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Selling Small Bankers

I noted this morning that I sold my Enterprise Financial (EFSC) 5% perpetual yesterday afternoon–I got lucky as I sold right at or near the high of the day on a limit order. I recognized about a total of 15% gain which included a couple of dividends.

Why did I sell it? Honestly, while the small bankers have been reporting fairly good earnings, someone is holding the bag on some bad loans. Of course I don’t know who may be holding bad, undisclosed, loans it only makes sense that someone is kicking the can down the road–of course this is just my feeling–maybe I am all wet–but in the end the longer we go without a disclosed ‘disaster’ in the loan book the more skeptical I get. In the end when I begin to worry about these things I am better to simply book a nice profit and move on.

I am sure we have some bankers–or ex-bankers on the site, but we all know that marginal loans can be renegotiated etc–even when there is little to no hope that they will ever be good loans. It is hard to imagine that many commercial real estate loans can be serviced when interest rates move as they moved in the last 2 years. We’ll just have to wait and see if my ‘gut feel’ comes to fruition.

Stashed a Little In This Solid BDC Baby Bond

This morning I decided to go ahead and take a position in the Trinity Capital 7% Note (TRINL) with a maturity of 1/16/2025. I paid $25.20–a dime more than I wanted to pay–but a fair price.

This is simply locking down what I believe to be a very solid 7% for the next year. Certainly I could garner another 1-2% in yield with other BDC bonds but this one gives me a ‘target’ 7% with virtually no movement of the share price (excepting accrued interest)

Trinity is a $1.3 billion business development company and while they make many term loans they also concentrate on equipment financing.

Bought a Little Brighthouse Financial Preferred on Friday

As I disclosed in an earlier note I intended to place a good-til-cancelled order for some shares in annuity provider Brighthouse Financial (BHF).

The BHFAP 6.60% non cumulative preferred was trading at $22/share on Friday and I entered a GTC order at $21.75—the order executed Friday afternoon. This was just a starter position.

At this time I don’t know if I will add to this position–will wait to see their financials for 2023 which won’t be released until 2/12/2024 so there is more than a month to wait.

In the next 6 months I expect shares to rise into the $23 area–this is if the 10 year treasury drifts lower—and who can predict the movements really.

Entered Good Til Canceled Order On Brighthouse Financial

I entered an order for Brighthouse Financial (BHF) 6.6% Preferred. My order is at $21.75 for a current yield around 7.59%. I chose this issue of the 4 preferreds they have outstanding because it has a 1st date of optional call in March–which gives it a huge yield to call if interest rates continue to fall through 2024 – meaning lots of capital gain potential.

I reviewed the financials of the company and I don’t like to see falling equity—and they had a $1 billion reduction in equity for the quarter ending 9/30/2023–BUT I anticipate that equity will jump substantially during the quarter ending 12/31/2023 because of falling interest rates and thus increasing portfolio values (their portfolio is about $73 billion).

Shares are rated Ba2 by Moodys (2 notches below investment grade) and BBB- (investment grade) by Standard and Poors.

Studying Carlyle Credit Income Fund Term Preferred for Possible Position

I am studying the newer Carlyle Credit Income Fund 8.75 % Term Preferred (CCIA) for a potential small position. It meets my hurdle–high yield, monthly payer and mandatory redemption in 2028.

This fund is newer, although technically it has been around for a long while–in a completely different form. The fund was previously the Vertical Income Fund which was bought by Carlyle recently–the portfolio sold off and the fund rebranded as a CLO owner.

The fund is small – about $150 million (including proceeds of this term preferred offering), but I suspect they will grow the assets fast–these funds make their living on fees–and the larger they are the more the fees.

This fund can be compared to Eagle Point Credit (ECC) or Oxford Lane (OXLC)–they own collateralized loan obligations–typically the equity tranche (meaning the higher risk tranch). Because they are organized as a closed end fund they are required to have asset coverage ratio of 200% for preferred shares. With this new term preferred CCIF should have about 300% coverage as the new preferred is their only leverage.

The main difference when comparing these companys is size and history. ECC and OXLC are much larger and have been around for years.

Currently shares are trading around $25.40 and this is where they are likely to stay for a while as Eagle Point Credit who bought 800,000 in a private placement on 11/21/2023 for $24.25 has been selling shares in the $25.40-$25.60 area–this may keep the share price tamped down for a while.

Haven’t bought this yet–but probably will take a small position.

The issue has a coupon of