1 Hour Until Fed Announcement

We will have a statement from the Federal Open Market Committee (FOMC) in about an hour and the wording of the statement will be critical to the next couple of days of trading in the interest rate markets.

In particular what is the FOMC take on inflation and on employment.  Markets are watching for these signals specifically.

Of course no interest rate hike is expected today, so any hike would set panic to the markets–even though they will be hiked in 60 days and everyone knows it.

Preferreds and baby bonds are flattish today while the 10 year treasury it a basis point or 2 higher.

Obviously none of us are able to trade on this news as markets will react faster than we can even dream of reacting so we will just sit back and watch how it all unfolds.

 

Fidus Investment Corp to Sell New Notes

BDC (business development company), Fidus Investment Corporation is selling a new baby bond with a short maturity in 2023.

The coupon on the new note is set at 5.875% which again is too low, given that we are staring at probable interest rate hikes ahead.  A quick review of Fidus (NASDAQ:FDUS) financials shows that the company is a solid BDC with good level of net income and we would be a buyer at a higher current yield.

The company has no other baby bonds or preferred stock outstanding.

The new issue will trade under the ticker of FDUSL, but likely will not trade for a week or so.  There will not be any OTC grey market trading prior to permanent market trading.

The pricing term sheet is here.

A Couple of Calls – 1 Preferred and 1 Baby Bond

Late Tuesday TCF Financial (NYSE:TCF) announced they would redeem their 6.45% TCF-B perpetual preferred stock on 3/1/2018.  There are 4,000,000 shares outstanding.  Redemption will be the usual terms–$25 plus accrued dividends.

Additionally REIT Equity Commonwealth (NYSE:EOC) called their 5.75% baby bonds (NYSE:EQCO) which became callable on 8/1/2017 and had a maturity date of 8/1/2042.  The call date is 3/7/2018 for $25/share plus accrued interest.

 

 

Some Potential Bargains for Consideration

We have been asked about some potential purchases that could be considered after the tumble that has occurred over the last few days (and really over the last month–the last few days were just steeper drops while the prior weeks were a slow slide).  Investors need to realize that the biggest drubbings took place in the lower coupon issues and higher coupon issues have not been as badly knocked down, thus there are relatively fewer bargains in issues we would consider purchasing.

As folks that have read our writings for the last couple of years know we have been advocating for “term” preferreds and baby bonds for the last 2-3 years.  We gave up maybe 1% in coupon by holding these issues as compared to perpetual preferreds, but it is likely with the fall that perpetuals have taken in the last month we are net winners.

Regardless of the fall in perpetuals and long dated baby bonds we will remain invested primarily in the term preferreds and short maturity baby bonds, but we have already started to deviate for some opportunities (hopefully good opportunities).

1st off we took a medium sized position (medium for us) of the Spark Energy 8.75% Fixed-to-Floating rate cumulative redeemable preferred today.



Our logic here is simple.  1st off we wanted a high yield perpetual, preferably a fixed-to-floating rate issue (as they are more likely to hold up as interest rates rise).  2ndly we want the issuer to show acceptable financials in recent years and lastly we want a bargain price.

We reviewed potential buys and the vast majority of available issues that fit our high yield needs are shipping issues and at this time we have always limited our exposure to the shippers although there are some issues which deserve consideration.  For now instead of a shipper we honed in on energy retailer Spark Energy (NASDAQ:SPKE) as our best high yield choice.  The company recently announced a reopening of the currently outstanding “A” series fix-to-floating issue (NASDAQ:SPKEP) which compounded the fall in the preferred share price to the bargain level of $24.50 from $27.25.

We closely reviewed Spark financials and we were surprised how well this energy retailer (of electricity and natural gas) had performed over the years (founded in 1999) and they now have near 1 million customers in 16 deregulated states.  Debt level are relatively low and revenues are in the $800 million area which is sharply higher than last year as the company has been acquiring other smaller energy retails.  This issue ticked all the boxes so we made a modest 400 share purchase.

We must note that this company is closely held with the founder owning 60-70% of the shares thus he has control of the company.

The next issue to highlight is the newer Cowen Inc. 7.35% notes due 2027.  This $25/share baby bond was launched in December 2017 and traded fairly strongly through December up to $25.80/share.  With the higher interest rates in January the shares have come back toward $25 closing today at $25.10.  A 7.30% current yield by a relatively solid issuer is nothing to sneeze at and while we have not purchased it yet for ourselves we are considering a purchase. Relatively solid financials and a maturity date in 2027 are prime considerations for us.




Lastly bargain hunters should consider any number of the mortgage REIT preferreds but one that seems reasonable would be the AG Mortgage 8.25% cumulative, redeemable preferred. This issue will become redeemable later this year, but presents little call risk as it is trading at $25.02.



It is unlikely we would personally buy this issue as we think there may be better opportunities ahead this year–within the next 3 months and when buying a fixed rate perpetual we want a super bargain–not just a decent bargain.  While we have purchased the perpetual Spark Energy Preferred mentioned at the start of this article it is a fixed-to-floating rate issue which recently announced a reopening of the issue sending the shares reeling.

Note that these are not recommendations to buy any particular issue, but just a couple issues we have bought or may buy and some thoughts on a 3rd issue.  Since we don’t know anyone’s particular circumstance these may or may not be appropriate for you.

Let the Beatings Continue

While overnight interest rates held fairly level, they have popped a basis point or two this morning. Additionally rates on a global basis rates are moving higher.

Utility stocks are trading flat this morning, but perpetual preferreds and baby bonds are off by a fair amount (1-2%). Certain issues are off by as much as 3%.

In another example of a mid-quality newer REIT preferred issue getting what it rightly deserves can be seen here. Only a very select group of REITs ever deserved a new issue coupon of 5.875%.

As before the term preferreds and short maturity baby bonds are holding up very well.  Most losses are just a few pennies per share.

Our personal holdings are off around 1/2% this year.  While most of the holdings are term preferreds or short maturity baby bonds we do hold a few high yield preferreds that are causing a little consternation, but we will endure.

A Rough Day for Income Folks

It was a rough day to be an income investors as REITs, Utilities, Preferred Stocks and Baby Bonds all took a drubbing. REITs and utilities were off a percent, but some baby bonds and preferreds were off by as much as 4%—yikes.

BUT let’s be calm about this or at least look at this from a positive perspective. The positive perspective is that we are able to buy new shares for 1-4% less than we could last week. We hope investors have some cash available for some bargains, but alas we are concerned that many investors have loaded up on perpetual preferreds in the last year and now are in the trap of watching them fall even though their income stream remains unchanged. We all know that you can’t have everything when you are an income investor. You have to either stay with shorter maturities (baby bonds or term preferreds) and likely forfeit 1% in dividends as compared to some higher coupon perpetuals, or you can buy the perpetuals and “pay the piper” when interest rates move higher.

When we wrote this morning we posted some charts of some of the high quality perpetual preferreds that have taken some massive losses in the last week.  It is our opinion that holders of these issues should remain patient and see what the next few days bring.  If interest rates remain quiet for the next few days it is likely that share prices may bounce up a bit from here which should sooth some nerves, BUT WHATEVER you do don’t make knee jerk decisions on your portfolio.  Take a step back for a day and think it through a bit before acting–poor decisions are made under these types of circumstances.

High Quality Preferred Continue Annihilation

In the biggest smack down of preferred stocks and baby bonds in the last number of months the high quality, low coupon shares are really getting spanked.

As we mentioned last night in the Monday Morning Kickoff we were watching the 10 year treasury for a breach of 2.68/2.69% and for a move above 2.70% on the way to 2.80%. The market strongly breached this level and is holding in the 2.70-2.71% area.

A good proxy for the high quality preferreds is REIT Public Storage (NYSE:PSA) serves to show what happens to these shares as interest rates rise.

Looking at this chart you can see the dislike for these shares–



Looking at a high quality, low coupon baby bond (Entergy Texas) the pattern is relatively less pronounced–not good, but less of a fall. Baby bonds many times have long dated maturities (in this case 2066), but long dated trumps perpetual.




We hope holders of quality issues are in the shares for the safe income as they have seen some capital evaporate.

We would suggest not buying any more of these until rates move higher–at least 2.80% to 3% as these levels are most assuredly are going to be reached.

Compare the above charts to the TERM PREFERRED from Gladstone Land (NASDAQ:LAND)




Monday Morning Kickoff

Monday Morning Kickoff

This is the 1st of what we hope is a regular feature each week as we look back on the week just past and into the week ahead.

Last week the 10 year treasury opened the week at 2.66% while closing the week at the same level.  During the week rates wiggled in a 2.61% to 2.68% range.  This is about what we expected given that the 2.67/2.68% level is where technicians peg resistance and we would claim that the run off of securities by the Fed will put a floor under rates.  While we generally don’t pay attention to technical analysis it does pay to understand what they are saying about various levels of resistance as rates move higher.  While technicians are claiming that a move above 2.67/2.68% is likely to propel rates into the 2.80% area,  investors apparently think this is rubbish as retail investors have plowed $36 billion into bond funds thus far in January according to Trimtabs.  Doesn’t quite seem to make sense to us as we have advocated short duration securities be bought in the face of increasing interest rates and we are not generally going to change that point of view in the next number of months.  Maybe individual investors are willing to take slightly higher rates to increase their income stream at the risk of capital loss.

GDP for Q4 2017 was released at 2.6%, which seems kind of Goldilockish–not too hot and not too cold.  On the face of it I guess it could be argued that this kind of growth doesn’t warrant Fed Funds rate hikes but this is just the first ‘cut’ on this number and it will be revised a couple more times.  Additionally the price index contained in the GDP report showed an increase of 2.5% annualized which is ‘hotter’ than previous quarters and is watched by the Fed.  This report was released at 8:30 a.m. on Friday so the bond market had a chance to digest the report and obviously didn’t react too much to the report.  The report press release is here.

Last week we had a few new (or reopened) income issues announced or priced.

On Monday Jernigan Capital (NYSE:JCAP) announced pricing on a new 7% cumulative redeemable preferred stock. Being a REIT distributions are not qualified distributions.  JCAP is somewhat of a specialty mortgage REIT, as they take equity positions in the self storage projects they finance.  Charting of the initial action in shares can be found here.  Shares are trading on the OTC grey market under the ticker JERCP at $24.85/share.

Electricity and natural gas retailer Spark Energy (NASDAQ:SPKE) reopened their Series A issue with 2,000,000 new shares.  The SPKEP issue, which is a fixed to floating rate issue has an initial coupon of 8.75% and had traded as high as $27.25 in late December but has fallen to a close Friday of $24.60/share.  High yield hunters may want to take a look at the shares now.  Details are here.  Distributions are qualified for the lower preferential tax rate

Late in the week container ship owner Costamare Inc. (NYSE:CMRE) announced and priced a new 8.875% cumulative, redeemable preferred stock.  Shares should have begun trading on the OTC grey market on Friday under the temporary ticker of CTMMF, but we were not showing it on eTrade or Fidelity when we looked late Friday.  Trading should get under way in earnest on Monday.  We are looking to a possible buy, for either a modest ‘flip’ or maybe a longer term holding on Monday if we can get the shares around $25/share on the OTC market.  Costamare has 3 other preferreds outstanding with coupons of 7.625%,  8.50% and 8.75% which are trading at $24.49, $25.18 and $25.48 respectively.

Very late Friday Hoegh LNG Partners (NYSE:HMLP) announced an ‘at-the-money’ offering of common units and preferred stock units totaling $120 million.  The preferred units will be units of HMLP-A which is currently outstanding and which has a coupon of 8.75% and which is trading strongly at $27.15/share at Fridays close.  No specific number of shares of the preferred are alloted to be sold, but we will watch to see if the share price gets knocked down Monday.  If shares take a good hit we will be buyers as the shares go ex-dividend on 2/7 with the payment of an outsized initial dividend of 79 cents paid 2/15.

To recap, specialty finance mortgage REIT, Jernigan Capital sold a reasonable 7% redeemable preferred, Costamare is selling a high yield preferred, Spark Energy reopened a high yield fixed to floating rate issue which cratered the preferred stock price and Hoegh announced an ‘at-the-money’ offering of preferred stock units which may not be well received.  Investors open to the higher risk these issues carry may have some potential buys in the coming days.

The average preferred stock price ($25/share issues) moved lower by 2 cents last week.  We realize that there are individual issues that moved up or down by 1%, but in general share prices were near flat.  Big moves either up or down by large preferred issuers such as beleagured AmTrust Financial (NYSE:AFSI) can move the average share price by a penny or two.

Of the 438 $25 preferred stocks that we follow 162 are trading under $25/share.  This is down by 8-10 issues in the last week.

Of course this week we have the FOMC meeting ending on Wednesday and while no interest rate hike is expected (per the CME Fedwatch tool there is a 4% chance of a hike) the statement made on Wednesday at 1 pm central will be closely watched for hints as to the FEDS future plans.  Additionally we will be watching Friday for any more substantial quantitative tightening through balance sheet ‘runoff’.   We watch the balance sheet of the Fed here–chart is updated each Friday.  Thus far the ‘runoff’ of the balance sheet has progressed at a very mild pace–about $10 billion/month since the high point in October.  The Fed is now supposed to move up to about $20 billion/month starting next month–that is quite a bit of buying power leaving the marketplace and will minimally serve to keep a floor under interest rates.

On Friday we have the somewhat important employment report for January and the consensus numbers for non farm payroll growth is modest with no change to the unemployment rate.  Only major deviations from the consensus will move markets.

Tonight, Sunday, we see that the 10 year treasury has bumped up to 2.69% before moving to a firm position at 2.68% where it is at midnight.  We are watching this closely for any movement higher than this area.

New Preferred Issue From Costamare Now Trading OTC Grey Market

The new OTC Grey Market ticker for containership owner Costamare (NYSE:CMRE) has been announced as CTMMF.

Trading likely started  today (Friday) but we do not find it on our eTrade screen or Fidelity at this moment, but they can be a day slow in getting the database updated.

It is our personal intent to purchase some of this issue on Monday if we can get it around $25/share.  We believe that as long as a quick review shows their financials to be in reasonable condition we will purchase for at least a “flip”.  We are thinking there is 50-75 cents worth of flip profit to be had in the issue IF it can be bought right in the grey market.

We may even hold the issue long term if the general economy remains relatively strong as issues such as this one should hold up even if rates move a bit higher in the months ahead.

Further detail can be found here.

Investors Still Hate Retail Related REITs AND Their Preferreds

In a good example of how hated retail related REITs are we can take a look at the preferred shares of Kimco (NYSE:KIM) which is a triple net lease REIT with quite a bit of retail exposure.

These shares were just issued in December and have an investment grade rating.

Only goes to show that holding high quality, low coupon preferreds can be costly. It doesn’t help that investors hate your business.




Costamare Prices New Preferred

Costamare (NYSE:CMRE) has priced their new preferred issue mentioned earlier today with a coupon of 8.875%.

For the high yield investor with a bit of a taste for risk this could be a good issue to own. At this coupon we may even take a small position if we can get it in the OTC grey market at a good price (below $25).

The pricing document is here.

This issue is 4,600,000 shares with an overallotment quantity of 686,000 shares.

The pay dates are the January, April, July, October cycle on the 15th with the first payment to come in April

The proceeds will be used for general corporate purposes.

The OTC grey market ticker has not been announced yet.

Containership Owner Costamare Announces a New Preferred Offering

Large containership owner Costamare (NYSE:CMRE) has announced a new preferred stock offering.

Preliminary offering information can be found here.

The company currently has 3 outstanding issues of preferred stock with coupons of 7.625%, 8.5% and 8.75% which are trading at $24.25, $25.38 and $25.70 respectively.

Pricing and OTC Temp ticker have not been announced as of now.

This issue may be a reasonable issue for those willing to incur a bit more risk, although a quick review of Costamare finances shows they are relatively profitable and have only 1 new build ship on order.  New build commitments are typically a negative in our eyes because the commitments require large cash payments and long lead times which means about the time the ships are delivered the global economy may tank.

We will post the pricing and ticker information when it is announced.

We Love Preferred Stocks of Closed End Funds (CEFs)

At the risk of sounding like a broken record we will once again mention the comfort that owning preferred stocks of closed end funds can bring an investor. We say that IN RESPECT TO DIVIDEND SAFETY. There is a time to own these and with rising interest rates this may not be the time UNLESS you are simply looking for a super safe income stream of 5-6%.

While business development companies (BDC’s) are technically closed end funds, we are NOT including them in the discussion in this article. We are discussing closed end funds which hold equity positions or in some cases debt issues–assets which can be readily valued (Level 1). BDC’s typically hold Level 2 or Level 3 assets which are NOT readily valued meaning you have to just “trust” management to value their assets—this is why most BDC’s are not rated investment grade.

Closed end funds with preferred stocks are almost all issued by the Gabelli family of funds. This includes Ellsworth Growth and Income (NYSE:ECF) and Bancroft Funds (NYSE:BCV), both of which are managed by Gabelli. Including Bancroft and Ellsworth the Gabelli group has 12 funds that have issued preferred stocks.

In addition to the Gabelli family, General American Investors (NYSE:GAM), Kayne Anderson MLP Fund  (NYSE:KYN), Tri-Continental Fund (NYSE:TY) and RiverNorth Marketplace have outstanding exchange traded preferred stock issues.

Of all the above named issues we would be extremely comfortable holding all except RiverNorth Marketplace and the Gabelli Go Anywhere Puttable Preferred if we were looking for a solid, safe income stream.

RiverNorth Marketplace holds loans which are made through peer-to-peer lending sites and our personal experience with these sites (in particular Prosper) is not that favorable. Additionally RiverNorth Marketplace is not a publicly traded security and we are not buying preferred shares of any company that doesn’t have a publicly traded security which provides more transparency into company financials. The Gabelli Go Anywhere shares may be ok, but we simply have not studied the issue closely enough to feel comfortable buying puttable shares.

Note that the RiverNorth Marketplace issue is a Term Preferred as is the Kayne Anderson MLP preferred, thus they have date certain redemption dates.

Almost all of the above securities are rated solidly investment grade.  A couple issues are not rated, but the Tri-Continental issue (NYSE:TY-) is certainly equivalent to investment grade (the CEF has been around since 1929).

For those who are rather new to investing in CEF preferreds we must explain further why we are so comfortable owning preferred of CEFs for a solid income stream.    CEFs are controlled by something called The Investment Company Act of 1940 and in particular Section 18 of that deals with leverage provided by the issuance of senior securities.  Section 18 requires that a closed end fund maintain asset coverage of between 200% and 300% depending upon whether the senior securities are debt or preferred stock.  This shifts almost all of the risk onto the holder of the closed end fund common shares.  The senior security holders have the protection of the full asset base and with asset coverage ratios of at least 200 or 300% their is very, very little risk for the senior security holder.

If there were a severe stock market crash the CEF would either have to buy in some preferred shares if they were to violate the leverage rules OR more normally would have to sell more shares of the closed end fund until the company was back in leverage compliance.  Back in 2008-2009 this did in fact almost happen and a number of the Gabelli Funds sold huge quantities of common shares to ensure they did not violate the rules.  When the CEF is a fund paying a sizable dividend the last thing you want to happen is to violate the leverage rules as you would then be required to stop paying dividends on the fund.  For instance the Gabelli Utility Trust (NYSE:GUT) pays a 8.45% dividend and you can be certain there would be a bunch of po’ed security holders if this dividend was suspended.

We have put together a small page of preferreds offered by these closed end funds and it can be found here.

CAUTION–as with most high quality low coupon issues the share price is highly likely to decline if interest rates continue to go higher.  Buyers of these issues should generally be most concerned with safety and a steady income stream with the understanding that share prices will decline somewhat in the months (or years ahead) if interest rates rise.  Here you can get a look at a chart of the Gabelli Utility Trust 5.625% preferred that became redeemable in 2008 which shows the movement of share prices as interest rates rose–use your mouse to expand the chart to a longer time frame.

Additionally like all preferreds with a possibility of redemption one should probably purchase only those trading around $25/share and shy away from shares of those trading much higher than $25.25/share to avoid potential capital losses if shares are called for redemption.  Many of these issues are past their 1st redemption date so could potentially be redeemed at any time.

For those looking for a little “lite” reading the Investment Company Act of 1940 (which includes Section 18) can be found here.

Disclosure–we own a modest position in Tri-Continental preferred and a large position in the Kayne Anderson MLP fund term preferred.

Spark Energy Prices a Preferred Issue (Re-opening)

CORRECTED

Spark Energy (NASDAQ:SPKE) has announced pricing for a reopened preferred stock issue.

This is a reopening of the earlier issue from March and thus is trading at $24.75 on the reopening.  The official offering price is $25.25.

The reopened Series A issue will be 2,000,000 share of a 8.75% fixed-to-floating issue with 250,000 shares available for overallotment.  When originally offered in March 1,400,000 shares were sold.

Charting for the issue is here.

Shares are cumulative and are redeemable as early as 4/2022.

The pricing document for the new issue is available here.

Spark Energy is an independent energy retailer (natural gas and electricity) operating in 18 states headquartered in Houston.

 

Interest Rates Hit 4 Year High

In spite of the 10 year treasury yield hitting the highest level since June of 2014 stocks raced ahead under the premise that congress kicking the budget can down the road by a month–is good news when it is really just more proof of the total incompetence of this group.

In the end it really doesn’t matter what the folks in Washington DC do because the easy money policies still have way too much money rolling from market to market driving prices to levels that will very likely end badly–SOMEDAY. No one pays any attention to the 600-800 billion dollar budget deficit the U.S. is running and this is before the probable additional deficits caused by the recent tax cuts. Goldilocks continues rule the markets. Irrational behavior can go on in these markets for many years and there is little use getting worked up over deficits when we won’t have to ‘pay the piper’ for potentially many years.

Preferred stocks and baby bonds lost maybe 1-2 cents today. If we can just get income securities to hold with penny losses while interest rates climb to 3% (we believe they will hit 3% this year) we will be in 7th heaven. Alas, these types of markets end with folks getting hurt. The last time income investors got hurt badly was when they were holding upstream MLPs and MLP preferreds believing they were ‘correcting’ when in fact they were heading toward bankruptcy. So what is hiding out there now just waiting to rear its ugly head?

We won’t change what we are doing investment wise as the equity markets go bonkers, nor do we change our path because most preferred stocks are holding up well. We continue to hold shorter maturity term preferreds and baby bonds within a couple of years of maturity–same thing we have been doing for 3 years because the loss of 1/2% or even 1% in yield we incur is worth the peace of mind we derive from this plan. It is likely we will change our road map later this year mainly because we believe by the end of the year we are going to see major changes in markets as the FED proceeds with the balance sheet runoff and global central banks are likely to follow suit. We think EXCITING times are ahead–unfortunately exactly what that means is something we can’t explain–could be good or could be bad–so many, many possibilities.