Innovative Income Investor | Innovative Income Investor

Cruising Into the Weekend

We all know today will be pretty darned quiet as no one is doing much investment wise–except some of us that are addicted to some sort of market adrenalin fix.

Today we have to search a little harder for that ‘fix’. Maybe one of the most interesting items today is the B. Riley (RILY) baby bond ‘call’. The company is calling the RILYL 7.50% issue which is the only issue outstanding that is currently in the early redemption period.

B Riley has become a complicated company that operates in traditional financial markets as well as having ownership (or partial ownership) of various operating companies–sometimes to take advantage of operating losses. bebe Inc. , magicjack, themaven?? Do I smell an implosion if a recession ever comes??

We haven’t had the time to do a deep dive into B Rileys financials lately, but anytime I see a company that has debt of almost $800 million with total equity of $299 million I get highly suspicious – I am going to try to dissect this one sometime soon.

This weekend we will post the latest version of the Sortable Master Listing. Since we had originally posted an earlier version we have been tweaking some components and now will put out a version for readers to use if they so choose. This will require you make a copy for yourself–so you should have a google account if you want to use it.

I will then start working on the next version for everyone–I plan to post an updated version every month.

A Quick Look at Giant Cooperative CHS

Ag cooperative giant CHS (Cenex Harvest States) has now turned into a oil refining company masquerading as a ag company.

CHS was a darling of mine many years ago so I thought I should check in with them because of the 5 preferred issues they have outstanding.

CHS preferreds have always been good to investors–with coupons much higher than comparable corporations would offer.

Some may remember–and some may not know this–that the 1st issue from CHS was issued primarily to cooperative members way back in 2003–it was a whopping 8% coupon (CHSCP), which became redeemable in 2008. In 2013 the company changed the terms of the issue so that it would not be redeemable until 2023. During the years of 2003-2008 the company issued another 9 million (more or less) of these shares–even though they could have garnered a lower coupon–the ownership remained strongly in the hands of many of their members, thus it always remained a strongly traded issue and I have always surmised that the optional redemption period on this issue was extended simply as a bit of a concession to the members/owners.

After this initial issue (in 2013, 2015 and 2015) the company began to sell new issues of preferred stock–primarily to build a massive fertilizer plan in North Dakota. The new facility was never built and instead the company invested proceeds in giant fertilizer company CF Industries (CF)–quite honestly this investment has not provided much in the way of profits until recently.

So what is the company doing lately in this absolutely horrible ag economy? Actually they are making quite a bunch of money–but little of the profit comes from the ag end of the business.

The cooperative had net income of $819 million for the year ending 8/31/2019–$618 million was generated from the 2 refineries they own as well as 1,450 retail outlets. Ag contributed a measly $43 million of net income (off revenue of $24 billion), while the nitrogen investment in CF Industries kicked in $73 million. Investments in Ardent Mills (the nations largest flour miller–a venture with Cargill and and ConAgra) and Ventura Foods contributed $81 million.

So while the lions share of revenue comes from the ag segment it produces almost no profits right now.

The total revenues the company has produced during the last 3 years have all been in the $31-$32 billion area which actually is pretty respectable for operating in the ag segment of the economy. Of course, if you go further back you will see they had revenue of $44 billion at the peak for the year ending 8/31/2013. Energy has always been a pretty large chunk of earnings for the company–so right now the prime difference is the lack of contribution from the ag business.–now if this was a publicly owned company shareholders would be pounding the table to get rid of the ag business. Obviously this won’t happen.

So as a whole the company is performing well. Unfortunately energy at some point will perform poorly and one can only hope that the ag economy has straightened out by then. Looking further at the company’s debt situation–I always look closely at the debt–things look good. Most companies can perform relatively well–even in a recession, if their debt is under control. In this respect CHS runs a pretty tight ship. They have $1.8 billion in long term debt and $2.2 billion of notes outstanding–a total of $4 billion in debt against $16 billion in assets. Equity is around $8.6 billion. Interest rates on the debt run from 2.25% to 5.40%–the debt is all unsecured. So debt is really a small consideration for the coop.

The company’s 10-K filing for the year can be seen here.

Now going back to the preferred stock–

CHSCP, 8% perpetual is currently trading at $28.15 and is optionally redeemable starting 7/2023.

CHSCO, 7.875% perpetual is currently trading at $27.60 and is optionally redeemable starting 9/2023.

CHSCN 7.10% reset rate perpetual is currently trading at $27.83 and is optionally redeemable starting in 3/2024.

CHSCM 6.75% reset rate perpetual is currently trading at $26.40 and is optionally redeemable starting 9/2024.

CHSCL 7.50% perpetual is currently trading at $27.38 and is optionally redeemable staring 2/2025.

So as a new buyer (I haven’t had shares for a long time) these issues don’t look too attractive on a yield to worst basis. On the other hand knowing that the air won’t come out of the price until maybe 12 months before possible redemption and having 3.5 to 5 years before potential redemption maybe a tiny buy is in order?

Do I really like CHS enough to buy the CHSCL 7.50% issue at a current yield of 6.85%–and a yield to worst of 5-5.25%? I doubt it.

First Republic Prices Preferred Stock

The previously announced new preferred issue from private banker First Republic (FRC) has been priced.

The company will sell 14 million shares (with another 2 million available for overallotments) with a fixed rate coupon of 4.70%.

The issue will be non cumulative and qualified.

The issue is investment grade with a BBB- rating from Standand and Poors and Baa3 from Moodys.

The new issue will trade under permanent ticker FRC-J when it begins to trade on the permanent exchange.

The new issue will trade on the OTC Grey market starting immediately under the ticker FRCJL.

The company’s press release with the pricing can be found here.

Thanks to Jerry for having the coupon 1st–very early.

Private Banker First Republic to Sell Investment Grade Preferred

Private banker and investment firm First Republic (FRC) has announced the issuance of a new series of non cumulative preferred stock.

The coupon on this one will be low–5% or below–and will be qualified. The issue should be rated BBB- by Standard and Poors and Baa3 by Moodys

NOTE–for due diligence you should go to the company’s investor relations page here. Alternatively you can go to the FDIC website here and search for First Republic. The company is NOT under supervision of the SEC so filings will not be found there.

The preliminary paperwork can be found here.

Thanks to mcg for being on this one.

Monday Morning Kickoff

The Standard and Poors 500 moved in a range of 3091 to 3127, about a 1% range, before closing the week at 3110–around a 1/2% loss for the week.

Interest rates, as measured by the 10 year treasury, stayed pretty tame last week, moving in a range of 1.73% to 1.85 before closing the week at 1.77%.

The Fed balance sheet actually fell last week by $17 billion–this is the first fall in the balance sheet since 8/28/2019.

Last week we had the following new income issues announced.

Morgan Stanley (MS) announced a new preferred stock with a coupon of 4.875%. The issue is trading under OTC Ticker MSLQL and last traded at $24.98. Further details are here.

QVC Inc. sold a new issue of baby bonds that while investment grade rated carry a coupon of 6.25%. The issue will trade under ticker QVCC, but it is not yet trading on public exchanges. Further details are here.

Insurance company AXA Equitable (EQH) sold a new perpetual preferred with a coupon of 5.25%–not toop bad for a split rate investment grade issue. The shares are trading on the OTC Grey market under ticker AXQEL and last traded at $24.85. Further details are here.

REIT Global Net Lease (GNL) sold a new preferred with a 6.875% coupon. This is an unrated issue which is now trading under the OTC Grey market ticker of GBLNP–last trading at $24.64. Further details can be found here.

Insurer American Financial Group (AFG) priced an investment grade baby bond with a coupon of 5.125%. There is no OTC Grey market trading in the issue, but the issue will trade soon on the NYSE under ticker AFGC. Further details are here.

Lastly partnership Fortress Transportation and Infrastructure (FTAI) sold a fixed to floating rate preferred with an initial coupon of 8%. Being a partnership the shares will bring a K-1 at tax time and the issue, while cumulative, will not be a qualified distribution. Shares will trade today (Monday) on the OTC Grey market under ticker FTABP. Further details can be seen here.