Master Limited Partnership (MLP) NuStar Energy L.P. (NYSE:NS) has sold a new fixed-to-floating preferred unit issue with an initial fixed coupon of 8.5%.
NS is a large MLP with annual revenue in the $1.6 billion area which is generated from 8,700 miles of pipeline and 79 storage and terminal locations. Although net income has fallen in the last couple of years (along with most MLPs) they remain financially strong and will have over $300 million is distributable cash flow for 2016.
This new preferred unit (preferreds issued by MLPs are call units instead of shares) offering will have a fixed 8.5% coupon until December 15, 2021. At that point in time the coupon will begin to “float” and will be the 3 month Libor rate plus 6.766% (for instance 3 month libor is now around .90% and that added to 6.766% would mean a coupon of 7.666%). These are excellent terms for investors as the fixed portion provides a good base for the coupon after 2021. The 3 month Libor rate in 2021 is, of course, an unknown, but it is likely to be much higher than it is today. Fixed-to-floating rate issues tend to trade more firmly in a rising interest rate environment as they have protection from higher rates as their coupon “floats”. In the next 5 years this issue will have interest rate risk, but shares should trade with less volatility than a perpetual preferred issue.
This issue is cumulative and redeemable (on or after 12/21/2021) as is typical for these type of issues. This issue will generate a K-1 at tax time since it is a MLP and some investors dislike the difficulties of dealing with these at tax time instead of the more straightforward 1099-DIV tax report for dividends received.
This issue is now trading on the OTC Grey Market under the temporary ticker NTSRF and is trading in the $24.90-$25.10 area. For those not familiar with trading on the OTC Grey Market you can read our primer here.
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