Category: Ideas

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.

I made 3 small purchases of the Hennessy Advisors (HNNA) 4.875% Notes due in 2026 (HNNAZ).

8/10/2023 $22.55

8/16/2023 $22.55

8/23/2023 $22.25

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.

Their latest earnings release is here.

Additionally the company carries a high cash balance of $59 million and essentially has no debt EXCEPT the HNNAZ issue which is $39 million.

Here is their most recent (6/30/2023) 10-Q.

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).

I will add these to my laundry list of securities owned soon.

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).

My best example is 2 term preferreds from CEFs that I own (overweight on both). These 2 are the RiverNorth Capital and Income Fund 5.875% term preferred (RMPL-P) and the XAI Octagon 6.5% term preferred (XFLT-A).

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 have a page of the term preferreds and short dated maturity baby bonds which one can find here. Of course regardless of the issue one must do their due diligence on the issuer–short or long dated maturities will make no difference if the company files for bankruptcy.

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.

The 10-K (annual report) for the period ending 2/28/2023 can be found here.

Their latest presentation can be found here.

So this gives me 2 buys in the 8% area of what I believe to be 2 of the higher quality business development companies

I expect no capital gains of these issues–just a steady nice interest payment stream.

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.

Here is the company’s 3/31/2023 10-K (annual report)

and here is the ‘glossy presentation’ from May 23, 2023.

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.

So today I went ahead and bought a starter position in the 2nd lodging REIT preferred shares–to accompany the Pebblebrook (PEB) position from yesterday.

I bought the RLJ-A 7.90% convertible preferred issue from RLJ lodging. While this is convertible there is virtually no chance that a conversion will ever occur. Shares are now at $23.58 with a current yield of 8.38%. Once again I chose this issue because of relative performance of the company AND importantly one of the best balance sheets in the sector–debt to equity ratio of around 1.

So for now this is all I want in the sector—I may put in some GTC orders in for additions at much lower levels in case of a ‘dump’, but like the smaller banks I want relatively small positions to begin to lock in some high current yields–am I way too early? I may be too early, but no one can buy the exact bottom nor sell at the exact top so the small position sizes protect me from massive losses.