How will the $100 million Series H preferred issuance affect Farmer Mac's Tier 1 capital ratio and overall cost of capital?
The $100 million Series H issuance will be counted as Additional Tier 1 (AT1) capital, so Farmer Mac’s Tier 1 capital base will rise by roughly the same amount (net of issuance costs). Because the new capital is added against a relatively static pool of risk‑weighted assets (RWA), the Tier 1 ratio—Tier 1 capital divided by RWA—should improve by a few percentage points (e.g., a 1‑2 ppt lift if the ratio was previously in the high‑70s). The boost moves the bank farther from the 8 % regulatory floor and gives it more headroom for loan‑growth or for meeting any future stress‑test requirements.
From a cost‑of‑capital perspective, the 6.5 % non‑cumulative perpetual dividend on the preferred shares is higher than the effective cost of common equity (which is typically lower after tax). Consequently, the weighted‑average cost of capital (WACC) will tick upward modestly—roughly the 6.5 % dividend spread over the $100 M plus the existing equity mix. However, because the instrument is non‑cumulative and perpetual, the cash‑flow burden can be deferred in periods of stress, making it cheaper in practice than raising fresh common equity or issuing debt at a higher spread. The net effect is a slightly higher nominal cost of capital but a stronger capital buffer that should compress funding spreads over the medium term and support the credit rating.
Trading implications – the capital‑strengthening move is likely to be viewed positively by the market, especially if the stock has been under‑pressured by concerns over capital adequacy. Expect a modest upside in AGM’s equity price on the announcement, with the most upside coming if the Tier 1 ratio lifts enough to trigger a rating‑upgrade or to enable a higher loan‑growth trajectory. For a short‑to‑medium‑term play, consider buying on any pull‑back after the news, while keeping an eye on the upcoming quarterly RWA release and any rating agency commentary that could confirm the capital‑ratio improvement. The preferred issuance itself does not dilute existing shareholders, so the equity upside is driven primarily by the stronger balance‑sheet profile rather than by immediate earnings dilution.