GAM is a solid closed end fund with $1.6 billion in assets and the only leverage they use is this issue of preferred shares—they have a asset coverage ratio of 837% as of 6/30/2024.
The interesting item of note is that the Board of Directors has a buyback in place for the preferred shares anytime they are under $25/share. They have authorized up to 2 million shares being bought (original issue was 8 million shares)–thus far to date they have bought just shy of 400,000 leaving lots of dry powder for further purchases.
Does this buyback authorization help to keep this high quality modest coupon price above $25? Not positive of the answer, but I do know that it doesn’t hurt.
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).
