I continue on the ‘hunt’ for some decent total returns with good levels of safety and have found one that I believe could return 10-17% with decent safety.
Aspen Insurance Holdings which is now owned by Apollo Global (APO) has 3 preferred outstanding at this moment–2 of them are 5.625% issues trading just over $20/share for current yields in the 7% area–the AHL-D issue is here and AHL-E issue is here. This one is favorable for a 10-17% return in the next year–predicated by a continuation in 10 year treasuries moving lower somewhat. While I have said I think rates move higher in the fall–for now they are moving lower and the economy is finally showing some signs of softening and my predications are certainly no better than a ‘coin toss’.
NOTE that the company has a 5.95% fixed to floating issue (AHL-C) now trading at $25.60. Because of the change from Libor to SOFR the company fixed this coupon at 9.59%–this is able to be bought, although there is ‘call risk’ and one shouldn’t pay over $25.60. It just went ex-dividend and can only be redeemed on a dividend payment date (1/1, 4/1, 7/1, 10/1). So if one believes this will remain outstanding for the next year this is a nice return. Little chance for a capital gain with this issue.
To achieve my target we need to see a $2/share move higher in the next year–of course by then we will have a clearer vision of rates ahead of us.
I have reviewed the recent earnings from Aspen and they are solid, although slightly lower than a year ago. These insurance companies have lots of moving parts–underwriting income and investment income and have dealt with lots of adversary in the couple years with the rising interest rates–but now they are seeing increased underwriting income and gains on portfolio holdings. These positive forces should continue as/if rates move lower.
While Aspen is owned by APO they continue to post their financials as if independent on their website. The latest data is here.
Since I have cash in my pocket I will buy one of the 5.625% issues on Monday–which one I am not certain.
These issues are rated BB+ by S&P (reaffirmed 4/12/2024) and Ba1 by Moodys–both a notch below investment grade.
It seems weird that the holding which has performed the worst for me over the last year is the one I am most comfortable holding forever–well not forever, but for the time being as long as interest rates remain ‘tame’.
Tri-Continental Corporation (TY), a closed end fund (CEF) has a $50/share preferred which was issued in 1963–the coupon is 5% (or officially it is a $2.50 preferred), but at the current price of $43 the current yield is 5.81%. Not what you call a high yield in these times of HIGH YIELDS, but in my mind the most solid preferred available. The issue is not rated, but when you have a 4000% coverage ratio who needs a rating (all closed end funds must maintain at least 200% coverage on their ‘senior securities’).
TY has net assets of $1.6 billion and over the last 10 years the common shares have returned 10.6% annually. Here is their fact sheet. Just a simple stock and bonds CEF–nothing fancy.
This issue is redeemable at anytime at a call price of $55/share so I don’t have to worry about it being redeemed–just keep drawing the dividend. My share price is down 8% from my average buy price, but I have held it for a long time so I have a positive total return.
The ticker on Fido it is TYPR on eTrade it is TY.PR – some others have it as TY- or TY-P. If you can’t find it try spelling it out in your symbol box (Tri-Continental Corp).
This is pure ‘sock drawer’ material–at this price 5.81% is not a bad return for the level of safety. One must be patient if buying as the average daily volume of the preferred is very minimal-922 shares per day according to Yahoo.
If you are highly sensitive to share price movements you don’t want to hold this or any low coupon issue when interest rates are racing higher. On the other hand the level of safety certainly provides for a good nights rest.
Disclosure–I own this security and am ‘talking my book’ here. Not a recommendation as each investor determines their own risk/reward demands.
I am trying to figure out what I am missing with Bridgewater Bancorp (BWB), the smallish Minnesota bank that I have mentioned many times. Is it simply because I live in Minnesota? Certainly I have a bias in that regard–sometimes it seems like you ‘know’ a company better just because you drive by their banks from time to time. But in the banking scene in Minnesota this $4 billion banking company BWB is simply a pimple on the butt of an elephant.
Is it because while many banking companys have had their preferreds jump nicely in the last couple weeks as interest rates have dropped little old BWB has gotten no bump at all and thus yields 9.55% at Fridays close? Why is my little banker preferred being punished?
Is it because someone ‘knows something’ I don’t know? Not very likely given the banker just published their 3rd quarter investor presentation 4 days ago—it is here.
Or is it simply because as Gridbird has correctly said many times ‘names matter’. Witness the Gabelli Funds CEF preferreds–really nothing special about these funds but the preferreds garner great respect—but the name-Mario Gabelli – the friendly gent we have wached on TV since ‘Wall Street Week” with Louis Rukeyser started in 1970 garners respect. Bridgewater Bancorporation – who the hell is that?
Well to get by the bolony stuff –what are their numbers? Is there big time trouble ahead? Well let’s check the data out!
A thumbnail sketch of BWB–
I have been quite amazed at the efficiency ratio of Bridgewater. Only in the last 6 months have I started watching this as a sign of a well run bank. BWB has always been low – although with the net interest margin getting squeezed in the last 18 months their efficiency ratio jumped – but still very low compared to competitors. I suspect they will get their net interest rate margin up during the next 6 months and their ratio will fall. The efficiency ratio is how much noninterest expense is required to generate revenue.
Then I look at the non performing assets and net charge offs – to say they are low would be an understatement. Less than 1/2 million charge offs since 2019–essentially zero.
So does BWB make office loans all over the U.S.? No–only 14% of the office loans are out of state with the balance mainly in the Twin Cities–and only 13% of those are in the central business districts (downtown)-the balance are suburban. The average loan size is small with excellent loan-to-value (although one should be skeptical of LTV numbers of all lenders–values are falling and what was a 62% LTV might be 80% now).
Or maybe it is articles like this one that ran in the local newspaper a few days ago that has spooked investors (not sure everyone can access–I have a subscription). Although with a 2.98% of office loans in default across the Twin Cities right now the risk seems somewhat muted. Will defaults rise? I think they may double or even triple in the next year depending on where interest rates go. But as shown above the average non owner occupied office loan at BWB is $2.3 million – these are more like loans on small properties – realtors, bankers, dentists and the like – not office towers in the downtown area, which seem to be continually in trouble. I would expect BWB to experience some increases–but not super serious increases—when you are near zilch there is only one up to go.
Yes earnings at BWB have been down—not unexpected as the costs of funds rose sharply–as it did for every lender. As you can see below the cost of funds rose 5X year over year. While interest income rose substantially it certainly didn’t keep pace with the cost of funds. This will change for BWB and all banks as the costs of funds falls and interest income rises. So assuming this is already occurring as rates have fallen I would expect improved net interest margins—at least for the next few quarters (then who knows for sure as the interest rates for the future are not really predictable). Below are the financials for the latest quarter and 9 months–softer–yes–terrible–no.
So with a careful review I added to my position on Friday and added more this morning (at 15.52) I am at now at 50% of a full position. We’ll see what happens and determine further moves.
Note that I am ‘talking my book’–this is not a recommendation, but at 9.55% current yield the risk/reward seems good – I would think a 10-20% capital gain is attainable in the next 3 months or so (plus dividends).
Recently a number of folks here and on other websites have mentioned some utility ‘illiquids’ for a possible purchase for those wanting a very safe income stream.
The very old (issued in the 1950’s and 1960’s) preferred shares from Connecticut Light and Power (parent Eversource-ES) are now selling at attractive levels providing current yields of 6.3% to 6.9%. These issues are all $50 issues and trading volumes are pretty lite. They may be redeemed at anytime at various redemption prices – $50 or above. They are cumulative and qualified.
I added a low ball Good Until Cancelled order this morning for the XAI Octagon 6.50% term preferred (XFLT-A). I currently hold a full position, but at the right price I am not against adding another 100 shares (for now). This has a mandatory redemption in 3/2026 and at my $24.00 order price will meet my current hurdle of 8% yield to maturity. The odds of this order executing seem pretty remote, but one never knows.
This is an unrated issue with a coverage ratio of 234% (200% is required) – not the highest quality term trust, but one which I have owned for a long time and feel comfortable holding.
Note that XFLT directors have voted (just today or yesterday) to make this CEF perpetual, as they previously had a term trust agreement which would have had the trust liquidate in 2029. This should have no effect whatsoever on this issue.
I had mentioned a week or two ago that I have made some nibbles on some good until cancelled orders for some baby bonds. I wanted to get the details out here and then I will update my ‘laundry list’ of holdings.
Note that I had a good til cancelled order in at $22.55 for the 1st 2 ‘nibbles’–which was lowered to $22.25 for the last nibble.
Now do I want this low coupon security that bad? No–but it has a maturity on 12/31/2026 and the yield to maturity was just over 8%–and I do want the 8%. These nibbles were added to what was already a full position–and while I don’t necessarily want more I have a $22/share good til cancelled order in right now.
It should be noted that I am very comfortable with this small company (Hennessy Advisors)–they have a market cap of just over $50 million so definitely a small cap. They advise open end funds and thus are paid on assets under management which have trended down in recent years, but finally they have assets moving higher and are taking over management of other funds which should drive assets higher.
This is not a recommendation to buy this security–but maybe a yield to maturity of over 8% is attractive to someone. Please fully understand how they make their money and the motivations of managers to secure more assets under management (money of course).
This is a topic which I have written about many times and was reminded of it when reading some comments on long term bonds (baby bonds) in one of the threads.
When you are fearful–worried about risk to your capital the place to turn to is either ‘term preferreds’ or short dated baby bonds.
When long term bonds are being hammered by rising interest rates in almost all cases issues that are out there with a ‘date certain’ maturity in the next 1-5 years will move only a small fraction of the price movement of those bonds which have maturity dates out in 2050, 2060 or way, way out. This is exactly why in the past I have held exclusively term preferreds and short maturity baby bonds (that is not currently the case).
You can see below that over the course of the last year these 2 issues have traded in a tight range of less than $1/share. The RiverNorth issue has a mandatory redemption in about 14 months (10/31/2024) and the XAI issue has a mandatory redemption in 31 months (3/31/2026).
One will give up some coupon for the pleasure of have a more stable capital investment. Obviously one wants to purchase these in the lower part of their trading range–and in no case should one pay over $25 or your yield to maturity will fall.
I recapped my buy of the new Capital Southwest Corporation (CSWC) last week–now for my 2nd buy in this sector (BDCs).
I am buying a 1/2 position of the newer Saratoga Investment (SAR) 8.50% senior notes (SAZ). 5 years to maturity, although 2 years to 1st optional call so one doesn’t want to pay too much above $25 for the issue in case we see sharp rate drops next year.
SAR is very similar to CSWC in many ways. They have assets under management of around $1 billion–so a decent sized business development company. Like CSWC they have maintained a relatively flat net asset value/share – always a good sign that they can maintain their NAV.
Also like CSWC the company invests primarily in 1st lien debt, although they do have 10% equity interests.
The company self grades their portfolio in colors green, yellow and red–obviously the red is the poorly performing issues of which the company claims to have none.
SAR has been around since 2007–while not as old as CSWC 16 years is ‘middle aged’ for a BDC and certainly they have seen the ups and downs in economic conditions in the U.S. In fact the company had issues in 2008 with a default on some debt–since then they have been straightened around and have performed very well in the last 10 years.
NOTE–I just bought a 1/2 position for 24.94. If we get some slippage I will add to the position.
I have surveyed the Business Development Company (BDC) landscape and have come up with what I believe are the 2 best buys available for my level of risk tolerance.
1st I will be buying some of the new Capital Southwest Corp (CSWC) 7.75% baby bond (CSWCZ). Honestly this is one of the top BDCs available in my mind. The baby bonds were issued with a Baa3 rating from Moody’s (per June 7 ratings action)- this is very unusual – of course virtually no baby bonds from BDCs are rated. Ratings mean zip if the company is poorly managed–so I have scrutinized SEC reports.
Like most business development company’s CSWC is required to maintain a 150% asset coverage ratio–but they have a self imposed limit of 166% which is tighter than the official requirement.
CSWC has maintained a relatively flat share net asset value during the last 2 years–no small feat in these times of skyrocketing interest rates and indicates there have been very few write downs in the portfolio.
The investments made by CSWC are mostly 1st lien loans – I don’t want a BDC that have a portfolio full of 2nd lien stuff – that is worth zip to me – I want to be paid 1st.
The portfolio is in the $1.3 billion dollar range (as of 3/31/2023)–a fairly large portfolio for a BDC. The debt portion of the portfolio has been self rated as shown below. 1 is performing ‘better than expected’–a 2 is ‘as expected’ 3 is ‘below expectations and 4 is ‘crap’. As of 3/31/23 .3% of the portfolio is on ‘non-accrual’.
CSWC was formed in 1961 and elected to become a BDC in 1988–so this one has been around quite a while.
As always this is not a recommendation to purchase this security and everyone should do their due diligence by reading the 10-K and by perusing the presentation and other pertinent data.
