WesBanco, Inc: Its New Fixed-Rate Reset Preferred Stock IPO Is Trading 4% Above Its PAR (NASDAQ:WSBC)

Introduction

In the period after the COVID-19 panic selling, companies began issuing exchange-traded fixed-income securities again. After the peak when there were issued 12 securities in May and also 12 more in June, a decline began to be observed in July when only 5 issues had their IPOs. Now, WesBanco, Inc.(WSBC) is offering the first preferred stock for August, its 6.75% Fixed-Rate Reset Series A Preferred Stock.

The New Issue

Before we submerge into our brief analysis, here is a link to the 424B5 Filing by WesBanco, Inc. – the prospectus.

Source: SEC.gov

For a total of 6M shares issued, the total gross proceeds to the company are $150M. You can find some relevant information about the new preferred stock in the table below:

Source: Author’s spreadsheet

WesBanco, Inc. 6.75% Fixed-Rate Reset Non-Cumulative Perpetual Preferred Stock, Series A (WSBCP) pays a qualified fixed dividend at a rate of 6.75% before November 15, 2025, and then switches to a dividend equal to the Five-year U.S. Treasury Rate plus a spread of 6.557%. For reference, the current five-year treasury rate is at the rate of 0.32% translating into a hypothetical post-call date nominal yield at 6.877%. The new preferred stock has no Standard & Poor’s rating but is rated a “BBB-” by the less authoritative Kroll Bond Rating Agency. WSBCP has a call date as of 11/15/2025. Currently, it trades more than 4% above its par value, at a price of $26.11, and has a 6.46% Current Yield and YTC of 5.76%.

Here is how the stock’s YTC curve looks like right now:

Source: Author’s spreadsheet

The Company

WesBanco, Inc. (WesBanco) is a bank holding company. The Company offers a range of financial services, including retail banking, corporate banking, personal and corporate trust services, brokerage services, mortgage banking and insurance. WesBanco offers its services through two segments: community banking, which offers services, such as commercial demand, individual demand and time deposit accounts, as well as commercial, mortgage and individual installment loans, and trust and investment services, which offers trust services, as well as various alternative investment products, including mutual funds. The Community Banking segment also offers insurance and securities brokerage services, among others. As of December 31, 2016, WesBanco operated one commercial bank, WesBanco Bank, Inc. through 174 branches and 163 automated teller machines (‘ATMS’) located in West Virginia, Ohio, western Pennsylvania, Kentucky and southern Indiana.

Source: Reuters.com | WesBanco, Inc

Below, you can see a price chart of the common stock, WSBC:

Source: Tradingview.com

The company’s dividend on its common stock has been increasing for the last several years, from $0.56 in 2010 to $1.24 in 2019. Also, with the Q1 and Q2 dividends of $0.32, the expected annualized payout of the common stock for 2020 is $1.28. With a market price of $20.52, the current yield of WSBC is at 6.24%. As an absolute value, this means it pays $86.03M in dividends yearly. For comparison, the yearly dividend expenses for the newly issued Series A preferred stock are $10.125M.

In addition, with a market capitalization of around $1.41B, WesBanco takes place as one of the relatively smallest ‘Regional Banks’ (according to Finviz.com).

Capital Structure

Below, you can see a snapshot of WesBanco, Inc.’s capital structure as of its Quarterly Report in June 2020. You can also see how the capital structure evolved historically.

Source: Morningstar.com | Company’s Balance Sheet

As of Q2, WSBC had a total debt of $1.71B ranking senior to the newly issued preferred stock. The new Series A preferred stock rank is junior to all outstanding debt and equal to other future preferred stocks of the company. At this point, WSBCP is the only outstanding preferred stock.

The Ratios Of Which We Should Care About

Our purpose today is not to make an investment decision regarding the common stock of WSBC but to find out if its new preferred stock has the need quality to be part of our portfolio. Here is the moment where I want to remind you of two important aspects of the preferred stocks compared to the common stocks.

  • Preferred shareholders have priority over a company’s income, meaning they are paid dividends before common shareholders.
  • Common stockholders are last in line when it comes to company assets, which means they will be paid out after creditors, bondholders, and preferred shareholders.

Based on our research and experience, these are the most important metrics we use when comparing preferred stocks:

  • Market Cap/(Long-term debt + Preferreds). This is our main criteria when determining credit risk. The bigger the ratio, the safer the preferred. Based on the latest annual report and taking into consideration the latest preferred issue, we have a ratio of 1,410/(1,710 + 150) = 0.76, meaning that the market capitalization is enough to cover only 76% of its debt and the preferred stock.
  • Earnings/(Debt and Preferred Payments). This is also quite an easy to understand approach. One can use EBITDA instead of earnings, but we prefer to have our buffer in what is left to the common stockholder. The higher this ratio, the better. The ratio with the TTM results is 101.61/(41.69 + 10.13) = 1.96, which indicates a good buffer for the preferred stocks and the debt payments. In the next table, we can also see historically how the company performs with respect to its debt payments coverage for the last 5 financial years.

Source: Morningstar.com | Company’s Income Statement

Sector Comparison

In this section, I’ll compare the newly issued preferred stock with all other $25 fixed-rate and fixed-reset rate preferred stocks issued by any US regional banks, with a positive Yield-to-Call. Note that all of these preferred stocks are eligible for the 15% to 20% federal tax rate.

  • By % of PAR and Current Yield

Source: Author’s database

With its current yield of 6.46%, WSBCP is one of the highest yielding preferred stocks in this group but not the highest. Generally, except for BANC-E, CFG-E, and ZIONN, all other issues are trading above their par value, and in fact, their Yield-to-Call is their Yield-to-Worst. To have a better idea of the YTC curve, I’m excluding ZIONN and BANC-D that are anytime callable.

  • By Years-to-Call and Yield-to-Call

Source: Author’s spreadsheet

The Yield-to-Call of 5.76% of the new IPO is actually its Yield-to-Worst. When comparing it to the rest of the group, WSBCP has the 8th highest YTC in the sector. Still, it is returning 1.09% higher than the average 4.67% YTW of all preferred stocks, issued by a regional bank.

The Banking Preferreds

This section contains all preferred stocks, issued by a bank company, that pay a fixed-rate or fixed-reset rate dividend, have a par value of $25, and a positive Yield-to-Call. Again, all of these preferred stocks are eligible for the preferential federal tax rate.

  • By % of PAR and Current Yield

Source: Author’s database

  • By Years-to-Call and Yield-to-Call

Source: Author’s database

Again, for a better view of the YTC curve, I’m excluding all callable issues.

Fixed Reset Rate Preferred Stocks

In this section, I want to compare the newly issued security with all other preferred stocks that pay a fixed reset rate dividend, bound to the Five-Year Treasury Rate. With WSBCP, the total number of this group becomes 11. Note that all issues are eligible for the preferential federal tax rate.

Source: Author’s database

Currently, only AEL-A and AEL-B are trading below their par value and have their YTW equal to their Current Yield, while the rest 9 are trading above that threshold and have their YTW equal to their Yield-to-Call. With its YTC of 5.76%, WSBCP takes place in the middle of this peculiar ranking. When compared to the group’s average YTW, WSBCP gives 0.21% lower than the average YTW of all fixed reset rate preferred stocks of 5.97%.

  • By % of PAR and Current yield

Source: Author’s database

  • By Years-to-Call and Yield-to-Call

Source: Author’s database

Redemption Following a Regulatory Capital Treatment Event

The Company may, at its option and subject to any required regulatory approval, redeem the shares of the Preferred Stock (‘I’) in whole or in part, from time to time, on any dividend payment date on or after the First Reset Date, or (‘II’) in whole but not in part at any time within 90 days following a “regulatory capital treatment event,” as described in the preliminary prospectus supplement dated August 4, 2020, in each case at a cash redemption price equal to $1,000 per share of Preferred Stock (equivalent to $25 per Depositary Share), plus any declared and unpaid dividends, without accumulation of any undeclared dividends to but excluding the redemption date.

Source: FWP Filing by WesBanco, Inc

Use Of Proceeds

The Company expects to use the net proceeds from this offering for general corporate purposes, which may include (‘I’) repayment, redemption or refinancing of indebtedness, (‘II’) capital expenditures, (‘III’) making contributions to the capital of Wesbanco Bank to support its lending, investing and other financial services activities, (‘IV’) funding of possible acquisitions, (‘V’) working capital, (‘VI’) satisfaction of other obligations of the Company’s and the Company’s subsidiaries and (‘VII’) repurchase of the Company’s outstanding equity securities. Pending any such use, the net proceeds from the sale of the securities may be invested in short-term, investment grade, interest-bearing instruments.

Source: FWP Filing by WesBanco, Inc

Addition to the iShares Preferred and Income Securities ETF

With the current market capitalization of the new issue of around $150M, WSBCP is a potential addition to the ICE Exchange-Listed Preferred & Hybrid Securities Index during some of the next rebalancings. If so, it will also be included in the holdings of the main benchmark, the iShares Preferred and Income Securities ETF (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.

Conclusion

WesBanco is issuing its Series A Fixed Reset Rate Preferred Stock with a fixed rate of 6.75% before the first reset date and the rate of the Five-Year Treasury Rate plus the spread of 6.557% thereafter. It is currently trading 4% above its par value of $25, at the marker price of $26.11, and has a Yield-to-Worst, equal to its Yield-to-Call of 5.76%. When compared to the other preferred stocks in the sector, it is not giving the highest returns, but when compared to the group’s average YTW, it has 1.09% better YTW than the rest. In terms of the other fixed reset rate preferred stocks, we can see WSBCP to be priced close to the average YTW for the fixed reset rate issues.

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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.

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