Added New OFS Capital Baby Bonds to Medium Duration Portfolio.

After trying to buy the new 6.375% baby bonds from OFS Capital last Friday at $24.80 and failing we did snag shares this morning for $24.90/share (bond).

These shares go into the Medium Duration Portfolio which brings the portfolio to 91% invested.  Unfortunately on Friday 4/27 our long held Arbor Realty baby bonds (ABRN) will be called in which will generate $10,188 in proceeds.  Buying the OFS shares while losing the Arbor Realty bonds means we lose a full percentage point in coupon as the ARBN bonds had a 7.375% coupon.  This means that when the week ends we will be back to around 80% invested–10% under where we want to be as we plan to hold at around 90% awaiting a super bargain (from where I don’t know, but we want a little dry powder).

Recall that this portfolio is very close to how we handle our own personal holdings.  We have many more issues overall, but that is a function of the size of the portfolio.  This portfolio is a $100,000 model and because of the modest size it is easy to monitor.  The model currently contains 10 issues.  Since the portfolio was conceived on February 8th it is just now beginning to break into the “black”.

No flipping or trading occurs in this portfolio. Our preference is to be “buy and hold” as we don’t have time to monitor and make changes on a constant basis.


Large BDC Hercules Capital to Sell Baby Bonds

Business development company Hercules Capital (NASDAQ:HTGC) will be selling a new baby bond with a maturity date in 2025.  It is likely the company will use some of the proceeds to retire the 2024 baby bonds, which had already had a partial call and which carry a coupon of 6.25%.

The terms are fairly normal with quarterly interest payments and an early optional redemption becoming available to the company in 2021.

The issue has not yet been priced, but it is expected to be in the low 5’s—too low to be of interest to us.

The preliminary prospectus for the issue is here.

The anticipated ticker for the new issue will be HCXZ–but this may change.

Monday Morning Kickoff

Whew! Last week was a bit wild and woolly, but we got through it as you all did and likely in fine style. Even though the 10 year treasury popped to end the week at the highest yield in 3 1/2 years at 2.95% most well positioned income portfolios suffered losses measured in $100’s not in $1,000’s. Anytime you can get through the week with tiny losses on a 14 basis point interest rate move higher you should count yourself fortunate.

So the 10 year treasury traded in a range of 2.81% to 2.95% ending the week at the high point.  The higher rates can only be blamed on 2 things–a heightened fear of inflation and a bunch of yakking out of Fed presidents as they mainly talked hawkish relative to fed funds interest rate hikes through the balance of the year and in to 2019.  Our suspicion is that we likely will see long rates temper a bit as the coming week wears on.  As we all know it isn’t pure interest rate levels that are deadly to income investors it is the speed of the movement.

So for the coming week we have exactly ZERO Fed presidents scheduled to speak.  We are always best to have no conflicting data spewing from their mouths since their economic guesses are no better than yours or mine.

We do have what I call minor data points being released this coming week.  Monday we have the Purchasing Managers Index being released as well as Existing Home Sales.  We see neither report being meaningful.  Housing sales will be flattish as there is little to be bought as inventories remain extremely tight everywhere.

Tuesday brings bunches of housing information as the Case Schiller housing price index will be released.  The Federal Housing Finance Agency will also release their housing price index.  Both will likely continue to show continued movement higher in prices.  Additionally New Homes Sales data will be released.  As we see it buyers are chasing fewer available properties and driving prices up—with lenders such as Fannie Mae and Freddie Mac helping to fuel the fire of higher prices.  Everyone talks affordable housing so they continue to lower credit standards and down payment requirements.  Quasi government agencies compete against each other to see who can write the most risky loans–more and more conventional loans are being written with 3% down.  To us a 3% down payment is equivalent to ZERO down–a job loss, divorce or medical emergency is plenty for these folks to fold their tents and walk away from the loans.

On Thursday we have the Durable Goods Orders for March being released and we expect it will be a meaningless report to the markets.  Additionally both retail and wholesale inventories will be released–again not important.

Friday we have the 1st estimate for 1st quarter GDP and the expectation is for a modest 2% annual growth rate.  Major surprises below 1.5% or above 2.5% could cause movements in interest rates and equity markets.  We also have the Employment Cost Index being released and again this could cause movement if the number comes in hot with gains in wages and benefits–confirming potential inflationary times ahead.

Of course there are other economic reports all week long but in any given week there is little that is meaningful to day to day trading in equities and interest rates.

Relative to interest rates moving higher we watch the Fed balance sheet runoff closely and there was no run off last week.  This leaves the Fed further behind the curve on the runoff–which is ok as they likely would not be able to meet their announced schedule of $30 billion a month – of course their announced schedule of $50 billion/month later in the year was always a joke, but we shall see.  If they all of a sudden meet their goals we will see interest rates, on the long end, shoot sharply higher–very quickly.

Last week we see that 198 $25/share preferred stocks ended the week selling for less than $25 compared to the same, 198, a week ago and the average preferred stock ended the week ended the week at $25.01—a gain of a penny from a week ago.  This is in a week which saw the 10 year sprint higher.

We had just 2 new issues being priced last week.  Eagle Point Credit Company (NYSE:ECC) priced a 6.6875% baby bond issue.  This issue will trade under the ticker of ECCX, but has not yet begun to trade.  Giant MLP Energy Transfer Partners (NYSE:ETP) priced a fixed-to-floating rate preferred at 7.375% initially.  The issue will be fixed until 4/2023.  The issue is trading under the temporary ticker ETPPP on the OTC Grey Market right now (with the wrong name on the chart–Sunoco who they recently merged with).

The baby bonds from OFS Capital (NASDAQ:OFS) which were issued 2 weeks ago began trading last week–we attempted to buy this issue at $24.80 on Friday, but our order was not filled–we will try again today at $24.90 and likely will succeed.

At this moment as we write the 10 year treasury is trading at 2.98%, but if the notes traded with a yield much higher this week we would be surprised. Of course no one knows for sure so investors should have their seat belts fastened in case it spikes as a potential mini-panic is possible in preferred stocks and baby bonds.


Retail REITs fall to Multi Year Lows–Most Income Issues Hold Up Well

We had to be out of the office for 4 hours today and certainly we missed some exciting times (although not of huge meaning to us).

What we noticed today was the beat down many of the Retail related REITs took. KIMCO was slapped down to a low not seen since 2009. But as some on Seeking Alpha claim–no problem because you haven’t lost anything until you sell.

Tanger Outlet Centers (NYSE:SKT) is almost in the same boat—bouncing on lows that they hit earlier this year, but previously not seen since 2010.

Believe it or not the average preferred stock and baby bond today was dead flat. We’ll take that given the direction of interest rates.

There was some interesting trading going on in individual preferred issues today. Below you can see that the GDL Fund preferred (a $50 issue) fell big yesterday and gained it all back today–happened so fast we couldn’t react.

We will write more when we have time to digest all the data.

Baby Bonds to Trade Today-Corrected

We have corrected the ticker which has been changed from the planned ticker.

The new OFS Capital baby bonds (NASDAQ:OFSSL) will begin trading today.  Of course depending on your broker they may or may not have their database updated.

OFS is a business development company (BDC) which has performed fairly well over the last couple of years and holds mainly senior secured floating rate loans.

This issue has a meager coupon of 6.375% but has a desired maturity in 2025.

We will be a buyer of these shares for various portfolios–models and personal.

We had done a modest drill down on OFS last week.

Our plan personally is to hold these until a weak economy is detected and at that point we would likely need to exit as we have little faith in BDCs holding risky loans in a weak economy.

Monthly Paying Preferred Stock List

While the number of preferred stocks paying monthly dividends grows smaller and smaller there remains a group paying that way and some of them are our favorites.

Our listing is complete (I think) and includes just preferreds.

Of course many of the issues outstanding are from the many Gladstone companies that are out there.  Gladstone Investment and Gladstone Investment are both BDC’s and while we likely will seldom own a BDC we own most of the preferreds.  Many of the Gladstone issues are “term Preferreds”, but not all.

Some of the issues are from Puerto Rican banking (or finance) companies.  First Bancorp, OFG and Popular Bank are all Puerto Rico based.  Whether being in Puerto Rico is a plus or a minus we leave up to the investor.  We do not currently own any of these issues.

One should note that a good share of all of the issues are now in the optional redemption period.  Honestly we like to buy issues trading in the optional redemption period as long as they are not more than a dividend or so above the liquidation preference ($25).  Issues paying a monthly dividend trade with less volatility–part of it is simply that on ex-dividend date they are only marked down by a month dividend instead of the quarterly amount.  Additionally the monthly payers provided a nice monthly stream of income.  Lastly we always say “a bird in hand is worth 2 in the bush” and it is always better to have the money in our pocket rather than the companies pocket.

The list is here.


Another BDC Seeks Approval for Lowered Asset Coverage

BDC New Mountain Finance (NYSE:NMFC) has announced it is seeking approval from shareholders to lower their asset coverage ratios from 200% to 150%.  The change would be effective in about a year.

NMFC claims this will allow them to “earn their dividend”.  NMFC currently has a yield of over 10%.  Seems to me investors are already telling them there is plenty of risk in the business–if they didn’t think so they wouldn’t be demanding a 10% yield.

When we hit the next recession we will wave goodbye to some BDC’s as there should not be any doubt in anyone’s mind that the more “rope” you hand a BDC the more likely they are to use the rope to hang themselves.  Remember that we are already in the position with most BDC’s to “just trust them” to value their assets correctly for coverage purposes–now we have to trust them a little more.

New Mountain’s press release is here.

Disclosure–we own term preferred shares of Gladstone Investment and Gladstone Capital–both BDC’s

Interest Rates “Want” to Go Higher

As I suspected would happen we didn’t see the 10 year treasury spend too much time in the 2.70’s%.

After spending almost the entire month of March in the 2.80-2.90% area rates fell into the 2.70’s in later March and into the first 7-8 days of April. Then yesterday rates popped by 6 basis points–based on?  Maybe a touch of inflation is in the air as we see crude oil prices touch levels not seen for a long time–3-4 years.  Add to this the spouting of Fed presidents talking about rate increases and you have a recipe for higher rates.

This morning we are right around 2.90%.  We have entered the territory where we could get a knee jerk move to 3% or a touch higher—this could set off a short term panic in perpetual preferreds–if rates were to move 10-12 basis points in a day.

Income investors need to be mentally prepared for this possibility–and a little dry powder would be helpful as bargains may arise.

As we have contended for maybe the last 6 months rates are very firm based on huge treasury issuance to fund the deficit as well as continued runoff of the Fed’s balance sheet (although this has been modest to date).  If the economy is just “so-so”, which is what we believe, rates can still move substantially higher.

Dynagas LNG Partners Slashes Distribution

Dynagas LNG Partners (NYSE:DLNG) has cut their quarterly distribution from 42.25 cents to 25 cents.  DLNG is an owner of a small fleet (6 ships) of LNG ships.

Dynagas has 1 preferred issue outstanding and shares fell 40 cents today, while the common units fell by about 10%.

DLNG had focused on securing shorter term contracts for their LNG ships, but have now switched to longer term contracts which gives them greater visibility to cash available for distribution.


Energy Transfer Partners Prices Preferred Units

Huge MLP Energy Transfer Partners (NYSE:ETP) has priced a large offering of fixed-to-floating rate units with an initial coupon of 7.375%.  The fixed rate will remain until 4/2023 at which point the coupon will float quarterly at a rate of 3 month Libor plus a spread of 4.53%.  While the initial is pretty decent for a quality company the floating rate spread is less enticing.

Dividends are cumulative, but will not be qualified for preferential tax treatment.

The offering is 18 million units with an additional 2.7 million shares set aside for overallotment.

The shares will begin trading tomorrow (Thursday) on the OTC Grey Market under the temporary ticker symbol of ETPPP.

Owners of the issue will receive a K-1 at tax time instead of the preferred 1099.

The pricing term sheet can be found here.

MLP Giant Energy Transfer Partners to Issue Fixed-to-Floating Preferred

Energy Transfer Partners (NYSE:ETP) will be selling a new fixed-to-floating rate preferred.  The issue will generate a K-1 at tax time.

The issue has not yet been priced, but will have a 5 year optional redemption time frame–this is a bit unusual as many times fixed-to-floating rate issues have longer fixed rate periods (as long as 10 years).

The issue will trade under the ticker of ETP-C when it reaches the permanent exchange.  It will trade on the OTC Grey Market under ticker ETPPP prior to big board trading.

ETP doesn’t have any $25/share preferred trading, but does have a 6.25% and 6.625% $1000/share issues outstanding.

The preliminary prospectus can be found here.


Eagle Point Credit Company Prices Baby Bonds

6:30 am

Specialty finance company Eagle Point Credit Company (NYSE:ECC) has priced their new baby bonds at 6.6875% with a maturity in 2028.

The ticker for this new issue will be ECCX and it should trade later this week or early next week.  No OTC Grey Market trading is expected.

While the coupon on this issue is not too bad we find the 2028 maturity about 3 years too long for us.  We will not be purchasing these baby bonds unless they trade down to $24 or so.

If you review our Medium Duration Income Portfolio you will see that the vast majority of issues mature between 2021 and 2024, although there is 1 issue in 2027.  At this time we don’t want to go longer as the longer we go the higher the interest rate risk and that defeats the purpose of this portfolio.  For the same reason we won’t purchase now for personal holding.

We will write more on ECC in the next couple of days.

The pricing term sheet can be found here.

Wrapping Up the Preferred Stocks of REITS List

We have updated our list of preferred stocks that have been issued by REITs.

While REITs offer cumulative preferred stocks they are NOT qualified for preferential tax treatment.

We believe our list is now up to date and 98% complete.  There are always a couple issues that get overlooked, but we will keep proofreading our lists to pickup those last missed issues.

Our list is here.

Under the preferred stock “tab” you can find all of the various lists published to date.  There are more to come as time goes by.


Any ticker symbol that is linked can be clicked to go the recap page for the issue and the issue chart.  We continue to add data and we continue to have our technical folks (contract people who we pay for by the hour) rearrange information.

Most recently you may notice that our website URL has a little padlock and “Secure”.   This simply mean that I own the site and I am who I say I am (Tim McPartland).  While we could have save $120 by foregoing a secure site, Google and other search engines will “demote” sites that are not secure.

Eagle Point Credit Company to Issue Baby bonds

Specialty finance company Eagle Point Credit Company (NYSE:ECC) will be issuing a new baby bond with a maturity date in 2028.  They will issue 2,000,000 shares plus another 300,000 to be reserved for overallotments.

Pricing has not been announced as of yet, but the proceeds are going to be used to early call the ECCZ issue which matures in 2020.  This  issue became optionally callable on 12/31/2017.

Preliminary details are here.

Unfortunately we personally own a few hundred shares of the called issue meaning we will have to find a suitable replacement.

Mid Day Ramblings

Interest rates started the day off 3 basis points higher, but now have drifted back down as there is no impetus to go higher at this point in time.  Not much news of consequence although retail sales were announced higher than anticipated–up 6/10% versus consensus of up 4/10%.  Yawn.

The DJIA is up quite a bunch at near +300 points–but it is quiet–orderly.

Preferreds and baby bonds are flat on the day again–in the last week the average $25 share has traded in about a nickel range–talk about quiet.

We do note that our Spark Energy 8.75% Fixed-to-Floating Preferred (NSADAQ:SPKEP) is back over $24.50 after a trip last month to $23 last month.  Braver folks could have picked up a nice ‘flip’ at this price–we had an average buy around $24.27 (actually I forget the exact number) so we are in the green and pick up a nice 54.7 cent dividend today (although eTrade hasn’t credited the account yet)–we are happy.

We await the trading of the OFS Capital baby bonds (NASDAQ:OFSL), which is not showing on the brokerage database yet.