CMA.PR.B: 6.875% Fixed Rate Reset Preferred IPO From Comerica Incorporated

Comerica (CMA) has issued $400 million of 6.875% Fixed Rate Reset Non-Cumulative Preferred Stock Series B (CMA.PR.B), rated BB/Ba1/BB+ and callable in 2030. Despite Comerica's 'A-' Fitch IDR carrying a Negative Outlook due to deposit challenges, the preferred's dividend coverage is robust, backed by common share distributions exceeding preferred payouts by 13x. The security, currently yielding 6.85% to call, is deemed fairly priced against sector peers but trades at a notably wider credit spread than Comerica's senior debt, which is priced tighter than average BBB corporate debt, suggesting potential relative value. Its size also makes it a candidate for inclusion in the PFF ETF.

Analysis

Comerica Incorporated's new 6.875% Fixed Rate Reset Preferred Stock Series B (CMA.PR.B) has been issued with split non-investment grade ratings (BB/Ba1/BB+), positioning it at the speculative-grade boundary. This contrasts with the parent company's 'A-' Fitch IDR, which carries a Negative Outlook stemming from a 15% decline in core deposits in 2023 and an elevated loan-to-deposit ratio relative to peers. Despite these underlying credit concerns for the parent, the preferred dividend appears secure, with the company's annual common stock distribution providing a coverage cushion of more than 13 times the new preferred's payout requirement. The security is currently priced with a 6.85% yield-to-call, which is deemed fairly valued against comparable regional bank preferreds. However, a key valuation discrepancy emerges when compared to Comerica's own senior debt; a 2029 bond rated two notches higher trades at a tight 77 basis point spread, while the preferred's spread is approximately 300 basis points, suggesting a significant risk premium for subordination. The security's structure includes a rate reset in 2030 to the 5-year Treasury yield plus 3.125%, which, based on current forward curves, could increase the dividend if the issue is not called. Furthermore, its $400 million issue size makes it a candidate for future inclusion in the iShares Preferred and Income Securities ETF (PFF), potentially creating a structural source of demand.

Key Decisions for Investors

• Investors should weigh the parent company's Negative Outlook and deposit franchise challenges against the preferred stock's robust dividend coverage and 6.85% yield-to-call.
• The significant credit spread premium of this Ba1-rated preferred stock over Comerica's own Baa2-rated senior debt may present a relative value opportunity for investors comfortable with subordination risk.
• It is prudent to monitor for the security's potential inclusion in the PFF ETF as a positive price catalyst, while also tracking any changes to Comerica's funding profile and credit ratings.
• For long-term holders, the 2030 rate-reset feature offers a potential hedge against a higher interest rate environment post-call date.