Innovative Income Investor | Innovative Income Investor

Saratoga Investment – Pick Your Poison

Business development company (BDC) Saratoga Investment Company (SAR) has recently sold 2 new baby bond issues.

The issue sold in April came with a 6% coupon (SAT) and trades at $23.15 today for a current yield of 6.47% The issue sold in October came with a juicy 8% coupon (SAJ) and today trades at a price of about $25–of course a current yield of 8%.. SAR also just sold a 8.125% issue which are not yet trading.

So which is the better buy of the 2 issues? It is not a simple question and more needs to be known on an investors intentions. Are you going to sell prior to maturity (both in 2027)? Do you anticipate that rates will be lower in 2024 than they currently are and SAR will be able to ‘refi’ the 8% notes? Both issues have 1st call dates in 2024.

So yield to maturity (full maturity) on both issues is around 8% right now. Yield to first call date in 2024 is about 8% on the 8% issue and almost 12% on the 6% issue. So it would appear that it is near a toss up unless you think rates are going to plunge back toward zero in which case the 6% issue would be superior.

Markets Facing Up to Reality

The hawkish tone of the Fed is coming home to roost today in equities and I think we can take J Powell at his word. As it stands today – another 50 basis point rate hike on 2/1/2023 (my words not his).

The S&P500 is off a giant 2.5% at this moment–and at the low of day.

Todays unemployment claims number was below expectations–employment would appear to be remaining relatively strong. Other economic signs were kind of weak–but far from falling off a cliff. But through all these economic signs the 10 year treasury is off 4 basis points around 3.46% as the bond market continues to see weakness sometime in the future. Plenty of cross currents in these markets.

Just ‘eyeballing’ preferreds and baby bonds they appear to be generally red–but more of the nickel and dime stuff–nothing serious. The last time I said this mid day prices hammered lower in the afternoon so hope this isn’t jinxing things for the rest of the day.

Well let’s see if the markets can turn a bit higher for the rest of the day–but as I type the S&P500 is at the low of day.

Lots of Minor Economic News Today

Well we had the main shows for the week yesterday and Tuesday with the CPI and the FOMC rate hike. Today we have a gaggle of minor reports which shouldn’t move markets much, but one never knows anymore.

Right now equity futures are down over 1% and interest rates have ticked down by a few basis points to 3.45%–it will be interesting watching how interest rates react to having no super major news for a few weeks–maybe we will just drift for weeks–that would be welcome.

I continue my streak of doing nothing (as far as selling or buying)–I did open my accounts to see that they were a bit ‘green’ yesterday–a tiny bit. December is a big month for my accounts for dividends and interest so I have that to look forward to for the end of the month. I doubt I will do anything to speak of as far as selling and buying for the balance of the month–it seems odd to be fully invested without reason to buy or sell.

Well let’s get this day going and see where we end up.

B Riley Investment Comes Home to Roost

Today B Riley Financial (RILY) has posted today an ‘open letter’ to board members and shareholders of a company which they have lent money.

In this case RILY lent money to a crypto miner named Core Scientific (CORZ) who quit paying interest and principal on loans in late October and now has threatened bankruptcy. In typical RILY fashion RILY has offered incremental financing to keep them out of bankruptcy. RILY’s loan was only $42 million and they have offered another $72 million in new money.

I don’t claim to understand Core Scientific (or any crypto miner), but I do know that RILY has made significant loans to marginal company’s in the last couple of years (i.e. Babcock and Wilcox (BW), Arena Group (AREN) and others) and I mentioned this a few years ago on this site–I own no RILY securities, but I do worry about their finances as there is significant incestuous activity at play here.

Please make sure to do your deep due diligence on your B Riley investments (i.e. baby bonds). I know a few authors on SA push the baby bonds and they are likely ok–but just the same understand what you own.

The open letter is here.