Disclosure: I am not a lawyer or a judge. My expertise is researching stocks. I have not passed the bar exam. I have never studied law in a formal setting.
I didn’t own any at the time, but Morgan Stanley made the decision to have some preferreds stay at fixed. Of particular interest was MS-K because of its low coupon but larger than typical spread to LIBOR. MS-K dropped from $25 to $23 on the day it was announced. As far as I’m aware, the decision is final. Wells Fargo took the opposite approach and added its fixed rate to the current benchmark, all but assuring the issue would be called on its call date.
I’ve got CIM-B coming up on its float date in 6 months. It would be a real insult if I’ve held waiting for the float date and the rug gets ripped out. As a precaution, I’ve invested primarily in companies that have the precedent of using SOFR + 0.26% or the floating rate is based on treasuries. It’s ridiculous how preferred shareholder rights aren’t protected.
CIM-B doesn't have the clause we like to see, but the footnote in their Q2 2023 presentation indicated shares swapped to SOFR + 26 basis points. However, it didn't specifically call out each series of preferred shares. To eliminate any potential confusion, I e-mailed management and ask them to confirm that the footnote includes CIM-B.
Thanks. I also emailed investor relations regarding the 10Q that specifies the preferred issues will float on their call date. However the same section references LIBOR despite LIBOR having been discontinued prior to the quarter end of the 10Q. Between the 10Q and the investor presentation, hopefully it’s an indication of management’s intention to allow the fixed-to-floating to live up to their name.
Edit: I read through the footnote in the investor presentation and it is clear enough to me that the preferred shares will float based on SOFR. I feel reassured with my CIM-B investment. The company is risky, but that’s quite the floating rate on current price for CIM-B in 6 months.
Today I got a (long-delayed) return call from Chimera IR (caller ID said 'private caller', but I happened to pick up anyway). He said they are still evaluating how they will handle the CIM-B LIBOR conversion, it has not been determined yet, and unclear when they will publish a decision. :-|
After your subscribers have had time to react to your CIM-B article, I think you should reach out to CIM-B. Offer them a chance to comment on the timeline of CIMs statements about the preferred shares. Give them 48 hours, then release your article to the general public. Your article has the potential for 200+ comments.
It would be good for CIM to see that before they make a decision whether to switch CIM-B to SOFR. The article would show CIM that the retail investor is well informed and shouldn’t be taken advantage of because we don’t have in house legal counsel.
I also have not heard from Chimera’s investor relations. I just sent a follow up email with additional links and quotes from the 10Q and the investor presentation.
Before they go the route of PMT, I’d like them to be aware that the two statements combined imply they intend to float CIM-B at its call date on SOFR + the applicable spread.
I noticed that the other Chimera ftf preferred prospectus supplements (for CIM-C and CIM-D, dated 2018 and 2019) do include the ‘calculation agent’ and ‘successor base rate’ language (good for SOFR replacement), while CIM-B’s supplement (from 2017) does not. And CIM-B has dipped since Friday, while CIM-C and CIM-D have not. So maybe CIM-B will be converted to fixed, while the others won’t. That seems weird, but a potential risk if they act like PMT (and no response from CIM IR yet). So I have sold my smallish holding of CIM-B before its ex-dip tomorrow, just in case.
So far, this am before market open, it appears the market does not agree with us on the fact that pmt preferred will float. I’m okay with that. I’m setup to buy 2.3M shares today between $19.70 and $21.50. We will see if my target range hits.
2whiteroses - I appreciate your work on this subject.. To me the most interesting prior case worthy of this same comparative analysis might be how STT has chosen to address their LIBOR based F/F issues… This is because they seemingly have decided to treat their two issues differently from one another apparently based on the minutia of the actual words used in the two different prospectuses…. https://investors.statestreet.com/investor-news-events/press-releases/news-details/2023/State-Street-Corporation-Announces-Transition-Information-for-Outstanding-U.S.-Dollar-LIBOR-Linked-Instruments/default.aspx. It would be interesting to see your take on how STT has interpreted what they have to do compared to what PMT is doing – Would you feel the same way about STT’s decision as he does on PMT? Please note this as an academic question, not one challenging your conclusion on PMT. Your analysis far surpasses anything I would attempt to do personally.
I'm not a lawyer, nor do I play one on TV, but to assume they would have a clause "or if there was no such dividend period" that would be impossible to be true is a leap of faith. I would conclude you are missing something in their argument or misinterpreting that clause.
They might have some scenario where they feel it can be true, or it may just be because it is part of boilerplate text from a different scenario. The same paragraphs are often copy and pasted between documents. So it could just be a lingering element that made sense in some contracts where the sentence was structured differently.
The language in some of the prospectuses can get pretty strange. Including sections that are nearly identical and then one issuer sticks something like "do not" into the sentence. That proceeds to get copied over to more documents and you end up with competing strings of very similar text.
@Colorado Wealth Management Fund there's one difference. NLY and PMT have language about choosing an investment bank to determine an equivalent rate like SOFR. PMT and even Morgan Stanley don't have that language and fixed it. Morgan Stanley is doing it too... The prospectuses of some of these have a loophole. I read it too and I'm a senior lender in banking for 15 years and have dealing with Libor fallback language
Sorry! Yes I meant NLY and AAIC mention a "Calculation agent" to determine an appropriate substitute which is SOFR. Interestingly, I believe it's MS that has a mix of both depending on the series so one they shifted to SOFR while they other they fixed. The mention of the calculation agent is why NLY and I just checked AGNC can't play games with the spirit of the law... They will not back down
Which ones did MS not screw? Series A was already floating. I didn't find the fixed to floating series they didn't screw, but I'd like to check it for a comparison.
Truly apologize but it's State Street. Got my financial firms mixed up. After their justification up front they have a chart showing which debentures and preferred shares either have non-workable fallback or a determination agent (which is similar to the calculation agent I mentioned).
VERY WELL DONE, Colorado! Thanks for this
Brilliant work Colorado. Thank you for taking so much of your valuable time to compile this information and sharing!
You're welcome. Thanks for taking the time to comment.
Great analysis. Looking forward to reading all the weekend comments (and PMT's humbling).
I didn’t own any at the time, but Morgan Stanley made the decision to have some preferreds stay at fixed. Of particular interest was MS-K because of its low coupon but larger than typical spread to LIBOR. MS-K dropped from $25 to $23 on the day it was announced. As far as I’m aware, the decision is final. Wells Fargo took the opposite approach and added its fixed rate to the current benchmark, all but assuring the issue would be called on its call date.
I’ve got CIM-B coming up on its float date in 6 months. It would be a real insult if I’ve held waiting for the float date and the rug gets ripped out. As a precaution, I’ve invested primarily in companies that have the precedent of using SOFR + 0.26% or the floating rate is based on treasuries. It’s ridiculous how preferred shareholder rights aren’t protected.
https://www.morganstanley.com/press-releases/replacement-rate-for-u-s--law-governed-u-s--dollar-libor-linked-
CIM-B doesn't have the clause we like to see, but the footnote in their Q2 2023 presentation indicated shares swapped to SOFR + 26 basis points. However, it didn't specifically call out each series of preferred shares. To eliminate any potential confusion, I e-mailed management and ask them to confirm that the footnote includes CIM-B.
Thanks. I also emailed investor relations regarding the 10Q that specifies the preferred issues will float on their call date. However the same section references LIBOR despite LIBOR having been discontinued prior to the quarter end of the 10Q. Between the 10Q and the investor presentation, hopefully it’s an indication of management’s intention to allow the fixed-to-floating to live up to their name.
Edit: I read through the footnote in the investor presentation and it is clear enough to me that the preferred shares will float based on SOFR. I feel reassured with my CIM-B investment. The company is risky, but that’s quite the floating rate on current price for CIM-B in 6 months.
I emailed IR as well. If anyone hears back, please post here.
As of this morning, I haven't heard back from them.
Today I got a (long-delayed) return call from Chimera IR (caller ID said 'private caller', but I happened to pick up anyway). He said they are still evaluating how they will handle the CIM-B LIBOR conversion, it has not been determined yet, and unclear when they will publish a decision. :-|
I got a similar email today. CIM-C and CIM-D will float. CIM-B is currently being evaluated.
“If they take this long to make a decision, they’re going to decide to screw somebody.” ~ Cinderella Man
After your subscribers have had time to react to your CIM-B article, I think you should reach out to CIM-B. Offer them a chance to comment on the timeline of CIMs statements about the preferred shares. Give them 48 hours, then release your article to the general public. Your article has the potential for 200+ comments.
It would be good for CIM to see that before they make a decision whether to switch CIM-B to SOFR. The article would show CIM that the retail investor is well informed and shouldn’t be taken advantage of because we don’t have in house legal counsel.
I also have not heard from Chimera’s investor relations. I just sent a follow up email with additional links and quotes from the 10Q and the investor presentation.
Before they go the route of PMT, I’d like them to be aware that the two statements combined imply they intend to float CIM-B at its call date on SOFR + the applicable spread.
I noticed that the other Chimera ftf preferred prospectus supplements (for CIM-C and CIM-D, dated 2018 and 2019) do include the ‘calculation agent’ and ‘successor base rate’ language (good for SOFR replacement), while CIM-B’s supplement (from 2017) does not. And CIM-B has dipped since Friday, while CIM-C and CIM-D have not. So maybe CIM-B will be converted to fixed, while the others won’t. That seems weird, but a potential risk if they act like PMT (and no response from CIM IR yet). So I have sold my smallish holding of CIM-B before its ex-dip tomorrow, just in case.
20K out loud to sell 22.30
So far, this am before market open, it appears the market does not agree with us on the fact that pmt preferred will float. I’m okay with that. I’m setup to buy 2.3M shares today between $19.70 and $21.50. We will see if my target range hits.
Put your buy orders in for tomorrow! I’m expecting great fills as volatility hits
2whiteroses - I appreciate your work on this subject.. To me the most interesting prior case worthy of this same comparative analysis might be how STT has chosen to address their LIBOR based F/F issues… This is because they seemingly have decided to treat their two issues differently from one another apparently based on the minutia of the actual words used in the two different prospectuses…. https://investors.statestreet.com/investor-news-events/press-releases/news-details/2023/State-Street-Corporation-Announces-Transition-Information-for-Outstanding-U.S.-Dollar-LIBOR-Linked-Instruments/default.aspx. It would be interesting to see your take on how STT has interpreted what they have to do compared to what PMT is doing – Would you feel the same way about STT’s decision as he does on PMT? Please note this as an academic question, not one challenging your conclusion on PMT. Your analysis far surpasses anything I would attempt to do personally.
The relevant prospectuses are https://www.sec.gov/Archives/edgar/data/93751/000119312514072924/d682864d424b5.htm
and
https://www.sec.gov/Archives/edgar/data/93751/000119312516532234/d172256d424b5.htm
Thank you. This looks interesting.
I'm not a lawyer, nor do I play one on TV, but to assume they would have a clause "or if there was no such dividend period" that would be impossible to be true is a leap of faith. I would conclude you are missing something in their argument or misinterpreting that clause.
They might have some scenario where they feel it can be true, or it may just be because it is part of boilerplate text from a different scenario. The same paragraphs are often copy and pasted between documents. So it could just be a lingering element that made sense in some contracts where the sentence was structured differently.
The language in some of the prospectuses can get pretty strange. Including sections that are nearly identical and then one issuer sticks something like "do not" into the sentence. That proceeds to get copied over to more documents and you end up with competing strings of very similar text.
@Colorado Wealth Management Fund there's one difference. NLY and PMT have language about choosing an investment bank to determine an equivalent rate like SOFR. PMT and even Morgan Stanley don't have that language and fixed it. Morgan Stanley is doing it too... The prospectuses of some of these have a loophole. I read it too and I'm a senior lender in banking for 15 years and have dealing with Libor fallback language
I think there's a typo, and I want to make sure I know exactly what you were saying.
First group: "NLY and PMT have language about"
Second group: "PMT and even Morgan Stanley don't have that language and fixed it"
PMT is showing up in both groups.
Sorry! Yes I meant NLY and AAIC mention a "Calculation agent" to determine an appropriate substitute which is SOFR. Interestingly, I believe it's MS that has a mix of both depending on the series so one they shifted to SOFR while they other they fixed. The mention of the calculation agent is why NLY and I just checked AGNC can't play games with the spirit of the law... They will not back down
Which ones did MS not screw? Series A was already floating. I didn't find the fixed to floating series they didn't screw, but I'd like to check it for a comparison.
Truly apologize but it's State Street. Got my financial firms mixed up. After their justification up front they have a chart showing which debentures and preferred shares either have non-workable fallback or a determination agent (which is similar to the calculation agent I mentioned).
https://seekingalpha.com/pr/19360939-state-street-corporation-announces-transition-information-for-outstanding-u-s-dollar-libor
What analysis! Wow!.