Bank Stock Convert. Redemptions and Leveraged ETFs.
I'm printing an excerpt of this from 24/& Wall Street because this issue is out there and also for certain selected accounts I own postions in UYG which is a leveraged bank stock ETF. I think it is something of which to be award but I'm not exactly sure how it could affect this ETF postively or negatively. Actually I think it is a bigger negative for holders of bank preferreds.
"The triple-leverage financial ETFs of Direxion Daily Financial Bull 3X Shares (NYSE: FAS) and Direxion Daily Financial Bear 3X Shares (NYSE: FAZ) are getting to deal with yet another potential wrench in the machine: preferred share redemptions from major banks. This will also pose a potential issue for the Ultra Financials ProShares (NYSE: UYG) and the UltraShort Financials ProShares (NYSE: SKF) ETFs that trade at double-leverage of the Dow Jones U.S. Financials index......
...All of these index levels actually track just the common stock, so the dilution, the new issuances, and the potentially larger market caps of the common shares would be what matters to these ETF’s. These ETF’s are only full of the common stocks......The biggest issue out there for how this will affect the ETF’s which track banks, financials, and preferred shares is the overall weighting.....The incentive here is actually rather simple to retire these at lower prices than the traditional $25.00 PAR if possible. The yields on many of these preferred securities is close to 10%. Some yields are even higher. Bankers cannot make that much spread even if the credit card rules were not changing.
There is also the notion that these preferred share redemptions act as effective Tier-1 capital raising activities. Some consider this a balance sheet trick, but if it lowers current obligations and long-term debt then that is ultimately good for shareholders of common stock in today’s environment even if you consider the dilution that the common holders have to accept.
"The triple-leverage financial ETFs of Direxion Daily Financial Bull 3X Shares (NYSE: FAS) and Direxion Daily Financial Bear 3X Shares (NYSE: FAZ) are getting to deal with yet another potential wrench in the machine: preferred share redemptions from major banks. This will also pose a potential issue for the Ultra Financials ProShares (NYSE: UYG) and the UltraShort Financials ProShares (NYSE: SKF) ETFs that trade at double-leverage of the Dow Jones U.S. Financials index......
...All of these index levels actually track just the common stock, so the dilution, the new issuances, and the potentially larger market caps of the common shares would be what matters to these ETF’s. These ETF’s are only full of the common stocks......The biggest issue out there for how this will affect the ETF’s which track banks, financials, and preferred shares is the overall weighting.....The incentive here is actually rather simple to retire these at lower prices than the traditional $25.00 PAR if possible. The yields on many of these preferred securities is close to 10%. Some yields are even higher. Bankers cannot make that much spread even if the credit card rules were not changing.
There is also the notion that these preferred share redemptions act as effective Tier-1 capital raising activities. Some consider this a balance sheet trick, but if it lowers current obligations and long-term debt then that is ultimately good for shareholders of common stock in today’s environment even if you consider the dilution that the common holders have to accept.
*Long UYG in certain risk oriented accounts, certain bank stocks in legacy accounts and certain bank preferreds.
posted by CR English at 9:20 AM
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