CHS Files “Late Filing” Notice with SEC

We have been awaiting the filing of results for CHS for the fiscal year ended 8/31/2018 (see below).

The company has just now filed a NT 10K–an inability to file report in a timely fashion because of the earlier frand acts affecting years 2015-2018.

The company expects income before taxes for Fiscal 2018 to be approximately $671 million.

The filing can be read here.

No Traction In Preferred Stocks

As many readers and commenters have noted that even with the 10 year treasury dropping in yield and even with Jay Powells’ dovish comments preferred stocks continue to move lower.  We can verify that on average perpetuals continue to drop.  Of course averages are just that–averages and the numbers do not tell the tale for all investors.

A week ago the average $25/share preferred was priced at $23.77–today that average price is $23.58.  No only is this average down on the week–it is down by one of the sharpest weekly losses that we have seen in the last year.

Additionally a week ago we had 261 $25/share preferreds trading below  $25–today we have 286 issues trading below $25.  So while there are outliers dragging the average price down (such as Maiden Holdings, Amtrust etc) it is not just these few issues driving the preferred market.

While the economy is in ‘Goldilocks’ mode at the moment, obviously preferred shares are not following suit.

While we hold plenty of short duration securities the few perpetuals we do hold have caused a little damage.  Today, which is a big dividend day for us (because of all the monthly paying Gladstone issues), we end up near even for the day because we lose a dime here and a dime there on the perpetuals we hold and they balance the dividends received.  Frustrating.

We know everyone out there is going through the same situation and there are no magical answers to the problem, but we are relatively confident that absent a black swan event preferreds should start creeping higher very soon.  As we mentioned we are looking at entering more perpetuals toward the end of December and January (getting the Fed hike behind us) and we are hopeful for a stable preferred market by then.

In the meantime investors should be looking at their shopping lists–not for Christmas, but for their portfolios.  Preferreds from REIT Arbor Realty and MLP Nustar are extremely tempting, but it is too soon for us so we will build the list and wait another 4 weeks.



Giant Coop CHS Continues Late on SEC Filings

Giant Minnesota agricultural cooperative CHS (Cenex Harvest States) is now late with their original estimated late filing with the SEC for the year ending August 31, 2018.  The company had previously stated they would hope to have the filing submitted by 11/29/2018 (yesterday)–but as of this moment no filing is found.  Investors almost always assume the worst from a late filing–and to be later than the announced ‘hoped for date’ just adds fuel to the fire.

Recently (in October) the company announced that an employee had performed an act of fraud on the company and earnings were likely overstated by a total of $190 million over the course of 3-4 years.  Additionally this caused assets to likely be overstated by around $200 million.  Needless to say this event raises questions about how a singular person could execute a large fraud over a number of years without it showing up in an audit–obviously very materially poor checks and balances.

CHS is a $30 billion dollar revenue coop with total assets of $17 billion and as such this is a minor event—BUT anytime something like this happens it calls into question the competence of management and the financial systems in place.  Additionally previously, in 2015, the coop made an ill advised investment in fertilizer maker CF Industries after raising funds for their own $3.3 billion dollar nitrogen plant-which was subsequently cancelled.  This investment has been nothing short of a disaster.

Fortunately CEO Carl Casale was shown the door in May, 2017.  Mr Casale was an utter disaster.  In addition to the above a CHS affiliate in Brazil went bankrupt in 2017 and CHS was ‘surprised’ by the bankruptcy–this cost the coop $200 million.

In spite of the continual missteps the company had profits of $576 million for the 1st 9 months of 2018.  A strong balance sheet can mask a lot of poor management.

Recall that the company has numerous preferred stock issues outstanding and had been a ‘darling’ of investors for many years.  Those shares, which had already been knocked lower simply because they are perpetual preferreds continue to trend lower.

The CHSCM 6.75% Reset Preferred are now trading under $25 as shown below  (as called to our attention reader aarod)

At this point the CHS preferreds are moving into the ‘show me’ stage.  Show me that you have fixed the issues–show me you don’t have more issues–show me you aren’t such damned fools.

We await the recent financials and could initiate a tiny new position depending on the filing.  We say tiny because we need a higher level of confidence in management.  The balance sheet has been stellar–but is it real–we certainly hope so.

BDC Prospect Capital Prices New Baby Bond

Large business development company Prospect Capital (NASDAQ:PSEC) has priced a new $25 baby bond offering with a fixed coupon of 6.875%.  This is a strong coupon for an investment grade company.  The baby bonds are rated BBB- by Standard & Poors

This is a fairly small issue with 2 million shares with another 300,000 available for over allotment so the issue will sell fairly quickly once it hits the market.

The issue will have a maturity date in 2029 with an optional early redemption date starting in 12/15/2021.

There will be no OTC Grey market trading on the baby bonds and the ticker symbol has not been yet been announced.

The final prospectus can be found here.

PSEC has 2 additional baby bonds outstanding both of which have coupons of 6.25%.

PBB was sold in 2015 and further details can be seen here.

PBY was sold in May, 2018 and further info can be seen here.

Goldilocks Is In the Room

With the semi dovish speech by Jay Powell yesterday we have ushered in ‘Goldilocks’.  For me this means that I am now expecting as few as 1 Fed Funds rate hike in 2019.

All is great for now and the next many months as stocks have a more reasonable price and the 10 year treasury yield has moderated to the 3.06% area.

The Fed funds rate hike for December will happen–only the severe black swan event could change the inevitable hike.  Thats fine–our money market is now at 2.16% and this will raise it a bit more–a nice cash alternative.

In May, 2018 I wrote the following–

“The bottom line is I still believe that 3.25% on the 10 year is the right number for the end of the year.  If we saw this rate on a straight line basis the rates would move higher by 4 basis points a month throughout the balance of the year.  We would be very happy with that result.”

Since May the average $25/share preferred stock fell from $24.86 to the current level (as of last Friday) of $23.72.  This tells me that the average perpetual preferred holder has taken a 4% hit since May—so for all of us that are “green” we have done a good job–even if it is 1% green.

While we hit the 3.25% a bit earlier than my expectations the ‘stars aligned’ for the most part.  Even a blind squirrel finds a nut on occasion.

So back to 2019.  I believe we will see maybe a Fed Funds rate hike in June–and of course that is a maybe–and that is it for 2019.  I see GDP growth starting to taper off the 1st quarter and I hope maintains a 1.5-2%% growth through the end of the year.  Employment will weaken–not bad, but starting as early as January job growth will start stalling out–maybe 100,000-150,000 new jobs monthly instead of 200,000.  Inflation is a big unknown–but outside of the tariff situation with China it would seem reasonable to expect 2-2.5% next year.  The wage inflation I expected probably won’t happen much–a slowing economy will temper future wage increases.

Much of my data is purely anecdotal–what do I see in my neighborhood.  Housing is an issue–high prices and high interest rates.  Refinancing of mortgages is at the lowest level in 14 years and this ‘dry powder’ has fueled the strong consumer (like it did 10 years ago).  At the margins a 1% increase in housing interest rates is painful to modest folks.  Apartment building has been going gangbusters and rents are at sky high prices–overbuilt?  Credit standards in auto loans and house mortgages are too low–and this will come home to roost someday (not 2019 likely).  We need to watch Consumer Confidence very closely–I believe this will telegraph the future–thus far it has held up better than I thought it would, but with high profile job cuts at General Motors etc consumers begin to ponder their own circumstances and maybe pull in their horns a bit.

For me this personal forecast allows me to ponder additional perpetual preferred purchases.  The plan is to buy maybe a mortgage REIT perpetual (don’t know which but there are plenty to choose from), I am also looking at American Homes 4 Rent preferreds–they have numerous issue outstanding and have current yields just shy of 7% and the strong balance sheet can withstand rent stagnation.  Maybe an equity REIT preferred–not sure which one.  These are moves I think I will make starting the end of December.

So the bottom line is we think that “interest rate risk” is minimal for 2019, but of course with perpetuals there remains “duration risk”.

Lastly I have been concerned about the Federal deficits–we should all worry about those.  To date the huge deficits have been sopped up by bond buyers–BUT, tomorrow or next week or next year (or 5 years from now) buyers will reject the financials of the U.S.  It is near impossible to factor such an event into our financial plans–the day is coming–we just don’t know when it is going to occur.

My normal warning is that this is simply a lot of rambling on our part–how we see things and how we react.  Each individual is responsible for their own investments for their situation.


NiSource New Preferred Trading

As noted by our reader ‘Retired’ the new NiSource preferred issue which priced yesterday is not yet trading on Fidelity–BUT we have an modest order in on the eTrade system and we suspect it is available everywhere except Fidelity where they seem to have trouble being timely.

There are interest rate risks in a few years with this issue, but we are comfortable owning a modest amount for the next couple of years.

Shares are trading in a 24.70 to 24.90 with about 1.1 millions shares being sold as of 8:35 am.  This is a 20 million share issue.

NiSource Prices New Fixed-Rate Reset Preferred Shares

Utility NiSource (NYSE:NI) has priced their new Fixed-Rate Reset preferred shares with an initial coupon of 6.50%.

The issue is rated low investment grade by S&P at BBB- and is rated high junk by Moodys and Fitch at Ba1 and BB+ respectively.

The issue will carry the 6.50% fixed rate until 3/15/2024.  After this time it will float at the 5 year U.S. Treasury plus a spread of 3.632% until 3/15/2044 after which it will be reset at the 5 year U.S. Treasury plus a spread of 3.632% plus 1% (total of 4.632%).

These terms are somewhat better than I had expected and a 6.50% coupon for a few years from a utility is tempting–in spite of their troubles I mention below.  Given the size of this issue we will watch trading on the OTC Grey market for a few days before deciding if we want a piece of this one.

This will be a large issue of 20 million shares.

The issue will trade OTC Grey market on Thursday under the temporary ticker of NISOP.  The permanent ticker will be NI-B when it begins to trade on the NYSE.

The pricing term sheet can be found here.

CAUTION–Columbia Gas (a division of NI) was the owner of the natural gas service which exploded in Massachusetts in September.  This event has cost the company near $1 billion to date, although insurance is likely to cover much of this cost.  We make this notation for potential investors.

It’s Showtime for Jay Powell

Fed Chairman Jay Powell will speak in a couple of minutes and this will set the tone for stocks for the rest of the week–most likely it will be a ‘euphoric’ type rise in stocks.

Bonds will likely drift lower yet as Powell will set a more dovish tone.

We would like to watch the markets react over the course of the next hour, but instead we have to head out into a modest snow storm in central Minnesota and do a little work that buys the groceries.

Large Utility NiSource to Sell Fixed-Rate Reset Preferred

Electrical and gas distribution utility NiSource (NYSE:NI) is going to sell a fixed-rate reset perpetual preferred.

We do not recall a large utility selling this particular type of preferred in the past and we don’t find a similar issue outstanding right now.

The 1st call date is in 2024 after which the reset formulation–based on the U.S. 5 year treasury plus a margin kicks in.  It will be most interesting to see what the ‘spread’ will be in the reset period.

Preliminary information can be found here.

Balance Sheet Reduced by $39 Billion Last Week

After 2 weeks of virtually no runoff in the Fed balance sheet their assets took a pretty big plunge last week with a drop of $39 billion.  The Fed remains on track to meet their reduction of $45-50 billion of balance sheet reduction each month.

It is our belief that this runoff should have been started around 2 years prior to when it actually started–and at a more modest pace.  While the 10 year treasury remains somewhat under control at 3.05% this morning it remains to be seen whether this will continue.  Logically speaking there is less demand for government debt by a substantial amount with the Fed out of the market and at some point the Fed will be forced to reduce the ‘pace’ of the runoff as federal government debt continues higher and foreign buyers step back on purchases.

Below is the chart from the last 3 months showing the plunge in the balance sheet assets



Federal Reserve Balance Sheet Runoff Discussion

We are linking to an article in Bloomberg relative to the Fed Reserve Balance Sheet runoff which we mention each week in the “Monday Morning Kickoff”.  This is important to us as we see the balance sheet as the ‘dry powder’ the Fed needs to manage rocky economic times.

We link this article because the U.S. deficits continue to grow and these borrowing needs, in combination with the balance sheet runoff, will have very substantial affect on economic factors in the future (i.e. interest rates).

Unfortunately we seldom see articles on the deficit and/or balance sheet runoff–it is nice someone is paying attention.

The article can be found here.

Invesco High Income Target Trusts – 2023 and 2024

We have had some discussion in various comments on the website about the 2 high income target date trusts from Invesco.  Additionally someone had asked me to opine on which is ‘better’–so I did some ‘homework’ over the long holiday weekend.

The Invesco High Income 2023 Target Term Trust (NYSE:IHIT) was launched in November 2016 at an initial offering price of $10/share.  The initial NAV (net asset value) was $9.835.  The intention of the trust is to return the $9.835 on or about on 12/1/2023.

The portfolio held by the 2023 portfolio was composed of about 86% commercial mortgage backed securities, 10% REIT corporate debt and preferred stock and 3-4% other investments.  This portfolio was about 81% investment grade, 13% junk rated and 6% not rated.  This data is of 8/31/2018

The initial dividend on these Trusts are not announced for 45 days after the IPO and in the case of the 2023 trust the initial dividend (and all subsequent dividends) was declared at 5 cents/share monthly–6% annually.  We are not aware of any defaults within the portfolio since inception years ago.

The 2023 Trust has UNII (undistributed net investment income) of around 4 cents/share (although this amount moves around month to month) as of 8/2018.

Below you can see how the IHIT issue has traded since issuance.

The Invesco High Income 2024 Target Term Trust (NYSE:IHTA) was launched in November, 2017 at an initial offering price of $10/share.  The initial NAV was $9.835 and it is intended that this amount would be returned to the investor on or about on 12/1/2024.

The 2024 portfolio was composed of 70% investment grade securities (and cash), 12% junk rated and 18% not rated with 84% commercial mortgage backed securities, 10% REIT corporate debt and preferred stock with a little over 5% in ‘other’.

The initial announced dividend on this trust was 4.67 cents/per share monthly-5.6% annually where it has remained since the IPO.  The price of the trust fell substantially after the announcement of the initial and subsequent dividends.

The 2024 Trust has UNII of over 7 cents (as of 8/2018)

Below you can see how this Trust has traded since a year ago.

So we can see the facts of each of the trusts.

The 2023 Trust is higher in quality by a bit than the 2024 Trust, but the declared dividends on the 2024 have been measurably smaller than the 2023 trust and this is the likely culprit on why the 2024 trust has traded consistently below NAV.  NOTE that the NAV on the 2024 Trust is 9.79 while the NAV on the 2023 Trust is 9.97.  The 2024 Trust trades at a 50 cent discount to NAV while the 2023 Trust trades at a premium of 6-7 cents.


So if one were to assume no defaults in either portfolio prior to ‘maturity’ the Yield to Maturity on the lower priced 2024 trust would be around 7%, while the Yield to Maturity on the 2023 trust would be around 6%.

Based on what we know today we would purchase the 2024 issue at this moment.  NOTE that we currently own the 2023 trust (purchased before studying the details closely).  We may switch to the 2024 when opportunity arises.

Other considerations.

Both portfolios use 25% leverage and the cost of leverage has been rising substantially (as pointed out by Bea) and this may affect future dividends.

The 2023 is a much larger portfolio–around $240 million versus $80 million for the 2024 Trust.

As the portfolios move closer to ‘maturity’ it is likely that the dividends may be reduced as loans ‘run off’.

The 2024 portfolio is somewhat lower in quality and a year furtehr out to ‘maturity’ thus the higher Yield to Maturity may be warranted.


REIT Gladstone Land Acquires Texas Potato Farm

Agricultural REIT Gladstone Land (NASDAQ:LAND) has acquired a farm in Texas which is primarily used for growing potato chip potatoes.

LAND has paid $8.5 million for 3,667 acres.  The farm has 2,200 acres under irrigation with 12 wells on site.

The farm is currently leased to CSS Farms who is a national agribusiness specializing in potatoes.  Terms of the lease have not been released although we may see that in the coming days.

Gladstone Land has a 6.375% term preferred stock (NASDAQ:LANDP) in which we own a full position in at this time.  It is a monthly payer and has a mandatory redemption in 9/2021–shares became optionally redeemable in September, 2018.  The share price has slid some in the last month and closed today at $25.26 which is down 2-3% in the last month or so and  we are considering a small additional purchase of shares.

The press release on the new farm purchase can be seen here. 


Brunswick Corporation Prices New Baby Bonds

Recreational boat builder Brunswick Corporation (NYSE:BC) has announced the pricing on their new baby bonds.

The Senior Unsecured Notes will come with a coupon of 6.625% and will be investment grade per all 3 ratings agencies (S&P, Moodys and Fitch) with ratings of Baa2, BBB- and BBB respectively.

The company will sell 4.5 million shares ($25 baby bonds) with another 690,000 available for overallotment.  The issue will have an optional redemption date starting on 1/15/2024 at a price of $25, plus accrued and unpaid interest.  The notes will have a maturity date of 1/15/2049.

There will likely be no OTC Grey Market trading prior to trading on the NYSE since it is a baby bond.

The ticker has not been announced but it is likely to be BC-B (as the previous issuance was BC-A)

The pricing term sheet can be found here.



Brunswick to Sell Baby Bonds

Brunswick Corp (NYSE:BC) will sell a new baby bond issue with a maturity date in 2049.  It is likely that this issue will be rated low investment grade.

Standard quarterly interest payments will be made and there will be an early redemption period available to the company starting 1/15/2024.

The company currently has a 6.50% baby bond outstanding (NYSE:BC-A) which is trading at $24.90 which can be seen here.

Preliminary information on the new issue can be seen here.