Interest Rates Continue Drift Down

In what is a move that is contrary to logic interest rates have continued to drift lower.  The 10 year is at 2.76% as we write which is just slightly lower than yesterdays close, but 18 basis points lower than just a week ago when rates touched 2.94%.

Our personal viewpoint has been that the 10 year treasury would close the year around 3.25% driven almost entirely by the run off of the Fed balance sheet and the need for the treasury to raise almost a trillion dollars to fund the government debt.  This continues to remain logical to us.  Our problem is that markets are not always seemingly logical.

For the moment we will continue to hold this point of view on interest rates.  We have a long way to go before this year is over and so much government debt to sell that it is hard to change our logic.  Our entire investing strategy has been based upon rates moving higher.  We have built our portfolios based upon shorter maturity holdings.  By holding shorter maturity issues we have to forego about 1% in yield as perpetuals generally are higher yielding.  At what point do we throw in the towel and admit we were wrong?

We will not make any wholesale changes in our holdings if we are wrong.  We will simply “ease” into select perpetuals, both fixed rate and fixed to floating rate issues.  It is not urgent that we gain extra yield–sleeping well at night is much better.

 

Recent New Issue Update

Just a quick review on the recent new issues now trading.

The new Allstate Corporation non cumulative 5.625% preferred began trading on the OTC Grey Market yesterday and is right around $25/share. We would expect (as would some of our readers) that the shares will have a shot at $25.50 once they get to the big board–maybe a 50 cent flip is in order for those so inclined. When this 20 million share offering was announced the other 5 preferreds outstanding from Allstate took a bit of a tumble.

Insurer WR Berkley issued 5.70% subordinated debentures (NYSE:WRB-E)  recently  and they have not yet begun trading.  There are 3 other WRB debentures outstanding and the 5.625% issue is trading at $25.12–down from $25.50 when the new issue was announced.  We expect the new issue to trade up toward $25.25 when trading begins.

The Tristate Capital Holding 6.75% non cumulative fixed to floating preferred offering has been trading strongly up near $26 and closing today at $25.88.  The issue begins trading tomorrow on the NYSE.

The investment grade Apollo Global Management 6.375% issue (NYSE:APO-B) has traded weakly and is now at $24.82

The 7.125% QTS Realty cumulative preferred (NYSE:QTS-A) has traded around $25 closing today at $25.28. QTS is a data center REIT.

The Compass Diversified  LLC 7.875% fixed to floating preferred (NYSE:CODI-B) continues to trade very poorly at $23.70 3 weeks after issuance.

Lastly utility CMS Energy 5.625% subordinated debentures  (NYSE:CMSA) have traded right around the issuance price of $25.

So what does this tell us?  The most obvious is that any issues with a K-1 attached to ownership (Apollo and Compass)  are truly unloved.

And as we have noticed before any banking issue with a coupon up in the high 6’s have traded strongly in the last year.  These are typically junk rated issues.  Those such as the low coupon Webster Financial (NYSE:WBS-F) which is slightly higher quality than the Tristate Capital Holding mentioned above, but has a meager 5.25% coupon has traded poorly at $24.15 3 1/2 months after issuance.

It would appear whether an issue has cumulative dividends or is non cumulative and whether dividends are qualified or not has little impact on the trading strength of a new issue.

This short bit of history may help investors to choose which issues to buy on the OTC Grey Market in the coming months.  There is nothing more disheatening than buying a new issue at $25 and watching it fall to $24 within a month (we have experience in this as have most investors that have been active in the new issue market).

Landmark Infrastructure Prices Floating to Fixed Preferred

Landmark Infrastructure has priced their floating to fixed preferred issue.

It starts off with a floating coupon of the greater of 7% or 3 month libor plus a spread of 4.698%.

In 2025 it will go to a fixed rate 9% (wow).

We don’t have time to look this over now, but will later.

The press release is here.

 

Treasury Sells Near $300 Billion in Notes/Bonds and Rates Fall

It is most incredible that in one of the largest weeks for sales of treasury securities in memory that the 10 year treasury is falling in yield.

The treasury is selling near $300 billion in securities this week and it is almost inconceivable that interest rates are falling.  Are there that many people (or governments)  licking their chops to take down a 2 of 3% yield?  I guess there is demand–and we need to see where this is all coming from–but all  the research takes a bunch of time which we don’t have right now.

The 10 year has been as low as 2.79% today and we will have to see if rates get driven a bit higher for the close to complete another day of rates in the 2.80%’s.

Very strange–very confusing.

Allstate Prices Preferred and OTC Grey Market Trading Begins

Large insurer Allstate (NYSE:ALL) priced their new preferred stock at 5.625% which is pretty much were we thought it would come in.

Of course the issue is non cumulative and perpetual and as such we have no personal interest in it at this time, although purely on a safety basis it is a decent issue.

The company has 5 other issues outstanding and they trade strongly between $25.59 and $26.33 with coupons of 5.62.5% to 6.75%.

The pricing term sheet can be found here.

The OTC Grey market ticker is ALLSP and likely is trading, but the ticker is not showing up yet on eTrade.

Landmark Infrastruture Partners Announces New Floating to Fixed Convertible Preferred Units-Corrected

MLP Landmark Infrastructure Partners (NASDAQ:LMRK) has announced the issuance of a new series of convertible preferred units (partnership preferreds are units instead of shares).

The Series C will be a floating to fixed rate issue.

Currently Landmark has 2 fixed rate regular preferred issues outstanding.  The LMRKP issue has a 8% coupon and trades at $25.13 while the LMRKO issue has a 7.9% coupon and trades at $24.05.

The preliminary prospectus is here.

This issue will result in a K-1 being issued to the investor as well as paying NON qualified distributions.

A Very “Weird” Market

After the fake out tumble last week based upon what is kind of non news the equity markets have gone nuts today.

The weird thing is that interest rates have barely moved higher–to 2.85% from 2.83%.  It would be expected that with stocks flying up near 700 points that the 10 year would be close to 2.90%, but obviously not.

Oh well we can live with low volatility interest rates as it holds income securities flat.  Although we like it, we always have to wonder what issue is out there that is causing this non reaction to sharply higher stock prices.  We are always leery–trying to look deeper.

Drilling Deeper on CAI International

Last week CAI International (NYSE:CAI) priced a new issue of fixed-to-floating preferred stock with an initial coupon of 8.50%.  At first glance at the initial coupon and the 5.82% spread when the issue goes to floating rate in 5 years we thought this would be a decent issue to buy.  Since that time we have drilled down much deeper into historical data of the company and have determined we should hold up for now.

CAI has become one of the largest owners of shipping containers on the globe with a fleet of over 1.2 TEU (20 foot equivalent) million units.  These containers range from the standard 20′ dry units we see all around the county on rail flatbeds to refrigerated units and specialized swap bodies which are made for over the road use in Europe.

In addition to their container ownership the company owns and leases over 7,000 rail cars of all types from dry bulk to tankers.

The company has done an excellent job of keeping the fleet utilized with over 97% of the fleet leased.

Additionally the company has a sizable logistics company which provides truck brokerage, warehousing and freight forwarding.

It is easy to see that this business (all of them whether containers, rail cars or logistics) is heavily dependent on the health of the global economy.  Of course almost all businesses are dependent on a healthy economy, but a limited number of them have debt of almost 5 1/2 times revenue.  This ranks right up there with the ocean shippers from a financial perspective–huge investment with high debt loads.  This is $2 billion in mostly floating rate debt that has to be paid for in good economies and bad.  This is a tremendous burden and honestly except for utilities we don’t like to see this high debt level in an investment.

As we review the last 5 years 2013-2017 we see the net income has ranged from $5 million in 2016 to $72 million in 2017 with free cash ranging from $111 million in 2016 to $183 in 2017. Stellar number–depreciation is huge on a fleet of containers and rail cars so the non cash depreciation charge is over $100 million/year.

In the 1st 9 months of 2017 the company had revenue of $254 million with net income of $35 million ($1.83/share).  With cash flow of $117 million (net plus depreciation).  Tremendous numbers.  At the same time here is what the common stock did–




So when an investor looks at these numbers at 1st glance they appear to be excellent–and they are excellent.  But is the reward adequate for the risk?  There is no common stock dividend which would help to be a margin of safety.  Would seem to me that a common dividend would be warranted.  Also 1 look at the common which has headed sharply lower while huge profits are announced seems strange–someone smells a rat here.

To determine if the reward is adequate to compensate us for the risk we have to look at the general global economic condition as well as a deeper history.

Briefly we think that the economies of the world are improving, but the growth rate is fairly modest and we think unlikely to speed up much if any from here.  Interest rates are being raised and while long term rates are not responding to higher short rates and investor has to wonder why if economies are doing well why won’t interest rates go higher.  Debt levels around the globe are higher than at any point in history and the U.S. has new budgets that will put the bond markets under stress (we believe) as buyers demand higher interest rates (which they haven’t done as of yet).  At the same time the U.S. is moving to quantitative tightening and other central banks are planning to do so by the end of the year.  Something has to give.

At the same time we are staring into higher interest rates CAI is buying containers and rail cars—to us chasing the economic growth that is currently in place, but which may very well wane later this year.  Additionally since CAI is a very international company any trade disruption will serve to pressure earnings.

This smells of the ocean shippers chasing current business by ordering bunches of ‘new builds’ that will never be needed.  The 1 saving grace is that containers and rail cars have a much shorter lead time that ocean ships.

CAI spent $370 million on new containers during the 1st 6 months of 2017 and while the claim is that they are spoken for with 8 year leases we are highly skeptical of these leases–as with ocean shippers the leases are only as good as the counter party  and sometimes they aren’t very good.  Bottom line is this is one heck of a large investment for a company with $348 million in revenue last year.  Remember that the company borrows money for these purchases.

We do note that the company claims that inflation and higher interest rates are good for the company blah, blah, blah.  Not buying that line irrespective of lease terms etc.

We could go on–but the bottom line is we think we need to wait and watch these shares.  We think the risk is high and the reward not quite high enough for us.  We think maybe another percent would help, but we shall see.

 

 

 

Allstate to Offer Fixed Rate Preferred Stock

Large insurer Allstate Corporation (NYSE:ALL) will be offering a new fixed rate preferred stock.

Glancing at the preliminary prospectus we see just the ordinary terms, meaning Non-cumulative (being an insurance company), optionally redeemable in 5 years with qualified dividends.

The preliminary prospectus is here.

Allstate has a total of 5 preferred offerings outstanding and the new issue MAY be used to redeem the only issue that is near a redeemable date (6/15) which is the ALL-A issue which has a coupon of 5.625%.

Given the mid level investment grade of Allstate we would expect a coupon around 5.50-5.75%.

Monday Morning Kickoff

Well what can be said about last week?  The DJIA fell by about 1400 points, which seems kind of big, but it is only 5 or 6%.  When you have been investing for only 6 or 8 years you think the world is ending–it’s not-this too shall pass.  For an income investor it  has served as a blessing of sorts as the flight to safety has pushed rates down to the low 2.80%’s.

Of course as we knew would happen the Fed raised interest rates, but this had almost nothing to do with any market action.  No rate hike has been more expected than this one–we can move forward without dwelling further on this factor.

Unfortunately another week like this will begin to spill over into income issues regardless of how well interest rates act.  Given that we have no reason to sell any particular issues we own it really doesn’t matter what the stock market does.

So taking a look at interest rates last week we see they traded in a range of 2.80% to 2.94%.  Rates had opened up Wednesday at 2.90% as the Fed Funds rate hike anticipated made a few folks nervous and the rate moved to 2.94% after the rate hike closing Wednesday at 2.91%.  Again rates did not hold the 2.90% level and fell all the way to 2.80% on Thursday as stocks tumbled and while stocks fell further through the day and certainly into Friday the 10 year rate moved higher to 2.85% Friday before closing at 2.83%.

We will be anxious to see who is spouting off this week on tariffs and trade wars since this is the driver of markets for the coming week.  We know the talking heads will be yakking nonstop about it as they fill their airtime–we would suggest the volume be turned way down–we know ours will be.  Please note that we don’t do politics on this site--when you start writing politics it is a no win for writers and readers.  We care about the results of politics–but we know we have to play the hand we are dealt regardless of which political party is dealing.

Last week the average preferred stock and baby bond fell just a bit to $25.14 from $25.17 which to use is pretty more “no change”.  The number of issues trading below $25/share moved to 191 from 190 the week before–definitely a calm week in income issues.

There were 2 income issues priced last week.  Insurer WR Berkley priced a new baby bond issue at 5.70%. We don’t see that this new issue is trading yet.  The company has 3 other issues of baby bonds outstanding and each is trading in the $25 to $25.75 range.

Global container and rail car leasing company CAI International (NYSE:CAI) priced a fixed to floating rate issue at 8.50% which becomes floating rate in 2023 at a rate of 5.82% plus 3 month libor.  We had originally hoped to take a position in this issue, but we have put a hold on that purchase.  After a through review of the companies historical financials we think that a trade war or recession would hurt the company badly.  Here is a chart of the common shares and if you use your mouse you can roll the chart back to 2008 and see the share price around $2.  in 2016 the share price hit a low of $5/share before heading sharply higher to hit $37 in October, 2017 before falling to $21/share most recently.  This is crazy volatility.  We will have full review of CAI International posted sometime Monday.



The new preferred shares began trading Friday under the OTC temporary ticker of CNNLP on the Grey Market and traded at $24.60.

For the coming week we have only 1 item of note on the Economic Calendar.  On Wednesday we have the 3rd reading on 4th quarter GDP and 2.7% is expected.  If this number is realized we should see no reaction from markets.  We have retail and wholesale inventories released on Wednesday and Chicago PMI and Personal Income and Outlays released Thursday.  We would be surprised if this is meaningful.

So with little important economic news to be released and Friday be Good Friday we are likely to see markets pushed around a bit by rumor and speculation.  We may have some modest reactions to any continued White House staff changes–we don’t think these are of consequence, but certainly folks are unsettled with the ongoing drama.

We did add a new investment in the Medium Duration Income Portfolio which we wrote about here.  The new issue is the Invesco 2023 Term Trust which takes us in a new direction as I can’t remember owning a term trust before–at least in recent years.

Adding a Small Position to the Conservative Medium Duration Portfolio

We have added a modest position of the Invesco 2023 High Income Target Term Trust (NYSE:IHIT) to the Medium Duration Income Portfolio.  We paid $9.72/share.

This term trust is a closed end fund and holds 80% or more of investment grade commercial mortgage backed securities (as well as a tiny portion of mREIT preferreds).  The trust does use leverage of 25% which is how they are currently able to pay just over 6% in dividends.

A term trust expires (liquidates) on the date specified–in this case on about 12/1/2023.  Most securities they hold mature in 2023 with a few in 2024 and some as early as 2019.  The key to a term trust is that if holdings are liquidated too early there is a potential for a reduced dividend.  On the other hand the company could choose to pay the cash out as a “return of capital”.

The trust IPO’ed on 11/28/2016 at a price of $10/share and has paid 5 cents per share each month since that time.  Current market price of the shares is $9.72 with a net asset value (NAV) of $9.97.

The goal is to repay shareholders $9.835 as the term ends which is the original NAV.

So with a maturity date of 2023 there is certainly a modest level of interest rate risk in this issue which reduces as 2023 approaches.  And of course there are chances of bankruptcies etc., but with a high proportion of investment grade issues this should be a lower risk.  Additionally since the trust uses leverage any rise in interest rates has the potential to reduce earnings because of the higher cost of leverage.

We personally hold a mid sized position of this issue in our personal holdings which we bought a few months ago.  We paid $9.74/share for our initial purchase and have been quite happy with the fairly tight trading range of the share price.

As always this is not a recommendation, but just what we think and have done.




Income Securities Hang Tough

Yesterdays wild stock market ride didn’t carry over to most income issues thus far and for that we are thankful.

Utilities were actually up a little and REITs only fell 1/2%. Preferreds and baby bonds did fall a penny or so.

The positive of a sharp equity market fall is that a ‘flight to safety’ pushes bond prices up, thus lowering interest rates. It was a short 36 hours ago the 10 year treasury was at 2.90% and yet yesterday it traded as low as 2.81%. At this moment the 10 year is at 2.84%. I don’t think at this point in time we can say anything at all has changed in the interest rate complex and we still expect a 3.25% 10 year before the year is out, but with so many cross currents anything is possible.

As I write the DJIA is off by about 90 points indicating a weak opening–which is kind of meaningless since the markets can swing by 100’s of points hourly. My hope is for stabilizing stocks markets because continued sharp sell offs will eventually spill over to our income issues and the year already is plenty difficult.

Yesterday our personal accounts were up 1/10th of a percent which I consider a victory, but only this month will our portfolios likely turn positive on the year when dividends are received on the 31st.

Investors need to continue to stay calm as all of the various situations unfold (i.e. tariffs etc). Having a bit of dry powder is not a bad idea ‘just in case’. Obviously there are plenty of nervous folks out there they could serve us some real bargains in any sort of panic.

CAI International Prices Fixed-to-Floating Rate Preferred-Update

Container and rail car leasing company CAI International (NYSE:CAI) has priced their new fixed-to-floating rate preferred with an initial fixed rate coupon of 8.50% with a floating rate beginning in April of 2023 of 3 month libor plus a spread of 5.82%.  This is a spread we like and we believe that for some investors this could be a decent buy.  As always we don’t make recommendations on securities to anyone–we can only give you our perspective.

Dividends are cumulative and  should be qualified for preferential tax treatment

A OTC grey market ticker has not been announced, but we believe it could begin trading either Friday or Monday on the grey market.

We believe we will take a position in this issue BUT until we do a deeper dive on their financials we can’t say for certain.  With luck we will have a go/no go for ourselves as well as the high yield portfolio prior to the market opening on Monday.  Our initial glance was simply that CAI has high margins, but they carry a ton of debt–characteristics that are ok in good economies, but dangerous in economic downturns.  The question on this new issue is not whether it is “good” or “bad”–our question is simply – Is the reward ample for the risk incurred?

The companies press release announcing pricing can be found here.

The pricing term sheet can be found here.

Big Tumble in Interest Rates

A fairly sure way to keep interest rates down is to sell off equities HARD.  While there are likely a couple factors to the interest rate fall you can be certain that a fair portion of it is simply a flight to safety.

While lower interest rates may at times be helpful to income securities that is not the case today.  The average preferred and baby bond is off 2 cents in spite of the 10 year tumble to 2.81%.  Sometimes the flight to safety also means tossing the baby out with the bath water which means selling common AND preferred stocks.

Todays move simply shows that an investor can’t focus on any given factor to drive interest rates.  Yesterdays action got the 10 year to close at 2.90%, but that is all forgotten today as talk of a trade war takes the stage.

As an investor that bought our first common stock in October, 1971 these nervous nellies and talking heads drive us a bit crazy and to some degree we long for the olden days when we had to wait for the newspaper to arrive to find out what our stock did the day before.  Given that we probably won’t go back to those days we live with the cards we are dealt.

Reviewing portfolios today we see little damage–a little here and a little there but nothing to get exited about.

We shall see what transpires the rest of the day as the DJIA is off 369 right now and the 10 year treasury is 2.83% (still locked in the 2.8 to 2.9% range).