Preferred Stock IPO: 5.45% From Arch Capital Group

  • Preferred stock
  • 23/08/2017
Preferred Stock IPO: 5.45% From Arch Capital Group
The total gross proceeds from the new issue are $200M. You can find some relevant information about the new preferred stock in the table below.

Arch Capital Group (NASDAQ:ACGL) 5.45% Series F Non-Cumulative Preferred Shares (NASDAQ:ACGLO) pay a fixed dividend at a rate of 5.45%. The new preferred stock bears investment grade rating of BBB by S&P and is callable as of 8/17/2022. Currently, the new issue trades under temporary symbol AHCCF, until starts trading on the NASDAQ. With the price of $24.90, the current yield of the new preferred stock is 5.47%. The dividends paid by these preferred shares are eligible for the preferential income tax rate of 15% to a maximum of 20% depending on the holder's tax bracket, which turns the current yield into 6.57% "non-qualified equivalent."

Arch Capital Group Ltd. [NASDAQ:ACGL], a Bermuda public limited liability company, writes insurance, reinsurance and mortgage insurance on a worldwide basis through operations in Bermuda, the United States, Canada, Europe, Australia and South Africa, with a focus on specialty lines. Our current operations were launched from an underwriting initiative in October 2001 to meet demand in the global insurance and reinsurance markets. The combination of our underwriting platform, our experienced management team and our strong capital base have enabled us to establish a prominent presence in the global insurance and reinsurance markets. Our businesses are divided into three platforms: Insurance, Reinsurance and Mortgage.

You can find some price and earnings information for the company in the charts below.

The company's net income is increasing for the last 5 years and the projections for 2017 are also quite bullish. This reflects in the significant uptrend of the common stock and a market capitalization of over $12.7B.

As of June 2017, Arch Capital Group had a total debt of $2.4B ranking senior to the newly issued preferred stock. The new Series F preferred shares rank junior to all outstanding debt and equal with the other outstanding preferred stocks which total $1.265B ($325M worth of Series C 6.75% Non-Cumulative Preferred Shares (NYSE:ARH-C), $450M worth of Series E 5.25% Dep Shares Non-Cumulative Preferred Shares (NASDAQ:ACGLP) and $490M worth of Convertible non-voting common equivalent preferred shares).

In this section, I want to take the time to compare the new issue with other securities issued by Arch Capital Group. Two other preferreds are listed on national exchanges: Series C 6.75% Non-Cumulative Preferred Shares and Series E 5.25% Non-Cumulative Preferred Shares. The company uses the proceeds of the offering of ACGLO to redeem in part ARH-C. That's why of the two, ACGLP offers the better basis for comparison. More information about ACGLP could be found in the table below.

ACGLP's IPO date was on 9/22/2022. It also pays a fixed dividend and the dividend paid is qualified. The current yield of ACGLP is 5.37%, which makes it a little less desirable than the new issue. Nevertheless, the spread of 0.10% between these two is insignificant to reflect any substantial arbitrage here.

What about issues higher up the capital structure? For my comparison, I represent a fixed-rate bond, maturing in 2034. Some information about the bond could be found in the table below.

It's clear that the bond has a longer maturity than the call date of ACGLO. The yield of the issue is 4.35% and that is its yield to worst. That yield should be compared to the yield to worst of ACGLO, which is the current yield of 5.47%. This 1% spread seems to be fair giving the fact that the bond stands higher in the capital structure. Still, the two instruments are quite different and sustainable conclusion cannot be made.

This chart contains all preferreds in the Property & Casualty Insurance sector (according to FINVIZ.COM) by their price and current yield. Important notice is that they all carry investment-grade rating and are eligible for the 15% to 20% federal tax rate. From the data displayed above, a statement could be made that ACGLO doesn't offer something special in point of perspective.

Nothing out of the ordinary.

With the current market capitalization of ACGLO of over $200M, it is a potential addition to the S&P preferred stock index. If the average monthly volume of ACGLO after its first six months on the NASDAQ is more than 250,000, it would be eligible to be included in the S&P U.S. Preferred Stock Index. With fewer than six months of trading history, issues are evaluated over the available period and may be included if available trading history infers the issue will satisfy this requirement.

This is an informational article about the new preferred stock ACGLO. With this articles, we want to pay attention to all new preferred stocks and baby bonds.

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.
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