Calm Day? A Little Bit of Buying

On a relative level today is kind of a calm day–equity markets up 1.5% or so. I am very leery of this market–everyone is trying to pick a ‘bottom’ without firm data to really be able to see clearly.

I have made 2 purchases today–no sales of investments (except most of my Proshares Ultrashort SP500 (SDS) early in the day).

I went ahead and started a position in the RLJ Lodging $1.95 Conv Preferred (RLJ-A) @ $17.05–see it is up to $18.xx already. I chose this one because of the strong balance sheet–I think they will remain in good shape for a couple quarters without much business.

I also bought some of the AllianzGI 5.625% Convertible and Income preferred (NCV-A) which is an add to a previous position.

That will probably be it for today since I strongly believe we are in a bear market rally and opportunities remain to be seen in the months ahead.

I see the mREITs are getting hammered today while the lodging REITS are mixed. Seems to me that these sectors will take a number of months to sort out–maybe even longer.

So for now am just slowly moving back into the marketplace and staying with quality sprinkled with a few others that have more of a speculative twist to them.

45 thoughts on “Calm Day? A Little Bit of Buying”

  1. I know that most of the readers here are doing pretty well under the circumstances; the only thing I care about is whether any of my holdings actually go out of business. I can withstand having 80% of my dividends being suspended , indefinitely, without selling a holding, but losing a
    complete holding would hurt.
    The most dangerous of my holdings are mReits, but some who hold only agency debt are down over 50%, which makes no sense to me. Perhaps someone can explain, as I thought agency debt was secure. ( Is it due to possible dividend suspensions ?).
    Thanks, howard

  2. Ford needing a gov bailout was on someones list of 10 surprises for 2020. And that was before covid 19. If that happens won’t be good for their preferreds. Besides price action another bad sign has been the excess inventory in dealer lots.

  3. Thank you Affinity4Investing, Gridbird, Qniform, Justin for explaining finer points about F-C the unsubordinated debt baby bond.

    Now the question as with other such investments is if to sell or wait and take a chance for better times while collecting the 7% and hope they do not go the bankruptcy way or invoke the clause as discussed to not pay on the interest.

    My current feel is to wait for a bump and exit to look for better & safer opportunities. Say a bump to $18-$19 where it was week or two ago seems reasonable?

      1. Indeed, very unreasonable. 50/50 shot at best. They could get back to business relatively quickly, but they were already having troubles before all of the C19 hit. The debt had already been downgraded at least once in the past year that I recall and now again. You can bank on a recovery, but then you might get another GE type scenario. A perpetual loser that just finds new and inventive ways to go lower and lower and lower. Flip a coin. Me, I’d look to see some recovery and then likely bail in the $20 area – but I’ll wait for now and see what the recovery looks like. If they catch another downgrade, that will likely make me punch the eject button – but we’ll see what happens. I’d be happy to get paid to wait as long as there is some path to recovery for might F but that is going to be a long path.

        1. Thanks for your well reasoned opinion. Yes, waiting to see if another downgrade of debt or rumors/articles of car company bankruptcies to eject or $18-$20 area before more troubles seems a good plan of action for this F-C for now.

          I did own a few bank preferreds in the 2007-2008 era and stuff like C common as it went lower and lower but did not have much of the IG grade stuff of $25 trading below $20 like few weeks ago so got a rude shock this time…

  4. Today’s bounce is definitely in anticipation of a massive rebalance tomorrow.

    Be interesting to see how certain Preferreds behave.

  5. Tim,
    Thanks for your post on the mReits last Wednesday. Helpful in these chaotic times. Good luck with your SDS trade. I do the same with VIXY, crazy volatility.
    I currently own AATRL based on previous sock drawer comments. Like everything it has traded down significantly but given that AMG is a solid Investment Grade company it seems very over sold. I re-read the prospectus today to better understand the rules for deferring payments and it seems very unlikely AMG would do that unless their business was in severe trouble. Any reason not to be buying here under $30 ?

    1. Yes, I have a lot of interest in AATRL at this price but would love to hear a little more about the parent, AMG.

  6. Noob question when I look up RLJ-A it says “SHARES ARE NOT REDEEMABLE” can someone explain what that means in this instance?

    1. It could mean that its a perpetual preferred with no maturity date.

    2. Noob,
      This is not a standard type of preferred. It is a convertible preferred. It can be converted into common stock of RLJ if the common stock gets to a specified price and stays there for a specified amount of time. Since there is little to expectation that the common of RLJ will be getting back to $89.09/share anytime soon, this is considered a ‘busted convertible’, similar to WFC-L and BAC-L.

      Here is the exact excerpt from the prospectus:

      Optional Redemption

      RLJ may exercise its option to redeem the RLJ Series A Preferred Shares, in whole or in part, only if, for 20 trading days within any period of 30 consecutive trading day period, including the last trading day of that period, the closing price of the RLJ Common Shares on the NYSE equals or exceeds the conversion price per share (initially, $89.09 per share, subject to adjustment as described below). In order to exercise this redemption option, RLJ must issue a press release announcing the redemption prior to the opening of business on the second trading day after the foregoing conditions have been met. Notice of redemption will be given by mail or by publication in The Wall Street Journal or The New York Times or, if neither is then being published, in any other daily newspaper of national circulation (with subsequent prompt notice by mail) to the holders of RLJ Series A Preferred Shares not more than four business days after RLJ issues the press release.

    3. It s a convertible with a way out of reach price of conversion, I forget exactly. RLJ aquired it when it bought Felcor. So highly unlikely to be called

  7. Unemployment estimate of 32% from the Fed. Dr. Fauci says it could be 100,000 dead, Dr. Blix says it could be 200,000 dead.

    Yet, the market is rallying.

    Is this some quarter end rebalancing?

    I did take a 25% share in ViacomCBS (VIAC). $42.37 in January. Down to $13.75. Current Yield about 7%

  8. What is the probability that NCV-A will be called on (or near) its call date of 9/20/23? Ditto for NCZ-A, GUT-A and GUT-C. Thanks.

    1. It is hard to predict, but if it is called, it would most likely be due to the fact that they can issue a new security that pays a lower rate. The proceeds from that issue would be used to pay off the existing issue (similar to refinancing your mortgage). It would cost the company generally about 3.5% off the top, so the expectation of interest rate directions will factor into the decision as well as the availability of capital at the time.

  9. There were some immovable objects during the crash:
    KTH and SOCGP. These guys were never in jeopardy of falling to par, where I would have kissed the sky if I could have snagged one or both.

  10. Ford Pref dividends suspended?

    I was looking at F-C the baby bond they issued in Dec 2019 with 6% coupon. Currently trading in $16-$17 range. Cannot find if the dividend on the preferreds is also suspended along with the normal dividend. Even wrote to the company investors relations but not reply since past few days.

    Would this be good buy here if they keep paying the dividends or even otherwise?

    1. F-C or F-B are still paying the dividends. They essentially have to or F would be in bankruptcy since they are unsub debt. Preferred’s are a totally different animal. I didn’t see where F has any preferred’s issued right now.

      I own F-B. Will not buy more and sorry I have the ones I do. F has a pretty ugly history of suspending common dividends.

      1. Thanks for your answer. Could you please elaborate what is ‘unsub’ debt? Is that debt that can only be made to default on in bankruptcy?

        Also why do say F-B not attractive at these prices? Is it that there are better non mREIT out there?

        1. Msquare….What this means is Ford can decide to pile more debt on top of this issue and put it longer back in the soup line. Basically when you buy subordinate debt your assumption should be if they ever go bankrupt you will get a pat on the back for playing the game, no money or pennies on the dollar at best. The only real feature a subordinate debt has over a preferred is they cant suspend the payment like true preferreds do at the behest of BoD. Preferreds must be declared officially each payment. A debt is a contract that doesnt need declaration.

          1. The sole advantage over another similarly rated preferred stock is that since it’s debt, it would be paid even if they take Gov handout (assuming they continue to be ABLE to pay).

        2. It means unsubordinated debt, as Gridbird touched on. Essentially, yes, it can only be defaulted on in case of bankruptcy – but take that as a general guideline. Unsubordinated debt or subordinated debt (baby bonds) mean you’ll get your money before common shareholders and preferred shareholders but in the case of near bankruptcy, you’re likely to be cashing this in for pennies on the dollar if you’re lucky and fast enough.

          I would absolutely not buy more F-B right here. Their debt just got downgraded again and during that downgrade, there was mention that it could very well be cut yet again if conditions don’t soon improve. There is no visibility at all as to when thousands of dealerships will reopen, when the assembly lines will start back up that have been shut down, nor what the demand will be once all of that does get back online. With unemployment slated to be so high, new cars will be one of the items people do not shop for as they concentrate on paying rent arrears, getting kids back to school, and shoveling out from debt and many other problems.

          Just my opinion….but I’d rather be in something that wasn’t cut in half by this downdraft (as an investment). Now if you’re looking to be a trader/flipper, that’s a different story. That’s just not where I’m at. I’m just holding mine because I bought them for the interest payment, not cap appreciation – so as long as they still pay – I’m OK with waiting (for now). Ford will not be allowed to fail, IMO.

          1. Ford can suspend payments on these without being held in default or forced to file bankruptcy.
            (They did this previously in 2009 on an earlier bond issue with identical features) There are dozens of bonds outstanding with this feature and Ford is definitely on my short list of those issuers most likely to invoke it.

            1. Here is the prospectus mention of it…Things can get down and dirty on these things and I just assume zero if something goes wrong. This isnt a sector Im a player in.

              If an Event of Default occurs and continues, the Trustee or the holders of at least 25% of the total principal amount of the series may declare the entire principal amount (or, if they are Original Issue Discount Securities (as defined in the Indenture), the portion of the principal amount as specified in the terms of such series) of all of the debt securities of that series to be due and payable immediately. If this happens, subject to certain conditions, the holders of a majority of the total principal amount of the debt securities of that series can void the declaration. (Section 5.02.)

              The Indenture provides that within 90 days after default under a series of debt securities, the Trustee will give the holders of that series notice of all uncured defaults known to it. (The term “default” includes the events specified above without regard to any period of grace or requirement of notice.) The Trustee may withhold notice of any default (except a default in the payment of principal, interest or any premium) if it believes that it is in the interest of the holders. (Section 6.01.)

              Annually, we must send to the Trustee a certificate describing any existing defaults under the Indenture. (Section 10.06.)

              Other than its duties in case of a default, the Trustee is not obligated to exercise any of its rights or powers under the Indenture at the request, order or direction of any holders, unless the holders offer the Trustee reasonable protection from expenses and liability. (Section 6.02.) If they provide this reasonable indemnification, the holders of a majority of the total principal amount of any series of debt securities may direct the Trustee how to act under the Indenture. (Section 5.12.)

                1. Justin, TEF, and A4I, I really dont know for sure where these are stacked to be honest…The prospectus is boilerplate..
                  The debt securities will be our unsecured obligations. Senior debt securities will rank equally with our other unsecured and unsubordinated indebtedness (parent company only). Subordinated debt securities will be unsecured and subordinated in right of payment to the prior payment in full of all of our unsecured and unsubordinated indebtedness. See “— Subordination.”
                  Apparently you will have to find a 2002 indenture to refer back to for more info as this doesnt provide it all as mentioned below.

                  The Indenture is summarized below. Because it is a summary, it does not contain all of the information that may be important to you. We filed the Indenture as an exhibit to the registration statement, and we suggest that you read those parts of the Indenture that are important to you. You especially need to read the Indenture to get a complete understanding of your rights and our obligations under the covenants described below under Limitation on Liens, Limitation on Sales and Leasebacks and Merger and Consolidation. Throughout the summary we have included parenthetical references to the Indenture so that you can easily locate the provisions being discussed.

                  The specific terms of each series of debt securities will be described in the particular prospectus supplement relating to that series. The prospectus supplement may or may not modify the general terms found in this prospectus and will be filed with the SEC. For a complete description of the terms of a particular series of debt securities, you should read both this prospectus and the prospectus supplement relating to that particular series.

                  1. I read the prospectus. To me it is incredible that it isn’t clearly stated up front whether it is senior or not. I assume it is senior, but it is my experience with Ford (I worked for them for 2 years around 30 years ago) and I wouldn’t trust them when it comes to any legal dealings. They know how to protect themselves and come out on top.

                    1. MCG, Im stepping out, as I just reposted to correct an error on my part. Im not playing here. In fact as a general rule if I have to check the details to know where my perceived safety is at, I am already investing in something I shouldnt be.

          2. Afffinity
            Baby Bonds are not necessarily subordinated debt There are plenty of them that are senior debt.

  11. Based on volume I think RLJ has been buying back preferred. Just a hunch on my part…they mentioned the possibility of doing it in a filing. Would make sense for them given the high coupon and the fact that it is not callable. We will see when first quarter reported.

    1. Maybe- 10 day ave 132k , 82k so far, not looking like it’s accelerating even tho lower today. 90 day – about 84.5k

      1. I am looking at volume in last 30 days vs. prior. Average volume in the six months prior to March 1St was 26k. We’ll see I guess?

  12. “…everyone is trying to pick a ‘bottom’ without firm data to really be able to see clearly”

    Yes, agree that it’s hard for figure this one out since it is the pandemic that has caused the economic distress for all concerned. Haven’t seen this in my lifetime, that’s for sure. It really is “different this time”!

    Me, I’m cautiously buying new and adding to established positions. Also, DRIPing all my stocks (all are dividend equities). Bought NNNPRF and PSAPRE among the new ones. PFG, common, too.

    Is it the bottom? Don’t know but I think we can see it from here.

    1. “…everyone is trying to pick a ‘bottom’ without firm data to really be able to see clearly”

      Agreed. People are basing their evaluations on old data.

      Until next earnings report, we won’t know how bad the damage is, who has really been hurt, and who is weathering this better than we expected. Some companies have near zero cash flow the last couple of weeks.

      I expect another drop based on those earnings reports. Sure the those expectations are allegedly baked into the current prices, but bad earnings always trumps old news. Question is how much further to fall.

      1. I have seen some analysts say that a stock’s fair value is only impacted 10% by the upcoming 2 quarters.

        I have no idea whether this is true. Perhaps somebody in the investment business with knowledge of calculating fair value can comment.

        This may explain some of the gains we have seen recently

        1. Seems impossible to calculate fair value at this point for just about every business, which is why you are seeing so many pulling guidance, cutting or suspending dividends, cutting or eliminating capex, etc. Anyone who says they can put an accurate number on a stock price should go back to selling used cars. But I hear ya’ Steve… It is confusing/interesting.

          The gain last week, IMO, were just a classis bear market bounce. Friday showed that the fear is still there underneath the surface. Today, there is hope on the number of dead in the US coming down from 2mm to 100-200K, JNJ announcing a vaccine trial, and ABT announcing a 5 minute test. Market trades on fear and today there is less fear, IMO.

          1. If the next 2 quarters is only weighted as 10% in fair value calculations, it would account for fair values not changing much.

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