Wells Fargo has sold the whole of a new perpetual preferred series at 6.55 percent, and the rate stops being 6.55 percent in September 2031

The document that matters here is a certificate filed in Dover, and the terms that decide what the security is worth are all in it.

On 17 August Wells Fargo filed a Certificate of Designation with the Delaware Secretary of State creating a new class of stock: 70,000 shares of 6.55 percent fixed rate reset non-cumulative perpetual Class A preferred, Series HH, each carrying a liquidation preference of $25,000. Two days later it sold 1,750,000 depositary shares, each representing a twenty-fifth of one of those shares. Divide and the whole authorisation was placed. At the liquidation preference that is $1.75bn of preferred stock, sold in pieces of $1,000 apiece.

That denomination is the first thing worth noticing. Most bank preferreds a retail investor has seen trade in $25 depositary shares, and Wells Fargo's own listed series, Y, Z, AA, CC and DD, each split a share a thousand ways. This one splits it twenty-five ways, and the cover page of the filing, which lists the classes registered under Section 12(b) of the Exchange Act, does not include it.

The rate has an expiry date

Perpetual is a description of the principal, never of the coupon. Holders get 6.55 percent from 19 August 2026 up to but not including 15 September 2031, paid quarterly in arrears on the fifteenth of March, June, September and December, with a long first period ending on 15 December 2026. From that September date the rate becomes whatever the five-year Treasury yield is three business days beforehand, plus 2.174 percent, and it resets on the same terms every fifth anniversary after that. Nobody knows what the second coupon is. That is the deal.

The spread is the fixed part and the only part the buyer can price today. Everything after 2031 is a bet on the five-year point of the Treasury curve, renewed every five years, for as long as the bank chooses to leave the paper outstanding.

Non-cumulative means what it says

Section 4(b) of the certificate is blunt. If a dividend is not declared before a payment date, it does not cumulate, it ceases to accrue, and the holders never receive it, whether or not dividends are declared in any later period. There is no catch-up. That single clause is most of why this instrument counts as capital to a regulator: the bank can stop paying it without defaulting on anything.

When it can be called

Wells Fargo may redeem, in whole or in part, on any dividend payment date on or after 15 September 2031, at $25,000 a share plus dividends already declared, and only with the prior approval of the Federal Reserve Board. There is one earlier door. Within 90 days of the company determining in good faith that a Regulatory Capital Treatment Event has occurred, it may redeem the whole series before that date, again subject to the approval of the appropriate federal banking agency. Investors in this paper have been buying that structure for years. It is worth reading anyway, because the first reset date and the first call date are the same day. The bank finds out what the new coupon would be and decides whether to keep paying it in the same week.