Description

Member LimitedDownside wrote up a very nice idea for First Horizon the other day.  I suggest
to read that idea for background and since it’s very recent it’s very relevant. However, I believe
the FHN PRD (preferred stock D) has more “limiteddownside” (ahem) versus the equity. 

Brief review: TD bank is purchasing FHN.  This was a top of the market deal and TD paid a full
price.  TD is a highly rated TBTF bank in Canada with a very large US footprint.
A few interesting points is that this was not an auction but rather TD approached FHN.  There
was no negotiation on price other than the “ticking” fee.  These points provide me with comfort
that this is a bank that TD really wants to buy.

Please note that the preferred is now trading at $19.50 today (up 2% since I started this write up)

The FHN PrD
This is an interesting piece of paper.  Par value is $25, but it is trading (as of 3/22) at $19, The
coupon is 6.10% payable 5/1 and 11/1 each year. Also, the preferred is tax advantaged with
lower tax rate on the dividends if you hold them LT.
The interesting wrinkle is that as of May 1 st  2024 (14 months away) this is callable at Par.  If it’s
not called, the coupon starts to float at LIBOR plus 385 bps.  Currently this would be
approximately 9% coupon.  Given the discounted price ($19 out of $25 par) if this is not called
the expected yield would be 11.75%.  This yield is in line with several other regional bank
preferred stocks and my view is that it doesn’t trade down much on a deal break. See a few of
the Comps listed later in the write up.

In a deal close it is highly likely that TD will redeem the paper and if so YTC is over 35%.  (FHN
might call the paper even in a no deal scenario although that is not expectation).

The near term catalyst for this security is if/when TD/FHN extend out the merger agreement
date (currently end date is May 27 th ) which I believe occurs in the next few weeks. Another
positive is if the deal price gets cut but at the same time more protection is added for FHN (deal
break fee for example) that highlights TD’s commitment to close the deal.

The common has better return if a deal happens with no change or modest change in price.  I
believe it is also a good risk/reward.  The downside for common in a deal break is harder to
figure out but my best guess now is $13-14 given where other regional banks are trading.  (10-
15% downside).
Some comments from Hope Dmuchowski, the FHN CFO, per evercore (from a few weeks ago):
 If the delay is expected to be materially longer than the previously communicated delay
(i.e. another year+), Hope Dmuchowski did not rule out that price re-negotiations could
be possible given mgmt’s fiduciary responsibility to shareholders. 
 the pending merger agreement has limitations to FHN’s compensation changes, capital
return, and branch openings in the interim (prior to deal close). Such limitations
inherently become more relevant amid extended deal delays.

 Hope re-enforced TD’s comments on their earnings call that relationship remains
positive. FHN noted that TD & FHN remain in active discussions re: merger integration
plans & related matters.
Comparables:
 the ZIONO preferred is trading at 21.50 - it's similar with a 6.30% coupon that converts
to LIBOR plus 425 bps.
 the WBS PRG is trading at 19.60 - and has a 6.5% coupon and is callable currently. 
There are several key risks in this security. The first major risk is liquidity, the Prefs trade a
couple of $MM per day now but in normal times about $1MM across all the various different
preferreds. In a deal break scenario the immediate volatility could lead to a MTM loss.
The second key risk is that as this merger takes a while to close FHN can lose people and clients
to lower the franchise value. In my view this is less of a risk for the preferred stock versus the
common but still a risk.
The third key risk is general bank risk and ongoing profitability of the business given the
expected increase in deposit costs (and/or deposit flight).
Happy to answer any questions and hear feedback on the idea.

Catalyst

deal end date extension

deal closing