Baby Bonds to Trade Today-Corrected

We have corrected the ticker which has been changed from the planned ticker.

The new OFS Capital baby bonds (NASDAQ:OFSSL) will begin trading today.  Of course depending on your broker they may or may not have their database updated.

OFS is a business development company (BDC) which has performed fairly well over the last couple of years and holds mainly senior secured floating rate loans.

This issue has a meager coupon of 6.375% but has a desired maturity in 2025.

We will be a buyer of these shares for various portfolios–models and personal.

We had done a modest drill down on OFS last week.

Our plan personally is to hold these until a weak economy is detected and at that point we would likely need to exit as we have little faith in BDCs holding risky loans in a weak economy.

Monthly Paying Preferred Stock List

While the number of preferred stocks paying monthly dividends grows smaller and smaller there remains a group paying that way and some of them are our favorites.

Our listing is complete (I think) and includes just preferreds.

Of course many of the issues outstanding are from the many Gladstone companies that are out there.  Gladstone Investment and Gladstone Investment are both BDC’s and while we likely will seldom own a BDC we own most of the preferreds.  Many of the Gladstone issues are “term Preferreds”, but not all.

Some of the issues are from Puerto Rican banking (or finance) companies.  First Bancorp, OFG and Popular Bank are all Puerto Rico based.  Whether being in Puerto Rico is a plus or a minus we leave up to the investor.  We do not currently own any of these issues.

One should note that a good share of all of the issues are now in the optional redemption period.  Honestly we like to buy issues trading in the optional redemption period as long as they are not more than a dividend or so above the liquidation preference ($25).  Issues paying a monthly dividend trade with less volatility–part of it is simply that on ex-dividend date they are only marked down by a month dividend instead of the quarterly amount.  Additionally the monthly payers provided a nice monthly stream of income.  Lastly we always say “a bird in hand is worth 2 in the bush” and it is always better to have the money in our pocket rather than the companies pocket.

The list is here.

 

Another BDC Seeks Approval for Lowered Asset Coverage

BDC New Mountain Finance (NYSE:NMFC) has announced it is seeking approval from shareholders to lower their asset coverage ratios from 200% to 150%.  The change would be effective in about a year.

NMFC claims this will allow them to “earn their dividend”.  NMFC currently has a yield of over 10%.  Seems to me investors are already telling them there is plenty of risk in the business–if they didn’t think so they wouldn’t be demanding a 10% yield.

When we hit the next recession we will wave goodbye to some BDC’s as there should not be any doubt in anyone’s mind that the more “rope” you hand a BDC the more likely they are to use the rope to hang themselves.  Remember that we are already in the position with most BDC’s to “just trust them” to value their assets correctly for coverage purposes–now we have to trust them a little more.

New Mountain’s press release is here.

Disclosure–we own term preferred shares of Gladstone Investment and Gladstone Capital–both BDC’s

Interest Rates “Want” to Go Higher

As I suspected would happen we didn’t see the 10 year treasury spend too much time in the 2.70’s%.

After spending almost the entire month of March in the 2.80-2.90% area rates fell into the 2.70’s in later March and into the first 7-8 days of April. Then yesterday rates popped by 6 basis points–based on?  Maybe a touch of inflation is in the air as we see crude oil prices touch levels not seen for a long time–3-4 years.  Add to this the spouting of Fed presidents talking about rate increases and you have a recipe for higher rates.

This morning we are right around 2.90%.  We have entered the territory where we could get a knee jerk move to 3% or a touch higher—this could set off a short term panic in perpetual preferreds–if rates were to move 10-12 basis points in a day.

Income investors need to be mentally prepared for this possibility–and a little dry powder would be helpful as bargains may arise.

As we have contended for maybe the last 6 months rates are very firm based on huge treasury issuance to fund the deficit as well as continued runoff of the Fed’s balance sheet (although this has been modest to date).  If the economy is just “so-so”, which is what we believe, rates can still move substantially higher.

Dynagas LNG Partners Slashes Distribution

Dynagas LNG Partners (NYSE:DLNG) has cut their quarterly distribution from 42.25 cents to 25 cents.  DLNG is an owner of a small fleet (6 ships) of LNG ships.

Dynagas has 1 preferred issue outstanding and shares fell 40 cents today, while the common units fell by about 10%.

DLNG had focused on securing shorter term contracts for their LNG ships, but have now switched to longer term contracts which gives them greater visibility to cash available for distribution.

 

Energy Transfer Partners Prices Preferred Units

Huge MLP Energy Transfer Partners (NYSE:ETP) has priced a large offering of fixed-to-floating rate units with an initial coupon of 7.375%.  The fixed rate will remain until 4/2023 at which point the coupon will float quarterly at a rate of 3 month Libor plus a spread of 4.53%.  While the initial is pretty decent for a quality company the floating rate spread is less enticing.

Dividends are cumulative, but will not be qualified for preferential tax treatment.

The offering is 18 million units with an additional 2.7 million shares set aside for overallotment.

The shares will begin trading tomorrow (Thursday) on the OTC Grey Market under the temporary ticker symbol of ETPPP.

Owners of the issue will receive a K-1 at tax time instead of the preferred 1099.

The pricing term sheet can be found here.

MLP Giant Energy Transfer Partners to Issue Fixed-to-Floating Preferred

Energy Transfer Partners (NYSE:ETP) will be selling a new fixed-to-floating rate preferred.  The issue will generate a K-1 at tax time.

The issue has not yet been priced, but will have a 5 year optional redemption time frame–this is a bit unusual as many times fixed-to-floating rate issues have longer fixed rate periods (as long as 10 years).

The issue will trade under the ticker of ETP-C when it reaches the permanent exchange.  It will trade on the OTC Grey Market under ticker ETPPP prior to big board trading.

ETP doesn’t have any $25/share preferred trading, but does have a 6.25% and 6.625% $1000/share issues outstanding.

The preliminary prospectus can be found here.

 

Eagle Point Credit Company Prices Baby Bonds

6:30 am

Specialty finance company Eagle Point Credit Company (NYSE:ECC) has priced their new baby bonds at 6.6875% with a maturity in 2028.

The ticker for this new issue will be ECCX and it should trade later this week or early next week.  No OTC Grey Market trading is expected.

While the coupon on this issue is not too bad we find the 2028 maturity about 3 years too long for us.  We will not be purchasing these baby bonds unless they trade down to $24 or so.

If you review our Medium Duration Income Portfolio you will see that the vast majority of issues mature between 2021 and 2024, although there is 1 issue in 2027.  At this time we don’t want to go longer as the longer we go the higher the interest rate risk and that defeats the purpose of this portfolio.  For the same reason we won’t purchase now for personal holding.

We will write more on ECC in the next couple of days.

The pricing term sheet can be found here.

Wrapping Up the Preferred Stocks of REITS List

We have updated our list of preferred stocks that have been issued by REITs.

While REITs offer cumulative preferred stocks they are NOT qualified for preferential tax treatment.

We believe our list is now up to date and 98% complete.  There are always a couple issues that get overlooked, but we will keep proofreading our lists to pickup those last missed issues.

Our list is here.

Under the preferred stock “tab” you can find all of the various lists published to date.  There are more to come as time goes by.

AT SOME POINT IN THE FUTURE WHEN OUR LISTS ARE COMPLETE WE WILL ALLOW COPIES OF THE LISTS BY READERS.

Any ticker symbol that is linked can be clicked to go the recap page for the issue and the issue chart.  We continue to add data and we continue to have our technical folks (contract people who we pay for by the hour) rearrange information.

Most recently you may notice that our website URL has a little padlock and “Secure”.   This simply mean that I own the site and I am who I say I am (Tim McPartland).  While we could have save $120 by foregoing a secure site, Google and other search engines will “demote” sites that are not secure.

Eagle Point Credit Company to Issue Baby bonds

Specialty finance company Eagle Point Credit Company (NYSE:ECC) will be issuing a new baby bond with a maturity date in 2028.  They will issue 2,000,000 shares plus another 300,000 to be reserved for overallotments.

Pricing has not been announced as of yet, but the proceeds are going to be used to early call the ECCZ issue which matures in 2020.  This  issue became optionally callable on 12/31/2017.

Preliminary details are here.

Unfortunately we personally own a few hundred shares of the called issue meaning we will have to find a suitable replacement.

Mid Day Ramblings

Interest rates started the day off 3 basis points higher, but now have drifted back down as there is no impetus to go higher at this point in time.  Not much news of consequence although retail sales were announced higher than anticipated–up 6/10% versus consensus of up 4/10%.  Yawn.

The DJIA is up quite a bunch at near +300 points–but it is quiet–orderly.

Preferreds and baby bonds are flat on the day again–in the last week the average $25 share has traded in about a nickel range–talk about quiet.

We do note that our Spark Energy 8.75% Fixed-to-Floating Preferred (NSADAQ:SPKEP) is back over $24.50 after a trip last month to $23 last month.  Braver folks could have picked up a nice ‘flip’ at this price–we had an average buy around $24.27 (actually I forget the exact number) so we are in the green and pick up a nice 54.7 cent dividend today (although eTrade hasn’t credited the account yet)–we are happy.

We await the trading of the OFS Capital baby bonds (NASDAQ:OFSL), which is not showing on the brokerage database yet.

 

Monday Morning Kickoff

Last week ended on a mild note with Friday being a down day, but it was calm and orderly-just the kind of day we like.

Last week the DJIA traded in a range of about 23,740 to 24,600 which is a pretty large range, but less volatile than the 1200 point range the week before.

The 10 year treasury traded in a range of 2.77% to 2.84% closing the week at 2.83%.  The Treasury conducted numerous bill, note and bond auctions and almost all of them came off weak, but at high yields that were only a tiny bit higher.  The Fed ran off only $3 billion from the balance sheet which leaves them behind the 8 ball relative to letting $30 billion a month runoff–with the March shortfall of runoff the Fed is now at $41 in runoff yet to be accomplished in April–we think they have slowed on the plan as it is likely not reasonable to do $41 billion in 2 weeks.  Of course the runoff doesn’t come in a straight line.

This week there isn’t any economic news that is likely to move the needle much at all.  The biggest economic item this week is that Fed presidents are giving 10 speeches–this always leaves open possibilities of ‘speaking out of school’ items.

It is interesting that the average $25 preferred stock and baby bond price fell  by just 4 cents  to $25/share and there are 198 $25 issues selling for under $25.  This has been really stable for the last 2 weeks.  Of course averages are hugely meaningless, but it does serve to show the relatively stability in this particular marketplace—for now.

Only 1 new issue was announced last week and that is from OFS Capital (NASDAQ:OFS) which announced a baby bond which priced at 6.375%. The issue matures in 2025.  OFS Capital is a smallish business development company which has reasonable financials.  We wrote yesterday about some observations on the company. We intend to purchase some shares of this offering as we really need to get some short maturity issues purchased for the Medium Duration Income Portfolio.  This issue should begin to trade this week under the ticker OFSL–there will be no OTC Grey Market trading.

Below are a couple of new issues from recents weeks.

CAI International is a large shipping container and rail car lessor which launched a 8.50% fixed-to-floating preferred.  The issue could have been bought for $24.60 and now it is a buck higher–would have been a good flip for sure.

Compass Diversified is a diversified manufacturer which sold a 7.875% fixed-to-floating issue which has traded poorly right from the start.  The company issues a K-1.

It is quite amazing how differently 2 companies can be viewed by investors.








A Quick Drill Down on OFS Capital

Note that this is not a recommendation to purchase any security.  We plan to purchase shares when it begins trading, but that is based on our needs.  No one on the internet is qualified to recommend anyone purchase securities as there is no knowledge of the suitability for any given investor.

Additionally we will be purchasing shares in the Medium Duration Income Portfolio.  Currently it is 80% invested, but when the Arbor Realty baby bonds (NYSE:ABRN-CL) are called on the 27th of April it will be just 70% invested so we need to add an issue to get back to 80% now and 90% soon.

 




OFS Capital (NASDAQ:OFS) is a business development company that recently has sold a baby bond issue with a coupon of 6.375% .  The issue has not yet begun to trade, but we expect it will do so within the next week.  When the new issue trades it will trade under the permanent ticker of OFSSL and will not trade on the OTC Grey Market prior to the permanent exchange trading.

Below we do a bit of a drill down on OFS Capital.  It is NOT meant to be exhaustive, because honestly to make an investment in the companies new baby bonds we don’t feel a need to dig tremendously deep.

As with all BDC’s they must have an asset coverage ratio of 200% (or meeting certain requirements it is now 150%) which adds a bit of safety to holding senior securities of a BDC.  A senior security would be defined as debt or preferred stock–anything senior to the common.

OFS Capital loans money to middle market companies. In the case of OFS these loans are in the form of Senior Secured Debt (70%) and subordinated debentures (19%).   The balance of their 11% of investments is in common and preferred equity.

OFS has financed their investments with an extremely low cost of capital as they own a SBIC (small business investment company) and thus are able to borrow with a guarantee from the Small Business Administration (SBA) at the rock bottom rate of 3.18% on average.  This should be very important to investors as this is a competitive advantage for the company.

The company is fairly small with total asset of $357 million (as of 12/31/2017) of which $73 million was in cash.  The company did a stock offering in 2017 and thus with repayments that have come in they have not done a great job of getting the cash invested.  We like to see some cash on the balance sheet, but this appears to be excessive and obviously doesn’t earn much of a return–as a potential debt holder we are not overly concerned with this.

Net Investment Income was at $16 million, $14 and $13 million respectively the last 3 years.

Net Investment Income per share fell in 2017 to $1.28/share from $1.46/share in 2016.  In general this was caused by there being 30% more shares outstanding in 2017 from the share offering earlier in the year.

The last 3 years OFS has paid a distribution to common holders of $1.36/share which means in 2017 they didn’t quite cover their dividend.  Of course this is a negative, but being within 8 cents per share for a year is nothing to be overly concerned with–as long as it is not a longer term trend.  In more recent news the company paid a special dividend of 37 cents in early 2018, based upon capital gains on investments.

Common shares are trading at $10.72/share which is a huge discount from their Net Asset Value of $14.12/share.

The company has a fairly narrow portfolio of investments with just 35 companies in the portfolio (as of 12/31/2017).  This obviously could be a negative as the average loan is sizable at $7.5 million.

OFS  claims to have daily, weekly, monthly and quarterly evaluations of the investments and from the result of their evaluation rates investments in 1 of 7 categories (1 being the best and 3 being average).  On 12/31/2017 all but $4 million of their investments were rated 2, 3 or 4.  This is always the part where common share owners of BDC’s simply have to “trust” management–since we don’t fully trust any management we simply don’t own common shares.

Apparently their credit monitoring has been rather successful as the company has a history of very low levels of non-accrual loans.

So at this point we have enough information to make a modest investment in the new OFS baby bonds, but we want to go a bit further to make sure we cover an important point for anyone reading this report.

OFS Capital is controlled by Richard Ressler.  Ressler owns Orchard First Source Asset Management which owns 22% of OFS Capital.  Ressler is also the Chairman of CIM Commercial Trust (NYSE:CIM) and the CIM Group manager of over $27 billion in real estate.  Investors should consider that common holders have little influence in the company because of the weight of Richard Ressler.  This is of minor importance to us as a potential debt holder, but would be a bit concerning if we were going to own the common.

So while we have concerns with OFS Capital they are mainly the same concerns that we have with all BDC’s–they make risky loans to companies at high interest rates.  We think that this is a minor risk with reasonable management, but if we are to enter a recession we would likely look to exit BDC positions.

A Drifting Day–But Next Week Will be Exciting Again

Today both stocks and bonds are drifting–we LOVE IT. Sometimes when you have most of your net worth in the markets there is an underlying bit of tension always present. Thanks to the President for taking the day off of Twitter.

The 10 year treasury yield is off 1 basis point and the average preferred stock and baby bond ($25 issue) is flat.

Consumer sentiment fell off a bit last month and likely reflects only a moderate economy–not ultra strong for sure.

Job Openings for February we also reflecting only a moderately firm economy as job openings were off a bit from consensus.

The Fed balance sheet for the last week was announced at LOWER by $3 billion–a meaningless amount relative to interest rate levels, but directionally in the quantitative tightening direction.  The minimal amount of tightening turns the spring tighter on what kind of runoff the Fed will need to do in the next month or two as they are behind the curve on the $30 billion/month runoff plan.  Maybe they have changed the plan and didn’t tell us–or maybe it is simply timing.  We are most curious how this plays out over time and it is our opinion that the economy is NOT strong enough to drive interest rates higher BUT the Fed runoff and huge issuance of the treasury will move rates higher.

 

Just a random note on the GDL Fund Series C $50 preferred (NYSE:GDL:C). Shares have been bumping up against  $52 today and we decided to exit with about a 3% profit in the last week or two (this was a personal holding). We had only gotten up to 300 shares but at near $52 we doubt there is little upside left. The issue has a 4% current coupon and is puttable to the fund at $50 in 2 years. We bought it for safety and will look to re-enter somewhere under $51.  We had not originally thought about exiting (just weren’t paying attention), but a note from Gridbird got us to consider the move as he exited–and he follows this issue closely.

Mid Day Ramblings

For once the 10 year treasury yield is up by 4 basis points which is in “sync” with a moderately higher stock market. Guess we haven’t haven’t enough presidential tweets today to rile the markets (but the day isn’t over) sending investors into the safe haven bond market.

The DJIA is up 267 points and the 10 year treasury is up 4 basis points to being firmly back into the 2.80’s% at 2.83%.

Preferreds and baby bonds are off 3 cents on a $25 share. Again right in sync with the bond market.

The 30 year bond auction had decent demand from investors, but a bit more tepid demand from dealers.

Tomorrow we have 3 Fed officials talking, but these talks seem to have lost some of there importance lately. We also have the JOLTS report–Job Openings and Labor Turnover report. This gives us a bit of a window on the pressures in the job market–how many jobs are open–meaning do workers have mobility to move to preferred jobs.

Beyond these items we likely slide into the weekend without fireworks–although if POTUS launches a Syrian attack we could see a flight to safety in bonds.