Tsakos Energy Navigation to Sell Fixed-to-Floating Preferred

Tsakos Energy Navigation is selling a new issue of fixed-to-floating rate preferred stock.

The new issue will pay qualified dividends and will be cumulative

The company has 3 fixed rate preferred issues outstanding and they have coupons of 8% to 8.875%.  The 8% issue is callable in July and the “use of proceeds” from this issue includes possible redemption of preferred stock.  The 8.75% and 8.875% issues are not redeemable until later.

The rate will be fixed until 2028 at a yet to be determined fixed rate and at that point will float at 3 month Libor plus a spread which also is not yet announced.

The issue will have a permanent ticker of TNP-F.

The issue will trade on the OTC Grey market, although the temporary ticker has not been announced.

Here is the preliminary prospectus. 

Insurance Company Enstar Group Prices Fixed-to-Floating Preferred Issue

Enstar Group Limited (NASDAQ:ESGR) has priced a new fixed-to-floating rate preferred tonight with an initial coupon of 7% which will remain in place until 2028 at which time the rate will float at 3 month Libor plus 4.015%.  While the spread in 10 years is a bit lite the 7% current coupon is darned tempting.

The issue is non-cumulative which is typical for an insurance company issue–and dividends will be qualified for preferential tax treatment.  They are selling 16 million shares with no overallotment shares.  NOTE that almost 12 million shares are reserved for specific institutions thus leaving only 4 million to sell on the OTC Grey market.  Shares should start trading tomorrow with the temporary ticker of ENSTF.

The permanent ticker when it moves to the NASDAQ should be ESGRP.

We were not familiar with Enstar and as such did a little bit of homework on the company. They were founded in 1993 in Bermuda (which is typical for many insurance company) and initially they purchased other legacy insurance portfolios–and in some cases entire companies–generally property/casualty companies which allowed the seller to refocus their capital on other business. In 2013 the company entered the “live insurance” business by purchasing a few other companies that are either specialty insurers or reinsurers.  This company seems to be a bit more complex than most insurers so potential investors should do some due diligence on the company website here.

The company now has assets of over $16 billion with equity of over $3 billion.

The company’s long term debt is investment grade (Standard and Poors BBB), while this particular new preferred issue is rated BB+–a notch lower than investment grade.  When we compare this issue to more recent insurance company issues from MetLife and WR Berkley which are both rated just 1 notch better and Unum which is rated the same the 7% on this issue is extremely tasty.

Pricing for this new issue can be found here.

Unum Group Notes Begin Trading

As noted by our reader SteveA, along with other readers, the new Unum Junior Subordinated Notes due 2058 have begun to trade on the NYSE.

All the details on the issue and the prospectus can be found here.  Shares are trading right around $25 now.  This is a large issue of 12 million shares plus another 1.8 million shares for overallotment.

We will have no personal interest in these baby bonds as we simply are not buying issues with maturity dates this far out–just too much interest rate risk right now.  This doesn’t mean the issue is bad–just that it doesn’t fit with our current strategy of investing (which no doubt will change at some point in the future).

We do note that the interest on these baby bonds can be deferred for periods of up to 5 years without being a default–we have NEVER liked these provisions.  Is it likely to happen?  NO–but who knows over the course of 40 years.

Medium Duration Income Portfolio Performing Well

The Medium Duration Income Portfolio is now performing exactly as expected.

This portfolio was formed in February, 2018 and thus is in the 4th month of existence.

At this moment the portfolio is up 1.58% and should approach 2% by the end of the month.  Since the portfolio wasn’t fully invested (considered to be fully invested at 90% or so) for over a month a little income was lost the 1st month or two, but now the portfolio is hitting its stride.

Recall this portfolio is similar to our own personal holdings–term preferreds and baby bonds maturing in the next number of years, although there are two baby bond with a 2027 maturity.

Note that 1 baby bond was called (Arbor Realty) in April and was replaced shortly thereafter with Sutherland Asset Management 6.50% baby bonds (NASDAQ:SLDD) which has performed admirably.

This portfolio is set up as a learning tool.  When we originally set up model portfolios many years ago they were for our personal learnings–now they are more for “newbies” to income investing–those that want a reasonable return without turning to common stocks, but want more than CD’s.  The intention is that the various issues are not “traded”–simply held.

A reasonable goal for this portfolio is a return of 6% to 7% in a rising rate environment (although whether we are in a rising or falling environment remains to be seen).

Global Markets Enter Highly Dangerous Waters

While we seldom are concerned when equity markets drop as many times these drops are supportive of the income markets we invest in, we have now entered a period where equity markets can “drag down” preferreds and baby bonds–this occurs when investors bail out of markets out of unfounded fears.

Overnight global markets dropped very sharply, in particular in Asia where drops of 2-3.5% were the norm.  At this moment DJIA futures are off by 300 as we write and the 10 year treasury is trading at 2.88%.  It would not surprise us one bit if the DJIA fell 1000 points one of these days and selling begets selling as nervous nellies leave the market in mass.

Certainly the term “trade war” is now closer to being an accurate description for the tariffs now being implemented around the globe, although we think the term “trade skirmish” still is accurate until such time that all the various tariffs are implemented.

Here is where we start building a little cash–take a few profits here and there, hold off reinvesting dividends and interest and hold cash in a money market.  The good part about holding a little excess cash is we earn 1.75% on the holdings.  In the past when we held too much cash we earned zip–and that was much more painful.

We are exploring many other concerns which are popping up because of the trade skirmish—-inflation, foreign purchases of treasury bills and bonds etc. as there are substantial potential issues ahead of us–and we had plenty of issues already on the U.S. economic plate.

 

 

Monday Morning Kickoff

We are gearing up (mentally) for an active week in the stock and bond markets.  Almost without question the tariff situation globally and in particular with China is going to cause some pain and suffering in some commodity markets as well as potentially in the equity markets.

Looking at the futures tonight share prices are off in most all the markets of the world–although we all know that the futures aren’t worth much in terms of forecasting closing prices tomorrow.

Last week we had the 10 year treasury trade in a range of 2.89% to 3.01% closing around 2.92%.  Of course the key items we had last week was the Trump summit with Kim Jung-un, the Fed Rate hike and a late week rush to safety as the U.S. announced tariffs on Chinese goods.  Of course not reflected in trading last week was reaction to China’s retaliation which came over the weekend.

Stock markets were down a bit last week closing around 25,090 on the DJIA–a loss of 220 points on the week–totally meaningless.  I have to admit that I thought it was much worse–I don’t pay too much attention to the equity markets unless they have a REAL move up or down (maybe at least 300-600 points in a day).  All I remember was the talking heads on CNBC were saying this was the “worse week of the year”–what idiots–I really need to have different background noise in my office.

For this coming week we have just 3 Fed presidents speeches—just shut your yaps–no good comes of these folks spouting off.  Then on Monday we have the Housing Market Index (builder confidence) and Tuesday Housing Starts are announced for May–both are expected to run hot–but that is the consensus so likely it won’t add to upward interest rate pressures.  Wednesday Existing Home Sales for May are announced and on Thursday the FHFA Housing Pricing Index is announced.  Also on Thursday the Leading Indicators is announced.  We would be really surprised if any of these are meaningful to any interest rate or equity market.  We won’t need fundamental economic news to make for some wild markets this week.

As we had noted on Friday the Fed Balance Sheet was up $2 billion in the lastest week and thus didn’t contribute to any upward pressure on interest rates.

We had 2 new issues announced last week.  1st RenaissanceRE (NYSE:RNR) sold a non cumulative 5.75% investment grade preferred.  This issue is now trading on the OTC Grey market under ticker RNREF and is trading right around $25/share.  Ohio banker Synovus Financial (NYSE:SNV) sold a non cumulative 6.3% fixed-to-floating preferred from which they will redeem their outstanding 7.875% (NYSE:SNV-C) fixed to floating rate preferreds.

Also the new 7.75% baby bond issue from Cowen (NASDAQ:COWNL) began to trade and is right around $25.05/share.

We ended last week with the average preferred stock trading at $25.12 which is up a few cents from the previous week.  Additionally there are 168 issues trading at $25 or below–2 fewer than last week.

 

 

Flight to Safety Again Sends Interest Rates Falling

It seems that the only time interest rates fall is when we have an “event” of some sort–in this case the tariffs placed on China.

Rates fell into the high 2.80’s before rebounding back up to 2.91%–we watched preferred stocks and baby bonds and there was no reaction whatsoever–flat (overall). Something we have noticed this year is that when interest rates fall income investments stay steady, but if they rise many income investments fall a bit. Obviously investors believe rates are moving higher–at some point in time.  Of course if the Europeans don’t get their growth going money will keep pouring in to capture our higher interest rates.

The Fed’s tapering programs took a week off as the Fed Balance Sheet grew by about $2 billion last week.  So in the last 12 weeks the balance sheet has fallen by $80 billion–at this rate it will take about 10 years to get the balance sheet normalized–don’t think that is going to happen–no way.  As we have mentioned before the “run off” in the balance sheet (meaning bonds mature and the Fed DOES NOT reinvest the proceeds) continues to put upward pressure on interest rates.  So $80 billion of new money was needed to buy bonds–thus far it has worked out–but 1 small glitch in the process could send rates much higher–guess we will have to wait and see how this plays out.

Spark Energy Preferred Slowly Creeps Higher

The fixed-to-floating rate preferred from Spark Energy (NASDAQ:SPKEP) has slowly crept higher–day by day as we close in on the ex-dividend date of 6/28. The dividend for this period was declared a month or two ago and it looks like buyers want to lock in a tasty 55 cent dividend.

As readers know we are totally overweight this security and are now at (or very near) break even on our total return. Of course with the benefit of hindsight we wish we would have bought even more down around $22.

Spark announced lousy earnings last quarter and won’t announce 2nd quarter earnings until the 1st week of August. The company predicts a flat year to last year. This f-to-f issue traded over $27 prior to a reopening of the issue.




Rate Hiked as Expected–Markets a Bit Confused

As we expected the Fed hiked the Fed Funds rate–looking at the bright side that means when we open our Fidelity account on the 1st of the month we will have a tidy payment for our money market holdings.  It seems like we can never stay fully invested–and then on the 1st we would see a 50 cent interest payment for “ready reserves”–now we might see a $100 or $200 depending on our cash on hand–it is small but welcome.  As of yesterday the Fidelity money market paid us 1.42%–we should see a hike in the next few days.

I think the markets are a bit confused about the interest rate situation.  The Fed released a statement that indicated the economy is stronger in their eyes than it was 3 months ago.  This piggybacked on top of the strong PPI released this morning would seem to indicate further rate hikes ahead.  The various talking heads had been debating whether there would be 2 more hikes or only 1–we will predict right now that a September rate hike will happen.  We are highly scientific – gut feel.  Both the CPI and the PPI are running kind of hot right now.  GDP Now is predicting a 4.6% in GDP growth for the 2nd quarter—we think this is poppycock–but even if it is 3.6% it is pretty damned good.  We already know that employment is running hot and the latest JOLTS (Job Openings and Labor Turnover report) report showed more job openings than available people to fill them.  Seems logical to believe that only a black swan event could derail the next rate hike.

As far as a rate hike in December–totally not predictable right now.  If we get long rates (7, 10 and 30 year) moving higher–at least to the 3.25% we expect we certainly can see further slowing in the housing market and likely will begin to see slowdowns in auto markets etc., but really it simply isn’t predictable at this point in time.

So at the same time the Fed is making noise on economic strength and GDP Now is predicting 4.6% GDP growth the yield curve flattened further.  The 10 year bounced off 3% before settling at 2.98% (up 2 basis points), while the 1 yr, 2 yr, 5 yr etc all moved higher by 4-5 basis points.  The difference between a 2 year t-bill and a 10 year treasury is a measly 39 basis points.

So all of this leads to a modest tumble in stocks.  Even though the hike met expectations the talk of strength spooked equity traders a bit–we think there could be interesting trading in both the stock and bond markets in the next few days.  We are also aware that the ECB could announce a winding down of their quantitative easing program on Thursday–so even more “fun” could be on the horizon.

 

 

Synovus Financial Sells Fixed-to-Floating Rate Preferred in Refi Transaction

Georgia banker Synovus Financial (NYSE:SNV) has sold a fixed-to-floating rate preferred stock. The initial coupon will be 6.30%

Being a bank this issue is non-cumulative, but is qualified for lower taxation rates.

The shares will trade with the fixed rate until 2023 and then will float at the pitiful rate of 3 month libor plus a spread of 3.352%. This is woefully inadequate for a issue that is rated BB- by Standard and Poors.

The proceeds of this issue will be used to call the currently outstanding 7.875% fixed to floating rate issue (SNV-C) which becomes redeemable on 8/1/2018.

The pricing for the new issue can be found here.

The issue is to trade on the OTC Grey market under the temporary ticker of SYNVP.

We Unload Our NuStar Baby Bonds

I know we have many holders of the NuStar floating rate senior notes (NYSE:NSS) that are on the site and I just wanted to pass on that I sold my personal holdings of 400 shares of NSS at $25.95.  Just too good to not lock down the capital gain at this point in time.

We had held these 400 shares since 5/2 and bought at $25.18.

As holders know we are in a “floating” rate period for these notes and the interest is being paid at 3 month libor plus a spread of 6.734% so should be in the 9% area right now.  This would give us an interest payment of around 56 cents/quarter.

Here is the detail on this issue.

We will look to re-enter the shares if they trade down at $25.10-$25.00 after going ex-dividend in a couple weeks.

RenaissanceRE Selling New Preferred Issue

Reinsurance company RenaissanceRE (NYSE:RNR) is selling a new preferred issue with a coupon of 5.75%.  Terms are normal terms with an early optional redemption starting in 2023.

The issue is non cumulative but is qualified for preferential tax treatment .

The issue is investment grade.

The permanent ticker of the issue will be RNR-F, but the issue will start trading on the OTC Grey Market as early as today under the temporary ticker of RNREF.

The pricing term sheet is here.

Thanks to reader Jon for the heads up on this issue.

The Summit is On and Markets Could Move

POTUS and Kim Jong-un are meeting at this moment as I write and as this is expected to be a short meeting I expect before I go to bed in 4 hours we will have some sort of news out of Singapore.

While there is not really any news that will likely be very meaningful coming out of this meeting markets can still be moved.  We can watch the Asian markets for their read on the summit.

If the meeting goes badly we could see bond prices rise a bit with a small rush to safety occurring and stocks could take a tumble.

More likely they will be meeting for a couple hours and then will release a statement that it went well and they will be scheduling a future meeting to continue talks.  If this occurs we could see stock prices up a bit with interest rates remaining flat or jumping a basis point or two.

No matter what happens tonight any affects will likely be very short lived as markets await the predetermined increase in the Fed Funds rate on Wednesday.

Monday Morning Kickoff

Well a new week kicks off and we can only wish it would be as quiet as last week was in the various markets.  Of course with the U.S./North Korean summit happening in Singapore and the rocky ending to the G7 meeting in Canada there is more than adequate material available for some unsettling presidential tweets.

The U.S. 10 year treasury traded in a range of 2.88% to 2.99% before closing the week at 2.94%.  There was minimal economic news of consequence released last week excepting the JOLTS report last Tuesday which showed plenty of job openings meaning there is plenty of potential for folks to demand higher wages for their services.

Of course this is an important week since we have the FOMC meeting starting on Tuesday with the announcement of a rate hike on Wednesday (at least that is our prediction) afternoon.  We don’t believe this will have a large affect on markets as markets have already pegged the odds of a hike at over 90%.  Prior to the FOMC meeting occurring the treasury will release the budget statement on Monday afternoon.  April showed a very large surplus in the budget, but May is expected to show a deficit of $144 billion and any sizable deficit above this expected amount could move markets as it will forecast the need for higher amounts of treasury’s being issued.   Also we have the Consumer Price Index report on Tuesday and the Producer Price Index on Wednesday.  While the PPI doesn’t usually move markets the CPI has the potential to move things as the markets are always looking for an excuse to move rates higher or lower.  Beyond these reports we have Retail Sales being released Thursday and Industrial Production being released on Friday–it is highly unlikely that these will be market moving announcements.

The Fed Balance sheet fell by an additional $8 billion last week after falling $10 billion the week before.  It is interesting to watch this fall and when matched up with the treasury budget statement which will be released tomorrow we might have an idea of the pressure on interest rates that may lay just ahead.

Last week we had just 1 new income issue price and that was a baby bond from Cowen Inc which priced a new baby bond with a coupon of 7.75%.  The higher coupon as compared to the older COWNZ issue which is outstanding and has a coupon of 7.35% is primarily due to the longer dated maturity in 2033.  COWNZ (the older issue) is trading around $25.08 right now and has a 2027 maturity date.  Given the maturity date 15 years out investors can expect to experience some interest rate risk (meaning sensitivity to interest rate movements) in this new issue.

The average preferred share or baby bond has risen in value the last couple of weeks to an average of $25.09 with just 170 issues now trading under $25/share.  It is always amazing how share prices are hard to keep down–they get knocked down and over time crawl back up–of course memories are short, but we know from tracking these things that the average share price $1.25 less than were they peaked a couple years ago.