September, 2020 | Innovative Income Investor

A Decent Opportunity In This Insurance Issue

Below I outline a potential opportunity. Of course the issue is not investment grade and is non cumulative so it may not appeal to many–on the other hand where can you lock up 7.07%? The risk/reward seems reasonable.

Today the 7.00% resettable preferred stock (ARGO-A) from insurer Argo Group International closed at $24.91. This price is down from close to $26 a month ago. The coupon is fixed at 7% until 9/2025—thereafter it resets every 5 years at the 5 year treasury with a nice 6.721% spread. The issue is rated BB by Standard and Poor’s.

Reasonably this issue should trade around $26 or so.

A couple of comparable issues for reference. American Equity Investment 6.625% fixed-rate reset preferred (AEL-B) spiked up today to $26.27. The coupon is fixed until 9/2025 and it is rated BB. After this it resets every 5 years at the 5 year treasury plus a spread of 6.297%.

The Enstar 7% fixed to floating rate preferred (ESRGP) carries the 7% rate until 9/2028 and then floats at 3 month Libor plus a spread of 4.015%. The issue closed at $26.27 today which was a drop of 75 cents. This issue is rated BB+.

As always this is not a recommendation–just an idea.

Public Storage Prices New Preferred Issue

Storage giant Public Storage (PSA) priced their previously announced new preferred issue.

The coupon will be 3.875%–not a giant surprise since they priced an issue in August at 4.125%.

The issue is rated BBB+ by Standard and Poor’s and A3 by Moody’s. Investment grade.

The issue is cumulative and non qualified.

All of the company’s outstanding preferred issue can be seen here.

The pricing term sheet can be found here.

Public Storage to Sell New Preferred

Self storage giant Public Storage (PSA) has announced that they will issue new preferred stock.

The company which has long depended on preferred equity issuance to finance the business currently has no older issues redeemable. The PSA-X and PSA-W issues will be redeemed tomorrow (both 5.2% coupons).

There is a 5.40% (PSA-B) issue which will be redeemable 1/31/2021. This issue is trading at $25.73 right now and holders may want to consider exiting now–this issue will be called 1/31/2021 and thus has about 50 cents worth of dividends to be collected up until call date.

All of their preferred issues outstanding can be seen here.

The preliminary prospectus can be read here.

If you prefer was right on top of this with EarlyBird and mcg chiming in. EarlyBird says ‘yield talk’ is in the 4-4.125% area. If you Prefer is tossing out a 3 handle guess.

Altera Infrastructure Preferreds Zoom Higher

I see that the 3 preferreds from Altera Infrastructure are moving strongly higher today.

The move higher is on an announced open market buyback of shares as they have been trading down in the $14/share area. Altera is the old Teekay Offshore which is now owned by Brookfield Business Partners (BBU)–part of giant Canadian asset management firm Brookfield

All the preferreds are now trading up $2-$3/share. You can see the issues here.

You can read about the buyback here.

Utility Entergy Texas Comes a Calling–UPDATED PRICING

UPDATE–They garnered a 1.75% coupon on the new issue–maturity in 2031.

Pricing term sheet can be found here.

Entergy Texas will be calling some or all of their 5.625% 1st Mortgage baby bonds due 2064 (EZT). These 1st became callable 6/1/2019.

The company will be selling some 1st mortgage $1,000 bonds with proceeds to be used in the redemption.

EZT had traded as high as $27/share a month ago–but had drifted lower in the last month to now trade at $25.40

The prospectus with the ‘use of proceeds’ statement can be found here.

With the various recent calls everyone should be on notice that these utilities will be calling issues when possible with proceeds from low coupon bonds (2-3%)–and who can blame them.

Monday Morning Kickoff

The S&P500 had another down week last week–but not by much as a frantic rally on Friday helped the week. The index had a low of 3209 with a high of 3320 before closing the week at 3298 which is 2/3% lower than the Friday before.

As has been the norm for weeks (if not months) the 10 year treasury closed at .66% with the yield running between .65% to .69% on the week.

The Fed balance sheet continued its climb adding $27 billion in assets after adding $54 billion the week before.

The average $25/share baby bond and preferred stock closed last week 15 cents lower than the week before–the losses would have been 27 cents/share, but a rally on Friday moved prices higher. CEF preferreds fell by 47 cents–the big loser on the week. Utility issues fell by 9 cents, banks by 7 cents and investment grade by 10 cents.

Last week it was relatively quiet in the new issue arena with just 1 baby bond issue announced–no preferreds were offered.

DTE Energy (DTE) sold the only issue last week.

The Junior Subordinated Debentures were priced at 4.375%

No ticker has been announced. It is likely this issue will start trading this week.

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Waiting on Stimulus Common Stocks Don’t Know What to Do

Almost without doubt equity markets are waiting on stimulus from congress. Like a junky looking for their next ‘fix’ this market is built on the Fed printing press and the big spenders in the government. Actually after all the months of crazy large gains in common shares it is nice to see a little reality come into the picture.

Income investors aren’t seeing many bargains in issues above average quality. The average $25/share preferred or baby bond is off just 1.3% this week–and given the level income issues have been trading at most are still at sky high levels—although given the other options available it is understood. Watching the utility issues, where I would like to buy, we have seen a 1% drop in values–still presenting a pretty lousy yield to call picture, but maybe that is simply the way it will be in the future. A number of commenters have noted the low coupons that are being garnered in the bond market–30 year notes down in the 2.5-3% area–why issue high coupon preferreds?

The big losers this week are some of the ‘junky’ issues–i.e. Hersha Hospitality (HT) preferreds, which are trading with suspended dividends. Each of their issues (3 of them) are off $1/share. Honestly the junky issues are just getting ‘put in their place’–trading down where they should be given the high risk they present.

I remain in the 70% area and continue to look for bargains–although I may be looking for a long time. We’ll see if congress rides in on their white horse to save the day—if not bargains may yet appear.

The Ashford Hospitality Death Spiral Continues

Lodging REIT Ashford Hospitality (AHT) continues down the road to insolvency.

It is likely many of you have followed this saga, but new twists and angles continue to be unveiled. I follow it a bit–not close as I have no dog in this fight.

AHT has 5 perpetual preferreds outstanding–which you can see here. Dividends have been suspended on the shares and each of the issues have tumbled another 25% in the last few days as survival seems bleak–all now trading in the $3’s.

AHT has offered an exchange of 5.58 common shares for each preferred share–or alternatively, for a very limited number of preferred holders, $7.75/share.

AHT currently has around 13 million common shares outstanding and the current offer on the table to the preferred holders would expand the number of common shares outstanding to a massive 140,000,000 shares.

Current common holders seem to be screwed no matter what they do. Common shares holders must be asked for approval to issue the new shares to the preferred holders–if they approve the exchange they will instantly be diluted into oblivion–if they don’t they can ride shares into Chapter 11 (maybe).

Preferred holders are pretty well screwed as well. They have been offered common shares which were trading higher when the exchange offer was made–but now are at $1.71/share today. If they do not exchange their shares the company is looking for approval to give them 1.74 common shares for each preferred share, instead of the 5.58 shares noted above.

Pile on top of this Cygnus Capital–a dissident holder has now come out against the exchange offer. Whether they have a clue as to what they are doing is anyone’s guess. Management obviously thinks Cygnus is clueless and has responded.

All I can say is ‘what a damned mess’. AHT now has a market cap of $24 million and debt of $4 billion — at least they had that debt before they turned over the keys on many of their hotels.

Regardless the saga may be drawing to a close soon.

DTE Prices Baby Bonds

DTE Energy (DTE) has priced the previously announced baby bonds.

The Junior Subordinated Debentures are priced at 4.375%–right where razorbackea said they would price.

The company can defer interest payments up to 40 consecutive quarters (10 years) without being in default.

No ticker has been announced. It is likely this issue will start trading next week.

The pricing term sheet can be read here.

DTE Energy To Sell Baby Bonds

Michigan utility DTE Energy (DTE) is coming to market with new junior subordinated debentures.

The company will call their junior subordinated debentures with a 5.25% coupon (DTQ). This issue has been callable since 2017 and is the only issue currently callable.

The company has numerous issues outstanding which can be seen here.

The preliminary prospectus for the new issue can be found here.

j was right on top of this new issue.