Tuesday, October 27, 2015

Kinder Morgan's New Preferred Stock Pays 9.75%, Trades Down (KMI)

A bit above the risk-free rate, eh what?

I've been at the market pretty much my entire adult life but, except for the death spiral stuff the pink sheet guys were doing in the 90's this is one of the more inexplicable offerings I can recall.*

The issue is a mandatory convertible preferred, here are the details in the pricing term sheet filed with the federales.

Usually you risk the dilution of a convertible because the market will allow you to pay a lower dividend than it would otherwise require. But in this case...well here's BloombergView:

Kinder Morgan's Uncertainty Principle
It is hard to be in suspense for long, but Kinder Morgan’s shareholders may wish they could have stayed there. 
Recall that last week, while releasing quarterly results and cutting its dividend target for 2016, the pipeline giant dangled the prospect of “alternative” financing to fund growth through the first half of next year. Regulatory constraints kept Kinder Morgan tight-lipped on what form this financing would take, though some speculated -- correctly, as it happened -- that it would be convertible preferred stock. This much was confirmed on Monday when the offer went out. 
On Tuesday, investors awoke to the cost: a 9.75 percent coupon with an effective yield nudging double digits. 
Which is a bit of a head-scratcher. Kinder Morgan’s reasoning behind going the alternative route was that it was preferable to issuing common stock after its dividend yield had soared to around 7 percent. That now looks cheap in comparison. 
When it partly lifted the veil on the preferred issue last week, Kinder Morgan’s chief executive officer said the move was aimed at “breaking the cycle” of broader fears around falling energy prices weighing on the common stock.
Thus far, anyway, it isn’t working: Since that call, Kinder Morgan’s stock has slumped another 12 percent or so, lagging the S&P 500 and pipeline peers badly. The dividend yield, at 7.4 percent, is almost back to its late September peak, which was the reason for casting a wider financing net in the first place....MORE
And kudos to Barron's Income Investing who have been dogging this story:
 Kinder Morgan’s New Convertible Stock Trading Below Offering Price
Today the common closed down a bit over 1% at $27.28 and was off another nickel in after-hours trading.

*Just so we (and the KMI attorneys) are clear on this, the Kinder Morgan issue is not an example of a death spiral financing, it's just the first thing I thought of going through the red herring and term sheet.

In a death spiral or Toxic Convertible financing a preferred was issued that converted into a stated dollar amount of common. The lower the price of the common the more shares the convertible holders received which led to bear raids on the stock by naked (why convert until you need to) shorts who knew their potential losses were capped by the convertible and who could profit mightily if the common went to zero, as it often did.

The SEC attempted to solve the problem of unregistered offshore sales of floating convertibles in 1990 with Reg. S and release 33-7505 but the scammers found loopholes that basically allowed them to sell stock offshore that immediately found its way back into the U.S. markets, directly contravening both the letter and spirit of the '33 and '34 Acts.

And then there was the interplay with the short selling stuff that the SEC sought to address with 2005's reg SHO on shorts but that's a story for another post.

To this day the SEC maintains a page on convertibles which warns:
...If the company has engaged in convertible security financings, be sure to ascertain the nature of the convertible financing arrangement - fixed versus market price based conversion ratios. Be sure you fully understand the terms of the convertible security financing arrangement, including the circumstances of its issuance and how the conversion formula works. You should also understand the risks and the possible effects on the company and its outstanding securities arising from the below market price conversions and potentially significant additional share issuances and sales, including dilution to shareholders. You should be aware of the risks arising from the effects of the purchasers and other parties trading strategies, such as short selling activities, on the market price for the company's securities, which may affect the amount of shares issued on future conversions. 
Companies should also understand the terms and risks of convertible security arrangements so that they can appropriately evaluate the issues that arise. Companies entering into these types of convertible securities transactions should understand fully the effects that the market price based conversion ratio may have on the company and the market for its securities. Companies should also consider the effect that significant share issuances and below market conversions have on a company's ability to obtain other financing....
Anyhoo, we'll probably have more on Kinder Morgan later this week.

"Kinder Morgan Funding Plan Gets Thumbs Down from Market" (KMI)
"Kinder Morgan's Mysterious Ways" (KMI)
Kinder Morgan Warns On Dividend Growth, Investors Saddened, Stock Drops 7% (KMI)
Why Kinder Morgan May Need to Lower Its Dividend Guidance
Chasing Yield: September Was the Worst Month In History For Master Limited Partnerships

See also:
The "Kinder Morgan Is a House of Cards" Theory and the Pros and Cons of Going Short (KMI)
There's Hatin' On Kinder Morgan and Then There's Calling For An Additional 24% Drop From Here (KMI)

And many more, use the 'search blog' box if interested.