CEF | Innovative Income Investor

Gabelli Funds Asset Coverages Remain Solid As a Rock

I’ve been doing some ‘due diligence’ on the Gabelli family of closed end funds and thought I would remind those looking for an ultra safe dividend that is in some cases right close to 6%,

CEFs have to have a minimum asset coverage ratio of 200% on their ‘senior securities (preferreds) and the Gabelli family of funds, which includes the Bancroft Fund (BCV) and Ellsworth Growth and Income Fund (ECF) always provide very nice coverage ratios–in some cases up to 876% (GAMCO Global Gold–GGN).

But like all lower coupon, high quality issues the share price will move in the opposite direction of interest rates, so if you are sensitive to share price movement these probably aren’t for you. On the other hand if you want a solid dividend–ultra solid actually, one should be in some of the Gabelli Family preferreds.

I have a page devoted to CEF preferreds with the coverage ratios posted on it which can be seen here.

Also Gabelli posts their coverage ratios each month and one can watch the changes on the page linked below.

Click here is see the coverages.

A Day of CLO Reading

Yesterday was quiet around our place–not that we were out late on New Years Eve because I was in bed by 9:30 p.m., but just because there were no plans of any type and I am not a real sports fan anymore so all the bowl games held little attraction. So this seemed a good day to do some reading–which is what I did.

I focused on collateralized loan obligations (CLOs). In the last couple months most of my reading has been on CLOs–trying to get a firmer understanding of the moving parts and pieces. Yesterday a fair portion of my reading was a study by a few NYU professors. It was a long piece of 52 pages and looks at performance from the 1990’s to 2020–times that preceeded most of the current CLO publicly traded companies (i.e. Eagle Point, Oxford Lane etc.). It is pretty complex, but with patience one can understand it.

The bottom line is that the items I focus on in a macro sense are correct (in my mind) relative to CLO owners. For instance GDP, employment and interest rates. These simple pieces of data can provide a reasonable ‘warning sign’ for potential dangers ahead in the CLO sector. I am not saying that CLOs will be hurt massively–but I am saying that other investors might believe this is true thereby moving in a large way to sell off the shares of the CLO owners and their preferreds and baby bonds.

Additionally, I find those more company specific pieces of data that I watch closely are at least close to right on. Specifically, I watch the net asset value of the common shares (which is published monthly by each of the companys), the coverage ratios (since I hold only senior securities and want to know my margin of safety) and I watch the ability of the company to raise money by selling common shares (thereby keeping the coverage ratio high).

Now specifically I own positions in 9 different securities that have large exposures to CLOs. While the number of positions is fairly large the actual shares are modest–none more than a 25% position. I list these all on my ‘laundry list’ page.

Why do I hold these? Because of my conservative positioning in 50% of the portfolio I need to try to balance the low coupons with some higher coupons. Do I feel this is too aggressive? NOT too much in the current economic conditions. Will I watch the data points I mention above? Absolutely!! Honestly with the uncertainty out there with a new ‘administration’ I will be more focused than usual on the data–both macro economic and micro (company specific) data.

RiverNorth/DoubleLine Strategic Opportunity Fund Term Preferred Now at $10

The series C, 6% short duration term preferred (OPP-C) from closed end funds RiverNorth/Doubleline Strategic Opportunity Fund (OPP) is now trading somewhat ‘normally’–right around the liquidation value of $10. This ‘rights offering’ series sold with strange pricing for a few days before now settling in. This has just 410,000 shares outstanding and it looks like the $10 liquidation value threw folks off for a few days.

The issue has a mandatory redemption on 12/1/2027 so maybe it is a decent spot to hide out in as a cash alternative of sorts.

CEF Highland Opportunity and Income Fund Tenders for Common Using Preferred Shares

Closed end fund Highland Opportunity and Income Fund (HFRO) has announced they are tendering for up to $100 million in common shares using a new Series B preferred issue. Details of the new preferred issue have not been announced, but they state they will be structured similarly to the Series A (HFRO-A) which is currently outstanding.

The intent of the tender offer is to try to move the common share price higher–it trades at a very steep discount to net asset value.

HFRO-A has almost always traded weakly–while A1 rated by Moodys there appears to be little confidence in the management of Highland Opportunity and Income Fund. A large share of their investments are in funds run by Nexpoint–which also is the advisor to HFRO. This company seems to have way too many incestuous relationships to be taken real seriously.

The press release from the company can be read here.

Thanks to J for posting info in comments earlier today.

CEFs Virtus Convertible and Income and Virtus Convertible and Income II Back in ‘Compliance’.

Both the Virtus Convertible and Income Fund (NCV) and the Virtus Convertible and Income Fund II (NCZ) have come back into compliance with required asset coverage rations.

The 2 CEfs had to suspend their common share distributions, which is the kiss of death to a CEF because of a breaking of the asset coverage test (they must have at least 200% coverage of their ‘senior securities’). They have now scheduled the distributions.

Both funds determined they would tender for the auction rate preferred shares ($25,000/share) and were successful in having 99.7% and 99.2% of the shares tendered in an voluntary tender offer.

One would have to calculate the coverage ratio, which I have not done, but obviously now over 200%.

It is a fair assumption that the 2 funds liquidated assets to be able to fund the repurchase of the auction rate preferred shares.

Both CEFs have an issue of exchange traded preferreds outstanding. Both issues have been trading down on the fund issues and now have current yields at 6.50%.

Virtus Convertible and Income (NCV) has a 5.625% preferred which can be seen here.

Virtus Convertible and Income II (NCZ) has a 5.50% preferred which can be seen here.

The company press release is here.