The Southern Company Sells a Giant Baby Bond Offering – Ticker SOJB

With over 9 million customers and 44,000 megawatts of electricity generating capacity you would expect that The Southern Company (NYSE:SO) would issue pretty large offerings of bonds and they have just done a $800 million dollar subordinated note offering.  The notes are rated lower investment grade.

SO is a holding company for numerous electrical utilities in the southeast United States.  These companies include Alabama Power, Georgia Power, Gulf Power and Mississippi Power. Additionally they own 8 natural gas utility companies as well as a telecom company and other small non consequential companies.

The new issue is the Series 2016A 5.25% Junior Subordinated Note, due October 1, 2076. Yes you are reading right–a maturity 60 years in the future.  Because of the very long duration of these notes they will be highly sensitive to movement in interest rates so if one has an interest in these quality notes they should be prepared to experience some erosion of capital when/if interest rates move higher.  It is noted that SO has 1 other baby bond issue outstanding which is a 6.25% subordinated note (NYSE:SOJA) that is currently trading at $27.50 with a current yield of 5.67%. This older note has a maturity date of 2075 so to this point yield investors have been anxious to own the issue.

It is always good to remind investors that many times notes such as these have some terms that are not beneficial to the bond owner.  In this case The Southern Company may defer interest payments on one or more occasions for up to 40 consecutive quarters without this being a default. It is scary to think of what situation a large utility would have to be in to defer interest payments, but you can be certain if this happened the price of the bond would fall dramatically. If interest payments are ever deferred the payments accrue additional interest at the 5.25% rate, compounded quarterly. Worse yet a holder of these bonds would be required to report the deferred interest as income and pay taxes as if they received the payment.

As is normal these notes have an optional redemption period beginning October 1, 2021. From this point on the company may call the bonds at $25 plus accrued interest.  The company may call the bonds earlier than this date if certain rating agency changes occur, but they must pay a 2% premium if this were to occur. Interest payments on debt are NOT qualified distributions in respect to a preferential income tax rate and will be taxed as ordinary income.

Most of the proceeds from this offering will be used to pay short term debt that was incurred to fund the maturity of a $500 million dollar issue which matured on 9/1/2016. The balance will go to general corporate purposes.

Like all debt issues this will NOT trade on the OTC Grey market prior to NYSE trading.  Additionally, the ticker has not yet been announced.  We would expect the issue to trade in the next 10 days and will post the ticker when it is known.

We have no interest in this note because of the very long duration as we only are purchasing shorter dated maturities at this time as they will perform better if we see higher interest rates in the months ahead.

Details of this new issue can be found here.

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