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 Morgan Stanley (MS). 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 424B2 Filing by Morgan Stanley – the prospectus.
For a total of 20M shares issued, the total gross proceeds to the company are $500M. You can find some relevant information about the new preferred stock in the table below:
Source: Author’s spreadsheet
Morgan Stanley 4.875% Non-Cumulative Preferred Stock Series L (MS-L) pays a qualified fixed dividend at a rate of 4.875%. The new preferred stock has a “BB+” Standard & Poor’s rating and is callable as of 01/15/2025. Currently, the new issue trades at its PAR at a price of $24.98 and has a 4.88% Current Yield and YTC of 5.04%
Here is how the stock’s YTC curve looks like right now:
Source: Author’s spreadsheet
Morgan Stanley is a financial holding company. The Company’s segments include Institutional Securities, Wealth Management and Investment Management. The Company’s Institutional Securities business segment provides investment banking, sales and trading, and other services to corporations, governments, financial institutions and high-to-ultra high net worth clients. The Company’s Wealth Management business segment provides an array of financial services and solutions to individual investors and small-to-medium sized businesses and institutions covering brokerage and investment advisory services, market-making activities in fixed income securities, financial and wealth planning services, annuity and insurance products, credit and other lending products, banking and retirement plan services. The Company’s Investment Management business segment provides a range of investment strategies and products.
Source: Reuters.com | Morgan Stanley
Below, you can see a price chart of the common stock, MS:
The company is constantly increasing its dividend on the common stock, from $0.20 in 2013 to $1.10 in 2018. For 2019, the common stock is expected to have paid а $1.30 yearly dividend. With a market price of $49.36, the current yield of MS is at 2.63%. As an absolute value, this means it pays $2.16B in dividends yearly. For comparison, the yearly dividend expenses for all preferred stocks of the company (including the newly issued Series L Preferred Stock) are around $525M.
In addition, with a market capitalization of around $81B, MS is rivaling with Goldman Sachs (GS) for the largest “Investment Brokerage” company in the US (according to Finviz.com).
Below you can see a snapshot of Morgan Stanley’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, MS had a total debt of $193.66B ranking senior to the newly issued preferred stock. The new Series L preferred stock rank is junior to all outstanding debt and equal to the other outstanding preferred stocks, which total $8.52B.
The Morgan Stanley Family
The company has six more outstanding preferred stocks, listed on the NYSE:
- Morgan Stanley 7.125% Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series E (MS.PE)
- Morgan Stanley 6.875% Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series F (MS.PF)
- Morgan Stanley 6.625% Non-Cumulative Preferred Stock, Series G (MS.PG)
- Morgan Stanley 6.375% Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series I (MS.PI)
- Morgan Stanley 5.85% Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series K (MS.PK)
- Morgan Stanley Floating Rate Non-cumulative Preferred Stock, Series A (MS.PA)
Source: Author’s database
Except, MS-G that is a fixed-rate preferred stock, four of the company’s preferreds are fixed-to-floaters and also there is one “floored” security. Morgan Stanley has announced that it is using the proceeds of the MS-L offering to redeem on January 15, 2020, all of its 6.625% Non-Cumulative Preferred Stock, Series G (MS-G), thus it will save itself a yearly rate of 1.75%. As an absolute value, MS will reduce its preferred stocks’ yearly dividend payments by $8.75M.
Source: Author’s database
When comparing the newly issued Series L Preferred Stock with the remaining issues, with 4.88% Yield-to-Worst (equal to its Current Yield) it has a slight advantage over the second-highest YTW in the group, MS-K. However, as a fixed-rate, “L” is more sensitive to interest rate changes, while “K”, except for having a 1.00% higher Nominal yield, has some kind of protection in this regard with its floating element that occurs after its call date. Moreover, it becomes callable two years later than MS-L, meaning two years more of call protection. As for MS-A, it is quite different from the rest. It is tied to the three-month LIBOR, having a minimum rate of 4.00% and it is trading at 90% of its par value, which explains the incredibly high Yield-to-Call.
Lastly, a comparison between the fixed-to-floating preferred stocks and the new IPO by their Years-to-Call and Yield-to-Call (Yield-to-Worst of the group). So let’s see how the Yield curve looks like:
Source: Author’s database
In addition, in the following chart, you can see a comparison between MS’s preferred stocks and the fixed-income securities benchmark, the iShares Preferred and Income Securities ETF (PFF). When leaving aside the two extremes, MS-G trading at call price the whole time and MS-A having almost 20% capital gain this year mainly due to the Fed’s lowering the federal funds rate, the rest are trading with a high correlation to PFF (in fact they are all part of its holdings) and slightly outperformed the benchmark.
Furthermore, there are a plethora of corporate bonds issued by the company and the picture below presents only a tiny part of it:
For my comparison, I choose a fixed-rate bond that matures very close to the call date of MS-L, the Corporate bond due 12/27/2024:
Source: FINRA | MS3947302
MS3947302, as it is the FINRA ticker, is rated a “BBB+”, has a maturity date of 12/27/2024, and is yielding at 2.287%. This should be compared to the 5.04% Yield-to-Call of MS-L, but when making that comparison, do remember that MS-L’s YTC is the maximum you could realize if you hold the preferred stock until 2025. This result is a yield spread of around 2.7% between the two securities, which can be explained by the higher rank in the capital structure and the higher credit rating of the Bond.
The chart below contains all preferred stocks issued by an investment brokerage company (according to Finviz.com) that pay a fixed dividend rate and has a par value of $25, by its Yield-to-Call and Current Yield.
The full list:
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.
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:
Redemption Following a Regulatory Capital Treatment Event
At the Issuer’s option, (I) in whole or in part, from time to time, on any dividend payment date on or after January 15, 2025 or (II) in whole but not in part at any time within 90 days following a Regulatory Capital Treatment Event (as defined in the Preliminary Prospectus Supplement dated November 18, 2019), in each case at a redemption price equal to $25,000 per share (equivalent to $25 per depositary share), plus any declared and unpaid dividends to, but excluding, the date fixed for redemption, without accumulation of any undeclared dividends.
Addition to the iShares U.S. Preferred Stock ETF
With the current market capitalization of the new issue of around $500M, 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.
As fixed-income traders, we follow every one preferred stock or baby bond, which is listed on the stock exchange. As such, MS-L 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 preferred stock has one of the lowest nominal yields, with respect to the preferred stocks, issued in the last couple of years. This year of lowering rate environment, only NTRSO, PSA-J, JPM-J, and ALL-I, are priced a bit lower. Generally, except in the presence of tangible arbitrage, I don’t find the new below-5% yielders as attractive. I prefer looking at the securities already available on the market. Even, MS-K, an issue from the same company, looks better and has not too low YTW with a much more interest rate protection from the new IPO.
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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.