is the issue with the lowest nominal fixed dividend rate, that broke the 5% threshold, which means it has the highest duration and is the most vulnerable from subsequent rate hikes.

In addition, in the following chart, you can see a comparison between FITBI and the fixed-income securities benchmark, the iShares Preferred and Income Securities ETF (PFF). FITBP is not on the chart because as a recently issued security, it does not have enough trading history. Despite that FITBI is part of the PFF’s holdings, it outperforms the benchmark, as during the peak of the recession in the late of the last year when PFF have lost around 12% of its capitalization at its lowest level, the Series I Preferred Stock managed to lose just 6%.



Source: Tradingview.com

Furthermore, there are plenty of Corporate Bonds issued by the company, and the picture below presents just a part of all:



Source: FINRA

For my comparison, I will choose a bond that matures 8 months earlier than the call date of the newly issued preferred stock, FITB4790624.



Source: FINRA | FITB4790624

FITB4790624, as it is the FINRA ticker, is rated a ‘BBB+’, has a maturity date of 01/25/2024 and has a Yield-to-Maturity of 2.412%. This should be compared to the 5.07% Yield-to-Call of the Series K Preferred Stock, but when making that comparison, do remember that new IPO’s YTC is the maximum you could realize if you hold the preferred stock until 2024. This result is a yield spread of around 2.66% between the two securities. However, we have to take into account the new preferred stock is trading below its par value, and actually its 4.97% current yield is what makes a yield spread of 2.56% between the bond and the preferred. Still, despite the higher rank in the capital structure and the higher credit rating of the Notes, the new IPO looks the better one. Moreover, unlike the bond, it pays a qualified distribution.

Sector Comparison

The chart below contains all preferred stocks in the “Regional – Midwest Banks” sector (according to Finviz.com) that pay a fixed dividend rate and has a par value of $25. It is important to take note that all of these preferred stocks are eligible for the 15% federal tax rate. The first bubble chart presents the preferred stocks by their Yield-to-Call and Current Yield.



Source: Author’s database

Here is the full list:



Source: Author’s database

As in the family, except for the new IPO, all preferred stocks are trading above their par value, and the Current yield is, in fact, their Yield-to-Best, and only for the Series K is its Yield-to-Worst. It seems that FITBO has an advantage as regards to this metric, but it is the issue with the lowest nominal yield. So, on a comparative basis, I would prefer ASB-E instead. It has a pretty higher nominal yield, its YTW is close to the new IPO’s, and still if it does not get called, ASB-E gives 5.59% current yield.

The Banking Preferreds

This section contains all preferred stocks, issued by a bank company, that pay a fixed-rate dividend, has a par value of $25 and a positive Yield-to-Call. It is important to take note that none of these preferred stocks is eligible for the 15% federal tax rate.

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



Source: Author’s database

  • By Yield-to-Call and Current Yield



Source: Author’s database

Again, the situation here is the same as in the sector. Except the new one, all preferred stocks are trading at a premium and their Yield-to-Call is their Yield-to-Worst, expressing the Yield curve of all banking preferreds. The IPO has quite higher YTC than the rest, but it is its Yield-to-Best, for which its placement on the curve is inappropriate and, therefore, presented in a purely informative way. As for the group’s current yields, the FITB Series K Preferred Stock gives the second lowest return, as only FRC-H has lower CY.

All BB+ Preferred Stocks

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



Source: Author’s database

Redemption Following a Regulatory Capital Event

Subject to obtaining all required regulatory approvals, we may redeem the Series K Preferred Stock at our option (I) in whole or in part, from time to time, on any dividend payment date, on or after September 30, 2024, and (II) in whole, but not in part, at any time following the occurrence of a “regulatory capital event” as described herein in each case, at a redemption price per share equal to the fixed liquidation preference of $25,000 per share, plus an amount equal to any declared but unpaid dividends to, but excluding, the redemption date, without accumulation of any undeclared dividends. Any decision we may make at any time to propose a redemption of the Series K Preferred Stock will depend upon, among other things, our evaluation of our capital position, the composition of our stockholders’ equity and general market conditions at that time.

Source: 424B5 Filing by Fifth Third Bancorp

Use of Proceeds

We intend to use the net proceeds of this offering for general corporate purposes, which may include repurchases of shares of our common stock. This offering is being undertaken as part of our 2019 capital plan as approved by our board of directors. Additional capital actions may be undertaken by us pursuant to our capital plan.

Source: 424B5 Filing by Fifth Third Bancorp

Addition to the iShares U.S. Preferred Stock ETF

With the current market capitalization of the new issue of around $250M, the new IPO 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.

Conclusion

As fixed income traders, we follow every one preferred stock or baby bond, which is listed on the stock exchange. As such, FITBO 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 metrics are good. It is well capitalized and pays more than 5x times more dividend on its common stock, that has the lowest rank in the capital structure, than what it will be paying for its preferred stocks. The new IPO has better YTW compared to its relatives, and FITBP has a history of a very good performance against the main fixed-income benchmark, PFF. However, it is the security with the lowest nominal yield from the family, all the fixed-rated preferred stocks issued by a bank, and except for the EIX’s 70-year old preferred stocks, also when compared to the issues with the same credit rating. Overall, because of its high vulnerability, the newly issued preferred stock does not fit into my interest.

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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

Posted on

Planned initial public offering of Brazilian bank BMG may raise up to $395 mln

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SAO PAULO, Oct 4 (Reuters) – The initial public offering of Brazilian bank BMG SA may raise up to 1.6 billion reais ($395 million) if the bank sells all the shares at the top of the range set for the transaction.

In a securities filing on Friday, BMG said it will issue 103.4 million new shares and its shareholders will sell 16.5 million shares. The price range was set between 11.60 reais and 13.40 reais per share. BMG expects to price its IPO on Oct. 24, the filing said. ($1 = 4.0561 reais) (Reporting by Tatiana Bautzer Editing by Chris Reese)

Source: IPOs