Preferred Stock: Time To Avoid Most Issues, Risks Exposed (NYSE:TRTN) (2024)

Yesterday it was announced that Triton International was being acquired by Brookfield Infrastructure Partners in a cash and stock deal valued at $13.3 billion. Triton (TRTN) common shareholders will receive consideration valued at $85/share, including $68.50 in cash and $16.50 in Brookfield (BIP) class A shares. While this led to joy for TRTN shareholders who saw their stock jump from about $63 to $83, a nice 30%+ gain in one day, preferred shareholders were left out of the party. All four issues of TRTN's preferred stock fell sharply with Series A falling by 8%, series B falling 9%, series C more than 13% and Series D by 12%.

Thus, one day investors believed that they were earning a solid and safe yield from an investment grade rated company, as TRTN is rated BBB- by both S&P and Fitch (which will likely change now with the sale, also note the preferred issues themselves are rated lower) and the next day they see an average 10% decline because of a sale of the company to a private buyer.

Why the decline in TRTN preferred issues? For a few reasons, first, private equity buyers are generally not kind to preferred shareholders. On December 12, 2022 we published an article on Seeking Alpha titled "Delisting Risk: A Growing Concern for Preferred Stock Investors" which highlighted the phenomenon of several cases of delisting of preferred issues by private buyers. The issue has been exacerbated by recently enacted SEC rules related to the "expert market" which greatly limited trading availability of certain issues; this topic is beyond the scope of this article, check out SEC Rule 15c2-11 for more information. The article highlighted how formerly high quality PS Business Parks preferred issues had been driven down sharply following its purchase by Blackstone (BX). Blackstone has taken advantage of the situation to purchase the "hanging" preferred at deep discounts, like this tender offer announced last November.

There have been several other examples in the last couple of years such as Hoegh MLP (OTC:HMLPF) ("HMLP") -- once a sought after higher yielding preferred issue now trading at $12.50 per unit. While the problem may have once been relegated to more obscure, smaller issuers, PS Business Park and TRTN are not micro or small caps. With large private equity groups looking to deploy large amounts of capital quickly, larger companies are well in the sights of these buyers and it cannot be assumed that their preferred issues will not be subject to the same concerns as smaller issuers.

I have not had a chance to closely examine the prospectus for TRTN preferred stock but we can be sure that Brookfield will use any legal strategy to obtain value at the expense of preferred shareholders. Delisting is actually a good strategy to lower the trading price of the preferred followed up by a series of tender offers to buy the preferred at a large discount to par. The notion that Brookfield will "do the right thing" is wishful thinking as evidenced by Blackstone's handling of PS Business Parks. The other risk, which also led to the decline in the price of TRTN preferred, is that Brookfield will increase the leverage of TRTN such as by taking out dividends and layering in new capital ahead of the preferred stock, greatly increasing the credit risk of those who choose to hold their preferred stock -- it won't be an investment grade issuer anymore. Brookfield may make statements that they won't do that now, but that policy (if in fact enacted) can be changed in the future, at some point Brookfield will look to extract maximum value out of TRTN. Again, we do not know for sure what will happen to TRTN preferred, and it all may work out for investors, but we do not know yet and there is risk that did not exist prior to this announced acquisition.

At this time, as a professional fixed income investment manager, we have mostly exited the preferred stock space -- a process that has been ongoing since last year as bond yields rose making them a much better risk/reward investment for income investors. Individual bonds have always been the core holding for our portfolios, with preferred stock and other securities like closed end funds mixed into portfolios in smaller amounts to add diversity and yield. At this time we see preferred stock as an investment mostly to avoid. Not only is interest rate risk a key issue which investors saw in 2022 with the sharp rise in the Fed Funds Rate (although the worst of it is likely behind us), but now delisting and acquisition risk is a key problem -- and this can happen with no warning as we just saw with TRTN.

With traditional bonds and exchange traded bonds still offering attractive yields in today's market, the risk/reward for preferred stock right now is difficult to justify in our view at this time, and the risk highlighted by the TRTN and PS Business Parks situations make this asset class even less appealing. Select issues of preferred stock such as those issued by money center banks (e.g. JP Morgan Chase) and a few other issues can certainly still be part of the fixed income toolbox, but investors should be cautious and highly selective. I long ago exited issues such as SEAL.PA and DLNG.PA and others. We had some exposure to TRTN preferred a few months ago but rotated almost all this exposure to bonds -- the very small amount still held in some portfolio was liquidated today. Perhaps it will all work out for TRTN preferred but we have found generally best to take a modest loss now and redeploy into better bargains versus hoping for the best. In our view, right now high yield bonds, investment grade bonds, exchange traded bonds, and some closed end funds (such as those that hold floating rate bank loans), as well select high dividend stocks such as those by the best-of-breed BDCs, are a better option than most preferred stock issues today. And don't dismiss FDIC insured CDs yielding 5% offered by your brokerage firm.

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Downtown Investment Advisory