The Securities That Banks Are Backing Away From: Credit Weekly

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14 hours ago

(Bloomberg) -- US banks, among the few companies that still sell preferred shares, are following JPMorgan Chase & Co.'s lead and retreating from the securities, even as investors are eager to buy them.
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Capital One Financial Corp. redeemed a $500 million preferred share this week, resulting in the market shrinking on a net basis this year, according to data compiled by Bloomberg. If the trend continues, this will be the second year in a row that the market for US bank preferreds has shrunk, something that hasn't happened since the lenders were replacing obsolete capital after the global financial crisis.
At the same time, preferred managers have received more cash to invest this year, as investors pile into higher-yielding assets that can perform well when rates are cut. Assets under management in the 10 largest funds in the space have risen by more than 10% on average year-to-date, based on Bloomberg-compiled data.
Capital One's redemption follows JPMorgan cutting its preferreds outstanding by more than a quarter last year. Banks are broadly paying off the securities because they don't need as many of them anymore: capital regulations that made preferred shares attractive to issue, including the Basel III endgame rules, are being eased now in the US. The securities are expensive for banks, because they pay relatively high dividends.
But banks were among the few companies still selling preferred equities, a sort of equity with some debt-like characteristics, that helped finance the industrialization of America. For earlier generations of investors, the securities were an attractive source of income, offering more than a company's notes would pay, but also coming with more risk. If the company fell on hard times, preferreds were close to the back of the line to be repaid, for instance.
Non-financial companies have been backing away from preferreds, in favor of securities known as 'hybrid bonds.' Hybrids are among the last bonds to be repaid if a company runs into trouble, but aren't as far back in line as preferreds, which are equity. Issuance became viable for companies once Moody's Ratings changed its methodology in early 2024 and the securities quickly became one of the hottest sources of capital-raising in the US.
With preferreds growing less popular, the managers of the largest preferred-focused funds are looking for alternatives. They are banking on the relatively high leeway they have to invest in securities similar to preferreds, such as hybrid bonds.
'That's the nice thing about our universe. When people talk about preferred securities, the definition is very grey,' said Douglas Baker, head of preferred securities at Nuveen. 'If things get tight in one area, we typically have plenty of places to pivot to,' he said.
It's a view shared by Mark Lieb, founder and CEO of Spectrum Asset Management and a veteran of the preferred market, who expects the supply of hybrids from US utilities to expand in order to cover the growing demand for infrastructure investments supporting AI. That growth can outweigh any loss of issuance from US banks, as their regulatory needs keep decreasing.
'We will have to see what the final rules and regulations are but on the utility side it's going to more than offset it,' Lieb said in an interview. 'Capex is going to go up.'
Non-financial corporates in the US sold about $30 billion of hybrids last year, with another $10 billion sold so far in 2025, data compiled by Bloomberg shows. This far exceeded what was repaid through the exercise of call options.
Week In Review
JPMorgan Chase & Co. helped Warner Bros. Discovery Inc. restructure its debt by offering creditors a deal that would leave them with billions less than they were owed, despite the notes having an investment-grade rating.
A trio of banks joined Morgan Stanley in a $5 billion debt deal for xAI Corp., after the company requested their participation to maintain relationships that could help with financings down the line.
New World Development Co. closed a record $11 billion refinancing deal, averting a potential crisis in Hong Kong's fragile property market.
SoftBank Group Corp. sold $4.2 billion of bonds in dollars and euros, as the technology investment firm turns to global debt markets to accelerate its artificial intelligence push.
JPMorgan Chase & Co. and UBS Group AG are among a group of Wall Street banks sounding out investors ahead of a mid-July launch for a $4.25 billion debt package backing Sycamore Partners' buyout of UK pharmacy Boots.
The European Central Bank held onto two bonds of embattled payments company Worldline SA while prices slumped after news reports alleging the company covered up fraud by some of its customers.
Goldman Sachs Group Inc. is leading a potential transaction for Gray Media Inc. to help the company refinance some of its existing debt, aiming to raise at least $750 million in the high-yield bond market.
Flora Food Group BV is the first issuer in Europe rated one of the lowest levels of junk to sell bonds in nearly a year, a sign of investors' insatiable appetite for risk.
Vodafone Group Plc pulled in multi-billion investor bids across a multi-currency debt sale, the proceeds of which will be used to finance a sweeping €2 billion ($2.35 billion) debt buyback.
Wolfspeed Inc., a chipmaker caught in President Donald Trump's push to reshape Biden-era tech subsidies, filed for bankruptcy to enact a creditor-backed plan to slash $4.6 billion in debt.
AMC Entertainment Holdings Inc. said it reached an agreement with creditors to end litigation that resulted from the movie theater chain's debt restructuring last year.
Merit Street Media, the startup founded by celebrity psychologist Phil McGraw, filed for bankruptcy in Texas.
On the Move
Josh Harris' 26North Partners is hiring bankers from JPMorgan Chase & Co. and Deutsche Bank AG as it continues to grow its investment-grade bets. The platform has tapped Todd Marr, formerly global head of debt private placements at JPMorgan, and Ravi Suresh, former head of insurance private asset solutions at Deutsche.
BNP Paribas hired Denise Chow from Morgan Stanley's leveraged finance team, one in a string of recent moves across lenders' debt capital markets desks.
Uros Stosic, a longtime leveraged loan trader, left Morgan Stanley to join Truist Financial Corp.'s team in New York as a managing director. He reports to Eddie Ferguson, head of loan and sales trading.
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