March, 2020 | Innovative Income Investor

Round and Round We Go–or Is It Up and Down We Go

Equity markets remain pretty wild as everyone trys to figure out the longer term effects of the corona virus.

For us income investors it means a little more time to try to find some bargains. It seems everyone is trying to play the same game–maximize quality coupons with a little call protection. Quality issues over say 5.25% with a few years until potential calls are trading over $26 or $27–or even more and I have trouble pulling the trigger on these–but maybe there will be no choice.

I went ahead and added a little bit of the MVC Capital 6.25% baby bonds (MVCD) yesterday at $25.29. I did this with the knowledge of the partial call on 3/26–I already held a position so just added to it–I see it popped late yesterday to $25.56.

I am watching mostly (not all) investment grade issues right now–will try to add a few hundred shares here or there–hopefully with a little call protection, but it seems reasonable given my cash situation I may park in some issues without much financial call risk even if they are currently callable.

Awaiting Pricing on First Citizens Preferred

We are awaiting the pricing on the new preferred issue from First Citizens Bancshares (FCNCA) as it was not priced yesterday–which mcg noted in yesterdays comments.

It will have a permanent ticker of FCNCP when it does trade on the permanent exchange. It will likely trade OTC Grey market 1st, but the ticker has not been announced.

As Bob P noted if the coupon is decent (above 5%) this issue may trade hot out of the gate–but we will wait and see.

A Couple Partial Calls in BDC Baby Bonds

As pointed out by readers in the last couple of days there have been a couple partial calls of baby bonds by 2 BDCs.

Capital Southwest Corp (CSWC) today has announced a call of 1.4 million shares (just under 50% of shares/bonds outstanding) of their 5.75% Notes (CSWCL) Due 2022. The partial call will take place on 4/3/2020. Shares closed at $25.40 today.

MVC Capital (MVC) has announced last week that they will call 800,000 shares of their 6.25% Senior Notes (MVCD) due 2022–this is less than 20% of the baby bonds outstanding. The call is for 3/26/2020. These shares/bonds closed at $25.56 today.

Spam Filter is Being Touchy

Everyday for the last week I have found comments in the spam filter which I have had to manually approve. Most of these I find no reason for why the ‘system’ rejected them.

The spam filter is set up to flag the most serious 4 letter words–not all, but the worst of them.

Additionally it is set to ‘kick out’ anything from one particular commenter who I banned at least 18 months ago (the only person ever banned).

So if a comment section is not taking your comment, don’t take it as a ‘ban’ or anything like that–likely the spam filter didn’t like something. When you end up in the spam filer it temporary stops you from posting until I get it manually approved and then you can post.

I will try to figure out what setting I have control over that will stop this seeming random kickouts.

Shares Really Popping!!

All of the income issues–no matter how good or how junky are really popping today. I just reviewed some utility issues and they all seem to be up 25 to 50 cents. The 1 issue I bought late last week is up 78 cents since purchase. Wow!!

Again I don’t think that prices are moving on anything more than BS and computer trading–I do know that the algo momo folks love this movement–get on and ride the wave-at least for a few hours.

From last Fridays close here is what the $25/share preferreds and baby bonds look like.

The grand total average share is up 61 cents. Banks are up 68 cents, mREITs 50 cents, investment grade 60 cents, CEFs just 33 cents (but they fell the least last week) and lastly the shippers are up $1.26.

North Carolina Banker to Sell New Preferred Issue

Regional banker First Citizens Bancshares (FCNCA) has announced a new issuance of preferred stock.

This banker has $39 billion in assets and recently they did a roadshow with an investor presentation in support of their recently sold Subordinated Notes and for this issuance of preferred stock. You can see the presentation here.

It looks like this issue will come as low investment grade with a Baa3 from Moodys.

Dividends will be non cumulative and qualified.

The preliminary prospectus can be read here.

Thanks to EarlyBird for staying in tune with a slow new issue market.

Does Your Fixed To Floating Rate Security Have a Libor Floor?

A few of our astute readers (sorry lost track of who these folks were) commented recently that baby bonds of the First Internet Bancorp (INBK) have a clause in the floating rate reset determination section of the prospectus that states the following–

The key part is the last sentence which reads ‘if the benchmark rate is less than zero, then the benchmark rate will be deemed to be zero’.

While I don’t expect that we will see a zero 3 month Libor rate anytime soon, I also didn’t think we would see a 10 year treasury under 1%.

What this means is that if 3 month Libor went negative you would have a ‘floor’ coupon of the spread used to set the coupon rate. For instance the First Internet Bancorp 6.0% baby bond (INBKL) has a spread of 4.85% which will be added to 3 month Libor. Thus 4.85% will be the lowest coupon this floating rate issue would be reset at.

I did some random looks at other mREIT issues and did not find the language that set the 3 month Lior floor at zero.

This is likely not a big deal–BUT you may want to know if you have a floor on your floating rate issue–the details are in the prospectus of each issue.

Where Do We Go From Here?

I see the equity futures are up near 2% today–which means absolutely nothing except traders love the movements up and down. I think we all know by now that the coronavirus is going to mean the U.S. economy is going to take a hit–exactly when and how badly is the question.

The Fed went into panic mode yesterday with the 1/2% Fed Funds cut–I expected it, but think in general it is ‘balony’ (a technical term)–we already had low rates with a slowly softening economy and if someone believes that this will ‘juice’ the economy they haven’t been paying attention for the last 5 years.

Here is what I believe. I believe that we are slowly sinking toward recession. The corona virus will just give us that last push over the edge of the cliff. This could take 1-2 quarters to play out–and we will watch for further details, but you know there are more than 169 cases of the virus in the U.S. and that we will see widespread school closings and other business closings. The travel and lodging industry are going to be slapped pretty hard–and overall spillover affects will be pretty damaging.

With the above in mind I am continuing to watch the high quality, low coupon preferreds and baby bonds issues–i.e. CEF preferreds and utilities. I think in a few years we will look back and say ‘I wish I could get a safe 4-5% coupon’–well maybe the time to get some of them is now.

I bought some of the ELJ Entergy 5.25% baby bond last week around $25.00. This should be a good holding, but it is callable now so may not be around long. What I would like to have is the same coupon with at least 3-5 years until 1st call date–to try to assure myself I have locked in that rate for the foreseeable future with a quality company.

Fed Does Huge Repo Operation

The FED was in the market yesterday for $53 billion in a overnight operation–then today they came in for $100 billion in 1 day overnight repo–not sure I remember a $100 billion repo in the past–most have been in the $40-$50 billion range lately as the Fed tried to cut back on the ‘punch’.

Even this huge liquidity operation was $9 billion short of what banks were asking for–they submitted $109 billion in liquidity requests.

I don’t fully understand all of the ins and outs of this marketplace–but anytime something out of the ordinary happens it should be noted–obviously someone needs some liquidity.

You can see repo operations here.

I should add that banks requested $70 billion in 14 day borrowings–but the FED only gave them $20 billion—wierd.

Holy Moly!! WTH

I know you folks were all ahead of me in seeing the gains today in your accounts.

I was doing my real job for the 1st 90 minutes of the trading day and just opened my accounts–WOW!

Virtually all of my accounts have now garnered the losses from last week back again. While I am really happy about that I am not happy with how we got to where we are at.

Right now Jay Powell is on the tube–I long for the days when markets moved on fundamental data–not press conferences and interest rate cuts. Can anyone guess when interest rates rise again? Years ago I used to write that we are the next Japan–and we are–they have had negative interest rates for 20 years or so.

This is another chance to review accounts and if you were stuck with something you didn’t want last week you could consider lightening up on those issues and then ‘shop’ with the proceeds.

A person has to ask “are rates going to go higher or lower in the next 5 years’? If the answer is lower then the high quality, low coupon issues with call protection might be the deal of the decade–of course if rates move higher then you get hammered.

I did sell a little of the UMH-D just a bit ago–200 shares. I was up to 700 shares so wanted to take a little off that table–I continue to hold most of mine.