Innovative Income Investor | Innovative Income Investor

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.

Priority Income Fund Posts Semi- Annual Report

Priority Income Fund (untraded) has posted their semi-annual report through 12/31/2019.

Priority Income Fund is a holder of CLOs (collateralized loan obligations).

The company has 6 outstanding term preferred which can be seen here.

The filing by the company can be seen here. Of specific note is the company has upped their allocation to CLO debt tranches to around 17-18%–of course this leaves them at 82-83% equity tranches which are typically higher risk.