Prospect Capital Prices Baby Bonds

As written about earlier today Prospect Capital has priced a new issue of baby bonds with a coupon of 6.25%,

The issue is a fairly small issue of 2 million shares (bonds) with an extra 300,000 shares available for over allotment.

There will be an early optional redemption period beginning on 6/15/2021 with the issue maturing 6/15/2028.

The baby bonds will trade under the permanent ticker of PBY and likely will begin trading next week some time–there will be no OTC Grey market trading prior to big board trading.

The pricing term sheet can be found here.

As noted by some readers this coupon is equal to the coupon of the currently outstanding Prospect Capital baby bonds (NYSE:PBB) and which mature in 2024.  The PBB shares are trading as shown below.  PBB fell today as the new baby bond issue was announced.

Primo Water Calls Glacier Water Trust Preferreds

NOTE–we can find no public data on this call, but we did receive a copy of my brothers call notice from Fidelity.

The below security was affected by a Full Call:

CUSIP: 376398202
Description: GLACIER WATER TRUST 9.06250% 01/31/2028 PFD

Tonight Primo Water (NASDAQ:PRMW) who has purchased Glacier Water Services Called for the redemption of their 9.06% trust preferred shares on 6/29/2018. With this call date investors will receive an accrued dividend of about 20 cents for a total redemption price of $25.20. Shares closed today at $26.70 meaning there will be a $1.50/share loss from todays price.

We had written about this possibility on 5/14/2018 and at that time had encouraged holders to “sneek out” of their shares at around $26.75 to preserve the capital gain.

At this point in time it is unlikely that you will be able to sell your shares and should be careful about entering an order to sell.  For a day or two after the call announcement your brokerage may require you to repurchase the shares at an unknown price.


BDC Prospect Capital to Sell Baby Bonds

Giant business dvelopment company (BDC) Prospect Capital (NYSE:PSEC) is going to be selling some baby bonds.

The baby bonds will have an early redemption feature beginning in 2021 and will have a maturity date in 2028.

Standard features will apply.  Quarterly paying, non qualified interest payments etc.

Preliminary information on the issue can be found here.

The company currently has a 6.25% baby bond outstanding (NYSE:PBB) which had been trading around $25.70–before tumbling 40 cents in the last few minutes.


MetLife Prices Preferred-Update

Insurer MetLife (NYSE:MET) has priced their new fixed rate preferred issue at 5.625%.  It is a huge issue with 28,000,000 shares being sold with another 4,200,000 being available for overallotment.

The issue in non-cumulative (as are most all insurance and bank issues), and has the normal terms of a optional 5 year redemption period beginning in 2023.  Dividends are quarterly of course.

The issue is investment grade and we believe that this is a good issue for those looking for quality with less regard for movement in share price which may go lower if interest rates move higher.

For comparison Allstate sold a non-cumulative 5.625 preferred in March (NYSE:ALL:G) which is now trading around $25.36 (about $25.10 stripped).

Final pricing documents can be found here.

UPDATE–issue will trade under the OTC Grey Market ticker MTLLP

MetLife to Sell Preferred Shares

Large insurer MetLife (NYSE:MET) is selling a new preferred issue with the typical perpetual preferred terms and conditions.

The shares will be fixed rate and will have an optional 5 year redemption being in 2023.

Shares will likely be rated investment grade by both Moodys and Standard and Poors.

MetLife has 1 other issue of $25 preferred outstanding (NYSE:MET-A) and it is a floating rate issue that trades with a minimum coupon of 4% which is trading strongly at around $25 in spite of the current 4% coupon.

The preliminary prospectus for the new issue can be found here.


Flight to Safety Causes Interest Rate Tumble

If it not one thing it is another.

For years we were concerned with the financials of most of the Europeon Union countries and then we weren’t worried–forget that most debt issues of these countries has NOT been addressed.  Many of these countries are just larger versions of Greece.  They have more debt than they will ever pay.

So now the answer to traders and some investors is to sell various European bonds and “buy American”–reminds us of 5-10 years ago.

My suspicion is that the European central bank will ‘deal with’ the Italian problem–it won’t be a long term solution, but it will placate the global marketplaces for the time being.

Of course the 10 treasury has fallen further than it has at any time this year.  Currently off 12 basis points and trading around 2.82%.  We think that once it bases it will move up a bit from here–but the Italian worries could stick around a week or two.  Also with the employment report we have this week there might have market moving consequences.

Today almost all income securities are up a tiny amount–the 400 point fall in the DJIA has not affected us thus far.

Income investors should mostly sit back and observe–no particular actions are likely helpful or meaningful to income investors.


Monday Morning Kickoff (on Tuesday)

Well here we go again–a new week, albeit a short week.    We trust everyone had a good long weekend and avoided all the weather events of the weekend.  We were in northern Minnesota this weekend and as we rode through the metro on the way home our car thermometer read 101 degrees–wow–not that I really mind the high temp–but it is May 28th.  Fortunately a front moved through an hour later dropping the temp to 77.

Last week we saw a falling 10 year treasury rate as the Fed seemed to indicate they might tolerate a little inflation and the Trump North Korean summit was cancelled–before being back on over the weekend.  The 10 year started the week at 3.08% and fell as low as 2.92% and closing at 2.93%.  We think this is probably the lower end of the 10 year trading range and would expect it to end the week higher–but short term predictions are near impossible–longer term of course we are looking for the year end 3.25%.

In the economic arena we have only 2 Fed presidents speaking this week–obviously everyone is on vacation as we haven’t seen so few speeches all year long.  On Tuesday we have the Case Shiller Home Price Index being released and it is expected to cool a bit to show a 6.4% year over year gain.  Also consumer confidence is being released and is expected to remain strong at a reading of 128–this one is actually important for interest rates, but has not been a real market mover–ever.  Personally it is our belief that a trend here–higher or lower is super important as the consumer is the lions share of the economy–when they turn tail for a 3-4 month period you damned well better be paying attention.  On Wednesday we have the second estimate of the 1st quarter GDP–important to watch if the 2nd read is more than a couple 1/10th’s off the initial estimate of 2.3%.  Also Wednesday ADP releases their employment report for May and it is expected to show 186,000 new jobs–mostly NO ONE cares as the report isn’t the official report–which will be released Friday and is expected to show 185,000 new jobs.  Of course nobody has any real clue on this report and the talking heads will make up 100 different reasons for a miss–either up or down, but in the end it could move markets.

The Fed balance sheet was totally flat last week indicating no run off of assets at all.  With recent Fed comments we will have to watch and see if the Fed makes any changes in the plans to let assets run off at $30/billion a month now and $40 billion a month starting next month.  While we believe that the run off keeps upward pressure on rates there is no doubt that demand for U.S. paper remains fairly strong on a global basis.

The average perpetual preferred and baby bond was up 7 cents last week-mainly in the last couple days as interest rates tumbled.  As the average price rose the number of issues trading under $25.00 fell to 188 from 202 last week–the largest drop in months.

We had a couple new baby bonds being priced this past week.  Ladenburg Thalmann priced baby bonds at 7% while tanker company International Seaways has priced a new issue at 8.50%.  We had reviewed Ladenburg Thalman last week since we had not taken a look at their financials for quite a while.  That review can be found here.




International Seaways Prices Baby Bonds

Tanker owner International Seaways (NYSE:INSW) has priced their new baby bond offering at 8.50%.

The bonds mature in 2023 and have an early redemption in 2020.

The bonds are rated Caa1/CCC+ by Moodys and Standard and Poors–highly speculative.

At this pricing (and rating) we have no interest in this issue, but will do some further digging in the week ahead.

The pricing term sheet is here.

The Hated Spark Eneregy

It isn’t much of a stretch to call Spark Energy (NASDAQ:SPKE) a hated security to hold right now (both the common and the preferred).  Of course I hate it more because I have an overweight position in the shares and after a small purchase on Wednesday I am down about 90 cents per share (factoring in 1 dividend received thus far).  Below is a chart of the common shares which are trading down from a high near $27 1 year ago.

Of course the preferred and common shares are not really ‘hated’.  With a damned lousy 1st quarter being reported on 5/9/2018 investors appear to have simply ‘reassigned’ the current level of pricing ($22.50-$23) to the shares and are saying ‘prove your worth’.  This is what the markets are all about.

The preferred shares which carry a coupon of 8.75% and are floating rate starting in 2022 (NASDAQ:SPKEP) are shown in the chart below.  The company originally had 1.4 million of these shares outstanding before ‘reopening’ the issue in January and selling 2 million more shares.  These preferred shares had been trading over $27 early in 2018.

So let us look at a bit of history from the last 3 years (they were formed in 1999).

Starting in 2015 Spark  generated $358 million in sales with net income of $26 million and they had depreciation of $25 million leaving free cash of $51 million.  In 2016 they had $547 million in revenue with $66 million in net income and $33 million in depreciation for total free cash of $99 million.  In the year just ended they had sales of $798 million, net income of $76 million and depreciation of $42 million for a total of $118 million in free cash.

The rising sales noted above was virtually all from acquisitions–companies that retail energy have a substantial ‘churn’ of customers and as such they are always on the hunt to ‘buy’ new customers.

The company announced revenue for the  1st quarter ending 3/31/2018 with a blowout number of $287 million which unfortunately was primarily caused by extreme cold in the companies service areas.  A retailer of energy has to buy power from the generating utility prior to adding their own margin to the sale price.  In the case of Spark they hedge potential pops in energy prices when they can be reasonably forecast.  Unfortunately for Spark they were unable to forecast the long period of frigid temps and because of this the company took a rather large hit to earnings as they were unable to pass along the cost of power to the end user.

For the quarter ending 3/31/2018 on $287 million in revenue the company lost $41 million, but had depreciation of $13 million so they had negative cash flow of $28 million.  This is meaningful for a company like Spark, but IF it is a one time event it really isn’t critical.

So what does the company have to say about the future. Below is a clip from the CEO’s statement from the earnings announcement.

So the company is expecting some big things throughout the balance of 2018.  We say ‘prove it’–and investors as a whole are saying the same.

Of course SPKE is somewhat of a strange duck in terms of ownership of shares and it is not helpful that 1 person controls 2/3rds of the shares and is paid a huge chunk of money every quarter and year in the form of a distribution.  The common shares of the company are now paying a dividend of .18125/share quarterly for a current yield of 7.2%.  Anytime that a single owner controls every move the company makes investors will be skeptical of the game plan when things don’t go right.

In addition to the ownership issue the company is ripe for lawsuits–all retail energy companies employ all kinds of methods to find new customers–many times employing outsiders to solicit potential customers.  This is likely simply a ‘cost of doing business’.  If one reviews the companies annual reports you will find bunches of lawsuits in process.  Our own research shows that while SPKE has plenty of lawsuits and no doubt plenty of unhappy customers, they are probably no worse than the other energy retailers in the market.

So what is an investor to do?  We don’t ever make recommendations, but we can convey our plan.

We have written that we have an overweight position in the SKPEP preferred shares and currently stand with a modest loss of around 90 cents/share when factoring in the 1 dividend we have received this far.

The preferred shares will go ex-dividend on 6/29/2018 meaning another dividend of about 55 cents.  The common and preferred dividends for the 2nd quarter have already been announced.

2nd quarter earnings should be announced sometime around 8/6/2018.  We anticipate that based upon statements from the company that earnings will be reasonably ‘normal’ meaning equal to the year ago quarter in which they generated $34 million in cash flow.

With the above information we expect that we will determine that the investment is worth continuing to hold.  We would expect that if the earnings return to ‘normalized’ levels the common and preferred shares should move somewhat higher.  If shares  move higher we will let some shares go–sell some, just to get to a normalized position size.

So with that we are going to give management approximately 10 weeks to ‘prove it’.  Prove to us we should hold the shares.

Cross Currents Everywhere in Interest Rates

We are slightly surprised by the direction of the 10 year treasury in the last 2 days–now at 2.97%–we thought the days of sub 3% rates were behind us.  Just goes to show that trying to forecast day to day movements is near impossible.

So the Fed now believes it is ok to potentially let inflation run a bit ‘hot’.  This assumes of course that the Fed actually can control inflation–either higher or lower inflation.  With ZIRP (zero interest rate policy) for quite a number of years there was little to no inflation–so I don’t think that with the Fed funds at 1.50-1.75% and the 10 year around 3% we are likely to have inflation.  But as we have noted many times the yakking of the the Fed–either in speeches or in meetings, moves markets more than actual policy.

Heap on top of this the now terminated meeting with North Korea.  Of course who knows–the meeting might happen regardless of what is proclaimed today.

In the end the this makes no difference to us on a day to day basis.  The average preferred stock or baby bond moves only a couple of pennies in a day and tomorrow the story may change and we may have interest rates reverse higher.

Just a note for those that are bored from time to time with these markets.  There are 2 securities that we have been ‘position trading’ (multiple day holdings).  First is TBF which is the Proshares Short 20+ year treasury (rates go up and price goes up–rates down price down).  With interest rates down 4 basis points today it has moved 20 cents lower.  The shares have traded in a range of $23.17 to $23.70 in the last month.  We have traded the shares twice in the last month.  When we trade the shares we are looking for a 20/30 cent profit.  It thus far has been an easy trade and we are maybe going to ‘leg into’ shares today with more added if they get a bit cheaper.  A person needs to have conviction of where they think rates are heading longer term to make this trade.

The second is the conservative IHIT shares.  This is the Invesco Term Trust 2023 shares which we hold in accounts all over.  It is a 6% yield.  It has traded reliably between $9.70 and $10.03 this year.  We buy in the $9.70 to $9.80 area and sell in the upper end of the range.  Worst case we have to hold it for a while and with a 6% dividend we don’t mind.

NOTE-this is not a recommendation to try to do these trades.  These are just kind of for boredom–and flipping for a few hundreds in profits.  We do these within our IRAs.

International Seaways to Offer Baby Bonds

Tanker owner International Seaways (NYSE:INSW) has announced that they will be selling an offering of senior notes.

While details are sketchy the issue will mature in 2023–and we love short dated maturities (although not normally from shippers)

At this point in time we are not familiar with the company, but a glance at the company shows they are headquartered in New Your City and they operate a fleet of 49 tankers and through joint ventures they operate in the LNG field as well.

The preliminary prospectus for the new issue can be found here.

We will be doing a closer look at this one.

Ladenburg Thalmann Prices New Baby Bonds

Financial services company Ladenburg Thalmann (AMEX:LTS) has priced a new issue of baby bonds with a coupon of 7% and a maturity date of 2028.  This issue will be a quarterly paying security.

The issue is small in size with just $40 million being sold (1,604,000 shares/bonds).  Another 240,000 shares are reserved for overallotment.

The shares will trade on the AMEX under ticker LTSF.  It is likely it will be 1-2 weeks before trading begins as the offering is not expected to close until 5/30/2018.  There will be no OTC trading prior to permanent AMEX listing.

The term sheet on the pricing is here.


Checking Out Ladenburg Thalmann

With a new baby bond offering coming it is past time to check out Ladenburg Thalmann (AMEX:LTS) to see how the company is doing.

As some have reminded me I had originally bought the LTS-A preferred stock issue a few years ago–probably in 2013 or 2014.  I sold it at some point though and no longer own the issue. With the benefit of hindsight I wish I had held it all through the years as it has been a steady monthly payer.

I decided to pull up the 2017 financials and see why I thought it was dicey holding in the past–it took me only minutes to see why I thought that was the case.  Many times in the past couple of years the company has not covered their dividend payments–but that is improving.

For 2017 LTS had a GAAP net income of about $7.7 million BEFORE payment of $32 million in preferred stock dividends.  The primary source of liquidity for the company over the years has been the issuance of common and preferred stock (instead of net income).

Now when we look at cash flow it paints a somewhat more positive picture as free cash generated during 2017 was about $36-37 million ($7.7 million of net income and adding back $28.8 in depreciation).

Now the company has been growing nicely with revenues now over $1 billion for the 2017 and net income in the quarter ending 12/31/2017 was strong compared to earlier quarters with $6.6 million in net income and free cash of $13 million.  So in the final quarter of 2017 they nicely covered the preferred stock dividend of $8.4 million.  They also had a 1 off of a credit of $6.7 million for taxes because of tax law changes.

During the quarter ending 3/31/2018 revenues again grew nicely and they had net income of $7.7 which when added to depreciation (a non cash charge) of $5.8 million means they covered the preferred dividend of $8.5 million with free cash of $13.5 million.

So the company is on the right track with growing revenues, but they are continuously selling some high yield 8% preferred stock which puts a whole lot of pressure on cash needs—$34 million/annually is needed right now just to service the preferred stock dividend.

The history is this for the preferred stock—outstanding shares–

12/31/2014      11.1 million

12/31/2015       14.7 million

12/31/2016      15.8 million

12/31/2017       17 million

This data is from the 2017 10K which can be found here.

At the end of 2017 the company still had 6.8 million shares of LTS-A available in a ‘at the market’ offering so we would have to assume that they are continuing to sell shares into the market when they can do so.

The common shares trade for $3.74/share which is up substantially in the last year or so as the company has improved their financials.  Shares traded as low as $1.70 in 2016.

Now forget the information above.  Phillip Frost MD own 35% of the company.  Ladenburg has a revolving credit agreement with Dr. Frost which pays him (a company he controls) 11% interest.  This agreement continues until 2021.  This data is in the most recent proxy materials found here.

Additionally Frost owns real estate etc. that Ladenburg leases and there are other various incestuous relationships in the company.

Is this information bad??  Common share holders may not think much of the arrangements, but preferred holders should feel some level of comfort having a billionaire watching over the company.  The odds that Dr Frost would let the investment go very far south is remote.  Here is Dr Frosts bio–the biggest downside is he is 82 years old.

So in summary I think that the word ‘dicey’ is appropriate for describing Ladenburg.  I think that holding the preferred shares is ok as the reward is fairly high for the risk involved.  With Dr Frost holding a nice sized purse there is some comfort that he would backstop the company.

We would suggest that holders make sure to watch the quarter earnings releases to make sure the dividend is being covered and to make sure they don’t back slide.


Ladenburg Thalmann Announces New Baby Bond

Financial services company Ladenburg Thalmann (NYSE:LTS) has announced the sales of a new baby bond.

The notes have a maturity date in 2028–a bit too far out for us, but we will have to see the coupon before we know for sure whether we have an interest.

Ladenburg has a 8% monthly paying preferred outstanding right now (LTS-A) as well as a 6.50% baby bond outstanding (LTSL) that was issued last November which is trading at $24.49 so it seems reasonable that the new baby bond should price at around 7%.

The preliminary prospectus can be found here.

We haven’t checked the Ladenburg financials lately, but the last we remember they are kind of ‘dicey’, so buyers should do their due diligence.

Monday Morning Kickoff

Right away this morning the DJIA is up about 240 points as we write, so it looks like the stock market will start off with a good move higher.   Interest rates are pretty much flat to lower in yield with the 10 year treasury trading around 3.08%.

The biggest factor this morning in the stock market move is some potential positive moves forward with China trade.  While Treasury Secretary Mnuchin is dealing with the Chinese certainly there are no guarantees that there will be a positive end to these talks.  Until the ink is dry on an agreement we all know that this issue could go south fast sending stocks lower.

This week we have 10 speeches by Fed Presidents—that is about 9 too many as all they ever do is cloud the marketplace with contrasting view points and forecasts that are no better than yours and mine.  Unfortunately these can be market moving talks and thus they are news.

We don’t have any real economic news (except the speeches noted above) until Wednesday of this week.  On Wednesday we have the Mortgage Bankers Mortgage applications report which is looking to be down 2.7%.  Personally from local observations it wouldn’t surprise me to see them down more than this amount.  Sales and re-financings of homes is softening quite a bit in rural Minnesota, but we know that doesn’t translate to the rest of the country, but with rising rates and very high prices for new construction it is a perfect storm for reduced housing activity–thus less mortgage activity ahead.  We will have new home sales released on Wednesday as well and these numbers were strong  last month and expected to soften a bit from the prior level.

We also have the Purchasing Managers Index flash report (PMI) on Wednesday.  This is forecast to be flat month to month.

The FOMC releases minutes on Wednesday and this has the potential to move markets if there are opinions in this report that varies from conventional wisdom.  With the Fed Presidents yakking every day it is hard to believe there would be anything that surprises in this report, but one never knows.

Thursday we have the FHFA House Price release as well as the Existing Home Sales report.  These will not be market moving in any way–too many excuses (reasons) for these being off the mark.

Friday we have the Durable Goods report and this is anticipated to be softening when aircraft are counted, but up nicely ex-transportation.  Like most items this will likely not be market moving.

The Fed balance sheet runoff really picked up steam last week with a run off of $21 billion–a much larger move than recent weeks.  This serves to keep the pressure on interest rates.

The average preferred stock and baby bonds fell by 5 cents last week.  Given the move in the 10 year treasury early last week this should have been expected–in fact we would have guessed a larger move down.  There are 202 issues trading below $25/share.

We had 1 new issue price last week and the B Riley 7.375% notes began to trade on Friday. Given that B Riley has 3 issues already outstanding with coupons of 7.25% to 7.50% there is really nothing new in the issue for us.

Eagle Point Credit Releases Earnings and New Presentation

Eagle Point Credit (NYSE:ECC) has released earnings for the quarter ending 3/31/2018 and concurrently released a presentation of data on Powerpoint.

The powerpoint can be found here.

Eagle Point has term preferreds and baby bonds outstanding which we have owned at various times although the recently called ECCZ 7% baby bond took us (personally) out of their shares for now.  We do have some of the term preferreds in the Medium Duration Income Portfolio.

ECC is a specialty finance company (not a BDC) and they invest in CLOs (collateralized loan obligations).  Looking over this presentation you can see why we are only comfortable owning this during good economic times.  There is a lot of “trust me” in these investments–so you better trust management if owning ECC issues.

A New Investment from a Reader Suggestion

kaptain_lou is a reader on this site, as well as many others and a few years ago he (or she) wrote an article on Seeking Alpha which outlined an investment that I was not familiar with–as usual I had to check it out a bit.  We are not shy about trying new ideas and are always looking for a little diversification.

Some readers may recall that nearly 10 years ago when “peer to peer” lending was just starting we ran a real money test on Prosper–one of the early peer to peer sites.  We deposited $5,000 and made 100 $50 loans.  The 1st few years were a total disaster as Prosper was not vetting the borrowers adequately.  After the company rebuilt their system to minimize huge losses the platform improved–but honestly still leaves a lot to be desired.  After our 10 year experiment we have a total annual gain of 4.56%–not terrible, but less than we had hoped for at the time we initiated the position.  We have been in “run off” mode with Prosper the last couple of years and now are down to only $449 in our account.  The point is that we tried it with minor amounts of money and now we know how bad/good it is.  If the economy is good I think a 5% return is probably attainable – if a recession hits watch out!!

The new investment I am speaking of is brought to you by Amerco (NASDAQ:UHAL)–the parent company of U-Haul, RepWest Insurance Company and Oxford Life Insurance company.  Quite simply the company allows you, the individual investor, to invest in U-Haul equipment.  This could be a truck, a car hauling dolly or even furniture pads.  Maturities range from 2 years to 25 years.

The investments may be done in a cash account or in an IRA.  Of course you have to set up an account on their site which is called the U-Haul Investors Club.

Setting up an account is quite easy, but I spent a full 10 days getting money transferred to my new account-not a really big deal as I was only transferring $1000 from my checking into a new IRA.  This account honestly is to allow me to “trial” the product and see exactly how it works.

Once you have money in your account you are allowed to purchase “U-Notes”, which are secured interests in whatever product you decide to invest in–they usually have 2-5 different investments available with coupons of 3-7.25% depending on the length of the loan you make.

At this link you can observe the current offerings of product.

The company files prospectuses on these offering just like they would do on a common stock offering etc.  The link to these is posted on the page with the individual offering.  Of course they are huge documents – most likely with a bunch of stuff no one ever reads.  We skimmed through it but mostly we went to the financial statements of Amerco.

Amerco is currently a highly profitable company with revenue of over $3 billion.   For the 3rd quarter ending 12/31/2017 the company had revenue of $842 million with earnings from operations of $303 million.  Additionally they had a huge gain on sale of real estate which we look at as a 1 off.  For the 9 months there was revenue of $2.8 billion with earnings from operations of $761 million.  These are phenomenal earnings.  The company has $10 billion in assets on the balance sheet and carries over $3 billion in debt (including the U-Notes we are talking about here).  Virtually all of the assets and debt are related to the U-Haul business as are revenues.  The 2 insurance companies contribute only about 5-6% to the overall revenue stream.

We have reviewed the company financials back to 2009 and they have been profitable each year since 2009, although recent profits dwarf those of 10 years ago.

Below is a chart of the common stock of Amerco.

Now for the WARNINGS.  This investment is NOT liquid–in fact you will receive a principal and interest payment each quarter until you have been repaid for your loan.

Because there is no liquid marketplace for this debt, you will be holding it until maturity.  Hopefully the company stays in good financial condition and full repayment with interest will occur, but it is conceivable that the company could go broke and your investment could be lost.

Additionally no one should consider an investment in these notes with money which may be needed over the life of the loan.

Our plan is to fund our U-Haul Investors Club with the balance of our IRA contributions for 2018 and continue to invest throughout the year.

Additionally we are adding $3,000 worth of investments to the Medium Duration Income Portfolio.  This will keep the investment and progress in front of our eyes.

As always this is not a recommendation for anyone to purchase any of these notes–we have already done so and will write further on our first purchase.

This article is just to further shout out kaptain_lou’s idea and should be viewed as an idea that readers may want to do further due diligence on themselves.

kaptain_lou’s original article on Seeking Alpha can be found here.



Interest Rates Hanging Tough at 3.08%

After the recent pops in interest rates we were curious as to whether they would remain above 3% in the days and weeks after the move. Just surveying rates today it looks like the 10 year treasury is firmly in the 3.08% area and will probably not move back below 3% anytime soon.

Higher interest rates are likely taking a tiny bite out of the housing market as housing starts and mortgage applications both came in a bit lite of where the consensus had pegged them. While rates are not out of control there are always marginal buyers that are excluded from the market place when rates moves higher. This is a case of the “haves” and “have nots” –the “haves” are mainly not affected in a great way with somewhat higher rates, while the “have nots” are living on the edge all of the time–including in housing. Fannie Mae has done their best to get the “have nots” into housing with 3% down payments and with rates moving up folks that have no cash for a down payment begin to be priced out of the market. Recall after the financial crisis 10 years ago the need for a 10 or 20% down payment on a conventional loan was a common requirement. Fannie has moved lower and lower and now we are back to trying to put the taxpayer on the hook for a bail out when these low down loans go bad.. Interesting times are ahead in the housing market during the next recession.

Today we began to look at the super high quality names in the preferred marketplace.  We would begin to deploy a few funds in these securities if the current yields hit 6%.  The issues we are referring to are the high investment grade issues from CEFs.  Our list is here.

These issues are almost all issued by one of the related Gabelli companies.  This includes Bancroft and Ellsworth, both of which are managed by Gabelli.  All of these issues are for those seeking very high safety, with little regard for maintenance of Net Asset Value (NAV).  These are very sensitive to interest rate movements, but you can sleep well at night knowing the income stream of these is very safe.

Here is an example of the interest rate sensitivity of these issues.  Ultra safe, but larger movements in share price as rates go up.

As rates tick higher the odds of these issues being redeemed becomes smaller and smaller as almost all of the issues are perpetual.

Our thoughts are simply that we would very slowly–glacier like–move into a few of these as current yields on them move above 6% so that over the course of maybe a year we have a 10-15% position in them.  Of course one never knows for sure when rate rises will be over so better to move into some of them slowly.

Note that while BDCs are CEF’s we DO NOT include them in this list.  This list is primarily of CEFs which hold Level 1 assets (stocks).  Business development companies hold Level 3 assets (meaning you have to trust management for valuations). We like a nice clean closed end fund investment where we can observe the securities they hold on a daily basis if necessary.

Surprisingly Orderly Markets

While stocks are off by a percent and REITs and Utilities are off by more than a percent this seems like a surprising orderly sell-off in light of the movement of the 10 year treasury moving higher by 8 basis points.  It helps that the talking heads are spewing garbage every moment about “skyrocketing interest rates”.  We all know what skyrocketing rates are and 8 or ever 12 basis points don’t qualify.

The average preferred and baby bond is off by 7-8 cents which is orderly and as we have mentioned 100 times before investors barely notice the loss of capital from their accounts at this rate, but over time you do lose a percent or two from your capital.  At a slow pace of rate movement higher dividends and interest payments tend to mask the capital losses.

As rates move higher we are keeping our eyes on term preferreds and baby bonds for any move to $25 or even lower.  At that point most of these issues would be great low stress positions (assuming they do go broke–so the RAIT issues should be avoided by most).  If a conservative investor can lock in 6-7% for a 1 or 2 year period it would likely be good timing for at maturity there may be some much better yields available assuming interest rates continue to move higher.

10 Year Treasury Strongly Breaches 3%

It was bound to happen and today (actually overnight) the 10 year treasury has strongly breached the 3% level and is currently trading at 3.06%–the highest level in years.  Honestly there is not a particular visible reason for this move—fewer buyers than sellers I guess.

While there is no panic in the interest rate market place REITs, preferred stocks and baby bonds are all reacting negatively to rates.

REITs are off 1 1/2% today and preferred stocks are off about a nickel on a average share.

We would like to have the 10 year hold right in here and drift a little lower.  It’s all about the speed and we don’t want this move in rates getting too carried away to quickly.

Of course we do not react to this type of move, but monitor the situation–more for potential bargains than for anything else.

B Riley Prices Senior Notes

B Riley (NASDAQ:RILY) has priced the new issue of notes mentioned earlier today and terms are a bit more lucrative than we had imagined.  The issue priced at 7.375%.  The notes will mature in 2023.

We had previously mentioned a bonus for early redemption in the preliminary prospectus – the bonus remains but the final pricing is a bit more generous.  If called after 5/31/2020 and before 5/30/2021 holders will receive $25.75 plus accrued interest.  Between 5/31/2021 and 5/30/2022 holders receive $25.375 plus accrued interest.  After this date and up to maturity redemption is for $25 plus accrued interest.

Shares will trade under the ticker RILYH likely before the week is over.  No OTC Grey market trading will take place.

The pricing term sheet can be found here.

Primo Water Looking to Call and Refinance Debt

Primo Water (NASDAQ:PRMW) which purchased Glacier Water Service a couple of years ago is selling common shares with the intention of “paying down debt” and refinancing the balance of their debt.

While it is not known for certain if the old Glacier Water Trust Preferred (NASDAQ:GWSVP) shares will be called it is likely that the 9.06% coupon is a target for this move. REMEMBER that trust preferred stock is essentially debt as the Trust bought subordinated debt from Glacier and this dividends received are treated as interest.

Shares are trading at $26.75 so there is plenty of downside to $25 (plus accrued interest) if I was a holder I would look to ‘sneek’ out ASAP.

While there is NO GUARANTEE the old Glacier Water Trust shares will be called, there certainly is an intent by Primo to reduce rates.

The preliminary prospectus for the common share offering is here and vague references to calling debt and refinancing can be found in the “use of proceeds’ section.

B Riley to Sell New Baby Bonds

B Riley Financial has announced a new 2 million share offering of baby bonds.  The notes will have an early redemption period starting 5/31/2020 and a maturity date of 5/31/2023.

This issue contains some bonus payments for early redemptions.  Between 5/31/2020 and 5/31/2021 the redemption is $25.50 plus accrued interest. Between 5/31/2021 and 5/31/2022 the redemption is $25,25 plus accrued interest.  After this date redemption is at $25 plus accrued interest.  While these bonuses appear nice it is likely a tradeoff for a slightly lower coupon.

The anticipated ticker will be RILYH which should start trading in about a week.  There will not be OTC Grey market trading.

The preliminary prospectus is here.



Monday Morning Kick Off

We have entered another Goldilocks period during the last week or so where interest rates trade in a narrow ranges while stocks march higher on almost a daily basis and common stocks are now “even” on the year (not counting dividends).

One potential fly in the economic ointment is the continued rise in oil prices. While we certainly notice prices going up at the pump, the current level of around $2.75 in Minnesota is not higher enough to do any real harm to the economy. We think it will take at least $3 before any real attention is given to the pricing and beyond that it will take another 50 cents to do real economic damage and contribute heavily to inflation as oil and natural gas prices are components of almost every consumer product sold in this country.

This week we have 7 Fed president speeches–these always have a potential to move markets if one of the presidents says something that is way out of mainstream thought. On Tuesday Retail Sales will be released and they are forecast to have risen .3% month over month–only if sales are outside a wide range of up .1% to up .5% will this number have any consequence for markets. Wednesday Housing Starts and the Housing Market Index are released as well as industrial production – none of these numbers of meaningful to the marketplace in a large manner as they are highly unlikely to be outside a wide range of expectations.  Thursday, of course, we have jobless claims, which have become unimportant on a week to week basis, but we also have Leading Indicators which will have a minor potential to move interest rates—too hot and rates break above 3% and too cold the 10 year treasury stays locked in the 2.90’s.

Outside of short term T-Bills being sold (and they are continually sold) we don’t have much for Treasury auctions this week.  On Thursday the auctions for the next week or so will be announced and this makes for an interesting read.  The current forecast is for lighter than expected sales of longer term notes and bonds as tax receipts have been quite high.  This coupled with the modest run-off of the balance sheet may mean only modest pressure on interest rates from the Treasury and the Fed.

Last week saw NO Fed balance sheet run off–the Fed remains a bit behind the curve on the run-off which is supposed to be running at $30/billion a month–until next month when it will flip to $40/billion per month.

The average preferred stocks and baby bond moved higher last week by 4 cents to end the week at $24.86  and we have 192 issues trading below $25 which is quite a change from 210 last week.  As we know, prices on these securities react to higher interest rates and then over time, assuming interest rates flatten, prices start to creep higher–the normal trend in pricing continues.

We had 2 new issues begin to trade last week.  Both are issues from MLPs.  DCP Midstream sold a 7.875% fixed-to-floating preferred issue which is trading OTC Grey market at about $24.70.

Oaktree Capital sold a fixed rate 6.625% preferred unit offering which is also trading OTC Grey market and is soft around $24.65.  This offering is investment grade.

A Quiet End to a Quiet Week

Coming into the week we had potential to see interest rates higher with the release of the PPI and CPI–but neither number was “hot” and in fact they were a little lite on inflation so the 10 year treasury remained about where it started the week–right now trading around 2.97%.

The DJIA is up on the week and has been trading pretty strongly as some of the unknowns in N Korea and Iran are hashed out.  Whether one agrees or disagrees with the Trump administration the marketplace would rather see action–not necessarily agreeable action–but action instead of an unknown.

For us the most excitement we have had is watching our Spark Energy (NASDAQ:SPKE) fixed-to-floating rate preferred (NASDAQ:SPKEP) fall by $1.50/share on lousy earnings caused by the cold snap that blanketed the country this winter causing costs for electricity to spike leaving energy retailers unable to pass the cost along.  In spite of the loss we believe the company is in decent shape and should recover nicely–we hope we can write at length on this soon.

We had a couple of decent MLPs offer new preferred units–DCP Midstream and Oaktree Capital which we touched on a number of times.  It is unlikely we have an interest in these are this time–maybe if they fall in price in the next year we might have an interest.

So next week we start it all over again–we hope no one experiences a Spark Energy next week and we have a quiet, profitable week.