$135 billion asset bank holding company KeyCorp has sold a new fixed-to-floating rate preferred with a still stingy initial coupon of 6.125%. Obviously the company is working for the common shareholders and want to hold the rate as low as possible, but in the face of rising interest rates this initial rate is really a likely loser for the individual income investor.
On an issue like this that is investment grade, but has a long fixed rate term (10 years) we focus on the substandard rate that you very possibly will be receiving for that length of time. While fixed-to-floating rate issues will trade firmer than straight fixed rate coupon perpetuals you still have interest rate risk and likely will lose capital assuming we are in a rate hiking cycle. We find almost no reason to be buying investment grade perpetuals at this point in time. We realize that some investors claim to be straight income investors who are not overly concerned with capital drawdowns, but why risk it when it is unnecessary.
This new issue has a floating rate of 3 month libor plus 3.892%. Our preference is obviously for a higher fixed portion, but as long as investors continue to scratch hard for yield this is the coupon we get–pure supply and demand.
Being a bank holding company the new shares are non-cumulative in respect to dividends.
This issue began trading today on the OTC Grey market under the ticker KYYPP and is trading at $25.26–obviously investors like the floating rate part of this issue (even if we don’t). For those not familiar with the OTC Grey market you can check our primer here.
UPDATE–we forgot to note that KeyCorp may use the proceeds to call their fixed-to-floating issue (KEY-H) which has a 8.625% coupon. This issue was inherited when they acquired First Niagara.
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