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 you 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 you 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.

Oaktree Capital Prices Preferred Units

MLP Oaktree Capital (NYSE:OAK) has priced the new preferred unit offering we mentioned yesterday at 6.625%.  It is anticipated that this issue will be investment grade.

The distributions on these units are NON-CUMULATIVE, but generally the terms are normal terms.  Quarterly payments, perpetual, 5 year optional redemption time frame and NON Qualified distributions.

Holders of this issue will receive a K-1 at tax time.

At this time we don’t know if we have an interest.  The coupon is decent for this level of quality, but we are more apt to wait and see how it trades over the next 6-9 months before committing.  If we do buy some it will be a smaller position.

Shares will trade under the ticker OAK-D on the NYSE, but for now will trade for a week (plus or minus a day) under the temporary OTC Grey Market ticker OKTRU.  Trading should start today, although some will not be able to trade it until Monday as their brokerage will not have it set up in their system.

The pricing term sheet can be found here.

Oaktree Capital Group to Issue Preferred Units

Limited Partnership Oaktree Capital Group (NYSE:OAK) is going to sell a new fixed rate preferred offering.

No real detail has yet been announced (such as pricing and size of offering).

As a company we kind of like Oaktree, which is organized as a MLP, as Howard Marks founded the company.  Howard is somewhat legendary in the distressed asset investment area and the company has $121 billion under management.  Of course that doesn’t make this a good investment–we will just have to wait and see.

The preliminary prospectus can be found here.

It is likely a K-1 will be issued for these units at tax time.

DCP Midstream Prices Fixed-to-Floating Preferred

Giant Midstream MLP DCP Midstream (NYSE:DCP) has priced their new fixed-to-floating rate preferred with a coupon of 7.875%.  The coupon will be fixed until 6/15/2023.  After this date the coupon will float at 3 month Libor plus 4.919%.

The issue will generate a K-1 instead of a 1099.

The ticker on the permanent exchange will be DCP-B.  The shares will begin trading on the OTC Grey market under the ticker DCPMP.

The issue term sheet can be found here.


Spark Energy to Report Tomorrow

Energy retailer Spark Energy (NASDAQ:SPKE) will be reporting 1st quarter results tomorrow morning at 10 am central.

We are most anxious to see what we hope is good results.  Spark Energy 8.75% Fixed-to-Floating (NASDAQ:SPKEP) is one of our largest personal holdings and we hold it in the High Yield Portfolio as well.

The preferred has traded weakly since a secondary offering a few months ago, but had previously traded as high as $27.  Our personal purchase prices average around $24/share.  The initial IPO was a year ago and a follow on was executed recently and involved 2 million shares.

The company has hired an adviser to potentially ‘shop’ the company as they have been unhappy with the current common stock price which has been trading around $11.50/share today.

DCP Midstream LP to Sell Fixed-to-Floating Preferred

Giant midstream energy master limited partnership DCP Midstream (NYSE:DCP) is selling a new fixed-to-floating rate preferred.  This issue will generate a K-1 at tax time (or after tax time as my experience shows they are almost always late).

The issue will have a early redemption period starting on 6/15/2023.

The issue will have a permanent ticker of DCP-B.  The OTC grey market ticker has not yet been announced yet.

No details as to size or pricing have been announced yet, but as usual the floating rate will key off the 3 month Libor rate beginning in 2023.

DCP currently has no $25 baby bonds or preferred issues trading but they have a 7.375% $1000 issue.

We have an interest in this issue if the pricing is right.  DCP is a $8 billion MLP and is well managed.

The preliminary prospectus is here.