Live Oak Bancshares has recently introduced a new preferred stock, offering an attractive nominal yield of 8.375%. However, a detailed evaluation reveals that its credit risk is considerable, and its potential for appreciation is restricted when compared to other available preferred stocks that are currently trading at a discount. Despite Live Oak Bancshares demonstrating strong asset coverage, the dividend cushion for common stock is not as robust as ideal. This new offering, priced at par, is particularly susceptible to increases in interest rates and appears less appealing than its counterparts that are trading below par, which would benefit from a decrease in rates. Considering its speculative credit profile and the limited upside, a 'Hold' rating is suggested for LOB-A, indicating no immediate investment interest.
Our ongoing analysis of exchange-traded fixed-income security IPOs brings us to Live Oak Bancshares's latest Series A Depository Shares. This new issue commands an 8.375% nominal yield, which on the surface, might attract income-focused investors. Yet, a closer inspection reveals several factors that temper enthusiasm for this new offering.
Firstly, while Live Oak Bancshares generally maintains sound asset coverage, the financial buffer for its common dividends is not robust enough to entirely mitigate concerns regarding the preferred stock's credit risk. This implies that while the company's assets could cover the preferred stock in a liquidation scenario, the ongoing ability to comfortably pay dividends might be more strained than desired, particularly in adverse economic conditions.
Furthermore, a significant point of concern is the pricing of LOB-A at par. In an environment where interest rates are volatile, a fixed-income security priced at par is highly vulnerable to an upswing in rates. Should interest rates rise, the market value of LOB-A would likely decline, leading to capital depreciation for investors. In contrast, existing preferred stocks that are trading at a discount offer a dual advantage: they provide a buffer against rising interest rates and also present potential for capital appreciation if rates decline or if their credit profile improves.
Ultimately, the combination of a high credit risk, a par pricing that exposes it to interest rate volatility, and a lack of significant upside potential compared to more favorably priced alternatives, leads to a cautious outlook. The speculative nature of its credit profile, despite the enticing yield, makes it a less compelling investment at this time.