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.