By Sean Walsh and Hildy Richelson
We at the Scarsdale Investment Group have always bought only the highest rated bonds available generally rated at least AA+ or AAA. But for those with different risk tolerances, and those who believe that some banking institutions are “Too Big to Fail”, this Wells Fargo issue may be of interest.
Because of the tax consequences of this bond, it would likely fit best in a retirement account where your investments can grow tax-deferred until withdrawal.
High interest rates on corporate bonds are back. Consider the example of a Wells Fargo offering that came to market August 23, 2023.
Wells Fargo & Co. is the 4th largest bank in the U.S. according to Bankrate.com, behind only JP Morgan Chase, Bank America, and Citigroup. These “mega-banks” took in over $120 billion of new deposits in the days following the collapse of Silicon Valley Bank (SVB) in March 2023. The earnings of the mega-banks have been strong.
This Well Fargo new issue might be attractive to certain investors who can take on some risk to gain a higher yield on their bonds.
5,000,000 Wells Fargo & Co. (Senior Unsecured Debt)
Ratings: Moody’s A1; S&P BBB+; Fitch A+
6.20% coupon due 8/31/2033 selling at par (100)
Callable Semi-Annually beginning 8/31/2025 at 100
6.20% YTC in Aug 2025 (Comparable US Treasury = 4.97%)
6.20% YTM in Aug 2033 (Comparable US treasury = 4.20%)
Advantages:
A robust 6.20% coupon provides a high cash-flow. For example, a 100,000 purchase provides interest payments of 6,200 per year.
This is Senior level debt.
Disadvantages:
This bond has only 2 years of call protection and yet it is a 10-year bond. That means that Well Fargo can buy back its debt from you beginning 8/31/25 and every 6 months thereafter. This is a major disadvantage if interest rates fall in the future.
The interest is subject to state and federal taxation. A tax-free muni bond would provide interest that is Federally tax-free.
You are subject to the risk of Wells Fargo’s ability to pay back its debt. Many issuers have much higher credit ratings.
The fact that this is a 10-year bond may be an advantage or disadvantage depending on the movement of interest rates.
© 2023 Hildy Richelson