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2 Purchases Yesterday – Both CEF Preferreds – 1 Safe Bucket, 1 Risker Bucket and Some Goofying Off

I had already written that I had made a purchase in the Priority Income Fund Term Preferred 6% (PRIF-H) shares. These have a mandatory redemption in 12/2026 and thus at $23.26 carry a yield to maturity of somewhat over 9%.

Then at some point Friday afternoon I made a small purchase of the Bancroft Fund LTD 5.375% perpetual preferred (BCV-A) at $22.35/share (good until cancelled order) with a current yield of 6.01%. This is a A1 rated issue from Moody’s. Bancroft is part of the Gabelli funds and has an asset coverage of 451% (as of 4/30/2024). The CEF invests primarily in convertible preferred and convertible bonds so assets are considered Level 2 assets (significant observable inputs toward valuation of assets). I consider this a ‘sock drawer’ issue at this time.

Friday afternoon it was time for a little break so the wife and I journeyed over to Red Wing MN for a little lunch and general goofing off–which always involves sitting on a bench on the Mississippi River. Not much happening yet on the river, but the tug boats are around so you know that barges will soon be floating corn and soybeans south. I don’t do much goofying around–just work, work, work so this was a refreshing afternoon.

12 thoughts on “2 Purchases Yesterday – Both CEF Preferreds – 1 Safe Bucket, 1 Risker Bucket and Some Goofying Off”

  1. I have been reading a lot on here lately about people buying this and that preferred. Has anyone been selling? I was overweight in several issues and been slowly balancing back to what I feel is a full position and maybe even lightening up more. Several accounts I am shooting to going back to about 1/3rd cash.

    1. I’m always selling. Gradually selling issues that were depressed last year and went up lately, mostly bank preferreds and REIT preferreds. Not into cash, I’m trading into other things including issues that were somewhat pinned to par so they didn’t participate in the rally much.
      Also selling some issues that just started floating as they tend to be fully priced compared to others that float later. Often selling below par by an amount greater than the lost dividends.

    2. Charles, Have been selling since November – most heavily in February/March.

      Definitely not trying to time the market, though had continued to buy/average-down relentlessly during the Q4 sell-off and was unwilling to sit on unusual cap gains of 10%-20% experienced by Q1 24.

      Like you, focused on income. The thesis for selling off about 70% of pfd was that at a minimum – even if the funds were reallocated to treasury or CDs/equivalents, those Q1 pfd sales and that reallocation would lock a 15%-25% annual gain through term ending late 2024.

      Buy-orders will reactivate if current downdraft which began in late March continues. This could occur through another “event” – even if it occurs in slow-motion. Important will be the return of a reasonable risk-spread.

  2. I currently like ADC-A (monthly payer 6.14%) and O- (6.34%), plus the broken preferred RLJ-A.

  3. Guess I lucked out from Tim’s disclosures and holdings I gleaned GenAm pfd GAM-B 5.90% and got a big slug at 24.56 a while back consider it core to juice cash. As long as positions are appropriate I don’t see any issue w taking a little risk here in other CEF pfds and there to increase overall income. Of course when it comes in and you have your watch lists you can buy other things too. Same in Gabelli funds, just I am not a Gabelli fan but that is just me.

  4. hey kid great points and thanks for the notes. Just one comment when one is dealing with convrts, one is almost necessdarily dealing with equities that are problematic and certianly more speculative.

    yes it is a very small fund.

  5. Red Wing pottery is what I thought it was known for a long time ago.
    August, what was your read on the RWT report that just came out?
    Just picked up my wife at the cruise ship in San Francisco. Walked through the Ferry building and the farmers market. Now in China Town for lunch.
    Not as beautiful weather as your having.

    1. Hey Charles I plan to listen to the conference later on this evening. Hope all is well

    2. Hey Charles,

      FWIW I did spend some time on RWT today. I like their story and what they are doing in terms of residential mortgage origination growth, partnerships with firms like CPP etc. They also seem to have done a great job of avoiding the more toxic segments of the loan market. The problem is that they continue to trade substanitally below book and continue to not earn their dividend on an EAD basis. Dividend is $.16/quarter while EAD is $.08 up from $.05 in Q4 03

      They are talking about substantially growing their portfolio (by $4B) based on the agreements with partner CPP. Let’s see what they do in Q2 in terms of ramping this up, and let’s see the impact on EAD. RWT also has a ~$200M convrt issue due in July – so that will be interesting.

      This is a tiny position for me and is easily the most speculative thing in my fixed income portfolio. I do plan to add to it next week, but only modestly.

      While the RWT story is getting better it still remains very much in the future (as always)…

  6. Interesting – this is a callable perpetual on fund that invests in convertible assets.

    The preferred is callable – so the owner is implicitly short a call option (therefore short volatility).
    The underlying assets are convertible so they are implicitly long call options (therefore long volatility).

    Albeit one option is on interest rates and the other is on equities. Kind of an interesting hedge.

    That aside the fund has a $1M postion in Rivian convrts. – Personally I think these will wind up owning the RIVN common after any restruring (not a prediction of RIVN b/k). Nice diversified exposure across industry segements and I noted (as might be expected) ABR and RWT convrts in the portfolio.

    It is a very small fund. The pref shares appear to have great call protection given the low coupon and an interesting current yield of 6% with upside in the event of a bout of rate cuts.

    1. August:

      Personally, I won’t buy preferreds issued by small closed end funds as crappy as BCV for an extra 10-15 bps in yield over better CEF preferred securities. You can get near 6% yields on CEF preferreds issued by larger and much better funds like GDV (GDV+H) and GAM (GAM+B) that have far stronger asset coverage.

      BCV is subpar to say the least. This fund has fallen 50% since interest rates bottomed in late 2021 (there was a monster $3.17 special dividend issued in November 2021). This dinky $136M fund has been around since 1971 and 53 years later trades $8 below its IPO NAV. If you look at the leverage from the $30M preferred outstanding based on total common assets, the fund is 28% leveraged.

      The “Total Distributable Earnings” Bucket has dried up into negative territory (as of the September 2023 Annual Report), and the fund is paying out ROC for the last two years since it is cash flow negative and the unrealized gains are long gone. In fiscal year 2023, the fund took in $2.5M in Net Investment Income and paid out $7.5M in distributions to common shareholders. This has gone on year after year. At some point, it is time to pay the piper.

      I glanced at some of their convertible issues (mostly small caps) and I don’t think the fund’s managers are very good equity investors. Their exposure in the REIT space is horrific (mortgage and hotel REITs).

      I would not touch this preferred unless they massively cut the common dividend for the CEF, but that likely won’t happen. I don’t know what Moody’s is smoking on this one with that rating for the preferred.

      GLTA and DYODD.

      1. Although there are of course a lot of factors to be considered, are you familiar with https://gab-misc-pdfs.s3.us-east-2.amazonaws.com/LevAnalysis.pdf? Given the discussion is about preferred shares of BCV, I would think asset coverage ratio of over 400% offers a great deal of well placed comfort in investing in BCV-A even with BCV Fund’s cash performance taken alone being nothing to write home about, don’t you think? Based on asset coverage alone, it looks to me like a middle of the pack Gabelli preferred, with ratios that support Moody’s view. Incidentally, although the rating is confirmed, you cannot find it in Moodys if you search by the CUSIP number used by QOL.

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