No sooner does Schwab disclose need for (up to) $500 million than it files with SEC for $2.35 billion cash injection by debt issuance and shares tumble 4.95%

Charles Schwab Corp. filed again today with the Securities and Exchange Commission (SEC), this time to issue nearly $2.35 billion in bonds, leaving analysts uncertain about why amid turbulence on Wall Street. 

The Westlake, Texas, administrator of $8 trillion-plus made the filing without explanation and without any apparent need for the bond float. 

Schwab is either “ripping the band-aid off” by reporting so many news events that the market can view negatively – or its hand was forced by unseen contingencies, says Tim Welsh, president of Nexus Strategy, who once worked for Schwab as an employee and with TDA as a consultant.

“The timing seems unusual,” he says. “If you had to plan this, you wouldn't do this two weeks before you move thousands of RIAs, millions of accounts and trillions of dollars of assets.”

The move comes on the heels of yesterday's disclosure that Schwab will need to record extensive TD Ameritrade-related severance expenses in 2023 and as much as $500 million in all by the end of 2024 for severance, termination of professional services and exits from real estate. See: Charles Schwab Corp. discloses imminent, sweeping 'TD Ameritrade' layoffs, indirectly revealed in new SEC filing that reports it will expense severance mostly in 2023 to gain 'incremental' $500 million synergy in 2024 and beyond

The largest tranche of TD Ameritrade assets yet will transition in two weeks on Labor Day weekend, largely ending the need for staff still supporting that brand and its discrete systems and service – hence rendering some TDA staff redundant.

Schwab also disclosed this month that its net new assets in July cratered as a direct effect of TD Ameritrade outflows of about $20 billion. See: Schwab 'proactively resigns' TD Ameritrade RIA custody clients, which accounts in part for July's $20-billion net new asset [from June] hiccup

Schwab's ‘Federal’ backing

Morningstar Analyst Michael Wong says Schwab's disclosed debt raise should not be cause for alarm on Wall Street, especially because it has the Federal Home Bank system and the Federal Reserve backing it.

“The company issuing debt shouldn’t be interpreted as Schwab being in any particular real need for immediate cash.” he writes in an email to RIABiz.

“Charles Schwab has access to significant amounts of cash from the Federal Home Bank system and the Federal Reserve.”

Nonetheless, Schwab shares tumbled $2.94 or 4.95% today in regular trading, its 11th consecutive daily decline, according to Bloomberg. Financial institutions in general had a bad day.

The Financial Select Sector SPDR Fund (XLF), which tracks the banking industry, was down modestly, 32 cents, or 0.94%, to close at $33.62, about mid-range between its 52-week high and low. 

No fear

“We believe the stock has declined in recent days partly from the overall pullback in the stock market and potentially from the higher 10-year Treasury rate,” Wong wrote. 

Investor chatter on Yahoo boards seemed to mirror Wong's view. 

“In regards to the stress test, the bank with the highest capital ratio under the Fed’s ‘severely adverse scenario’ was Charles Schwab,” wrote one commenter.

“All the negative talk regarding Schwab is now put to rest. Stock will now retrace back to mid-70s over the short-term. Enjoy the ride!” he added. 

“Gap up, enjoy the short squeeze party at these give away prices,” wrote another. 

Indeed, of the 15 analysts who follow the stock, 12 are buy, two are hold and only one says sell. The average 12-month price target is $73.80, a 30.1% upside, with a swing in analyst ratings between $57 and $92 a share. 

Attractive valuation

Certainly, such a momentous systems merger allows for the possibility of hiccups that could compound existing sour sentiment, says Welsh. 

"Under current capital regulations, Schwab has abundant capital and it has ample access to liquidity from its normal business operations, natural periodic debt issuance, and borrowing from the Federal Home Loan Bank system and the Federal Reserve," Wong writes in a commentary today. 

"While we can imagine some of the concerns of the previous two quarters related to the U.S. banking system and Schwab resurfacing in people’s minds, we continue to believe that the relatively diversified, larger financial institutions will be fine and that many of them are trading at attractive valuations."

Indeed, the last time Schwab tapped credit markets – for $2.5 billion – in May, it was still suffering the aftershocks of the March banking crisis. Then, like now, its filing said the raise was for “general corporate purposes.”

Excess caution

Schwab is paying about a 1.8 percentage point premium from treasury rates on the bond issuance.

It includes $1,350,000,000 at  6.136% fixed-to-floating rate on notes due 2034 and $1,000,000,000 5.875% notes due 2026, according to the filing.

The 10-year U.S. Treasury rate is currently about 4.3%.

Schwab could use the money to pay down long-term debt. Schwab has $3.7 billion of a total of $20 billion that matures by the end of 2024,  the  Wall Street Journal reported, based on a May regulatory filing.

The bad news for Schwab is that the price of money just shot up.

In the May raise, it paid 2.05 percentage points higher than U.S. Treasurys for 2029 notes, or 5.643%. For 2034 notes, it paid a 2.27 percentage point premium or 5.853% , the May Journal article reported.

Just a year ago, Schwab sold 10-year bonds of around 2.9%, or about half what it now needs to cough up annually to procure the cash.

Several banks have recently filed for big bond issuances – perhaps in an excess of caution lest rates only continue to rise as the Fed fights to control as yet untamed inflation. Those banks include: PNC, Bank of America, Goldman Sachs and Huntington Bancshares, Bloomberg notes.

Schwab's issuance reportedly went through without a hitch on August 23.