Reviewing the comments on the website leads me to believe that there is some hesitation by some to own senior securities (preferred stocks and baby bonds) of non traded Closed End Funds. I can understand the hesitation, most of which stems from a lack of understanding of some of those company’s that issue preferred stock as leverage for the fund. We have all been conditioned to watch prices of common shares of closed end funds as an indicator of the general health of company and thus the health of our preferred shares and related dividends and obviously we can’t do that with a non traded fund.
In particular, for us, this pertains to the preferreds issued by the Priority Income Fund and the new issue from Eagle Point Institutional Income Fund–both which are non traded funds. In this case both company’s are ‘interval funds‘. Interval funds are non publicly traded funds that sell shares continuously through investment advisors that make ‘tender offers’ monthly or quarterly to purchase a percentage of their shares from holders. These periodic ‘tenders’ are meant to provide a modest level of liquidity to investors.
I note that my research shows there are 92 non traded interval funds in existence.
Why non traded and why interval? These funds are meant to provide access to sometimes illiquid securities–i.e. real estate related investments etc. While the Priority Income Fund and the Eagle Point Institutional Income Fund are focused on the ownership of CLOs they are able to invest elsewhere in investments which are not liquid. Additionally non traded closed end funds often have ‘suitabilty’ restrictions, thus they are not suited for public trading.
The sale of common shares of non traded funds on a continuous basis is made at the net asset value of the shares—and the tender offers to buy shares periodically is made at net asset value. Of course when one buys shares through their investment advisor they may well pay a higher price – i.e it includes a commission (or load) of sorts.
The good part of these funds is that they file all their reports and information with the SEC so we have access to information continually (not daily, but at least monthly). These are not non reporting funds, just non traded. This is NOT a situation similar to AmTrust Financial where they do not file their financials with the SEC ever.
I own 2 issues of Priority Income Fund term preferreds and feel totally comfortable with monthly updates. Like any other CEF I want them to maintain a high asset coverage ratio – Priority is now at 320% (6/30/2024) which provides safety for senior security holders.
So I never recommend securities to anyone so this is not a recommendation to buy anything–but I don’t let the non traded status of a closed end fund deter me from a purchase of a senior security if it meets my investing needs.
Tim,
Please don’t be offended if you think this is harsh.
I have finished looking over Priority Income Fund, and I’m still going to disagree with you on the risk level.
First, regarding why it doesn’t trade publicly, that’s merely a choice of the issuers to let brokers sell their shares with a load.
You stated, ” … non traded closed end funds often have ‘suitabilty’ restrictions, thus they are not suited for public trading.”
I’m not sure what you’re saying here because “suitability” relates to an individual investment’s suitability for an individual investor’s goals and level of risk. Are you perhaps expressing an opinion that uses “suitability ” in two different ways in the same sentence, where it’s your opinion that while security that very much could be publicly traded , you don’t think it should be? It just seems you’re mixing two ideas here.
Next, the NAV is reported at intervals. The level of asset coverage is shown in the prospectus. It’s very much possible that using whatever level of inputs are available from the market–whether level 2 or 3– that NAV could decline massively in a very short period on senior secured loans (the CLO’s) that are well below investment grade. In fact, the non-diversified nature of the fund more it more likely.
Third, just looking at the coverage on it’s senior secured facility, which is (from memory) somewhere in the 9000%’s –and looking at the rate they pay for this facility of 1 month SOFR +3.25% with a defined minimum even if they do not use the facility, and the 6.5% rate on the 2035 term debt with over 2000% coverage, the preferreds are not anywhere close in “value” to the purchaser versus owning a piece of the term loan or the borrowing facility. This makes me think PRIF should be investing in CLO’s containing it’s own debt, as I wouldn’t mind earning those rates.
To sum this up , a buyer of the preferreds is a retail purchaser at the bottom of the capital stack, and is getting the dregs of the capital stack. I can only look to the rest of the stack to decide if I am getting a good deal on an investment in the preferred.
I’d rather be pari passu with every other debt/ preferred holder unless I’m getting a MUCH higher yield.
When you say an investor should look at the ability of the issuer to continue issuing new shares, yes, that’s true. However, I think that ability can suddenly dry up in a recession.
Am I too frightened? Well, maybe.
I just don’t see the value of holding something when I know someone higher in the stack has a better deal .
When I actively traded for a living using massive leverage (which scared the heck out of me so much I’d often spend the evening at a movie theater until midnight to get my mind off it before coming back at 1am PT for premarket trading), I would see a new trader doing something that made little sense to me. When I asked why they owned that security, the answer would be , “I’m just trading it.”
Ofc, a non-answer.
Here, I see you making an argument of “I’m just investing in it.”
LT
Thanks for sharing your experiences and thoughts.
losing trader – I am not making any argument to own or not own. You know I disclose what I do personally, but do not EVER recommend anything to anybody–the objective of the post was to discuss interval CEFs.
The preferreds are obviously not at the bottom of the capital stack–there are hundreds of millions in common equity junior to the preferreds.
Relative to the preferred asset coverage my numbers are correct (approx). It is a simple mathematical calculative looking at the balance sheet. Total assets divided by preferreds and liabilities.
As far as ‘suitability’ I am talking suitability of a particular investor to buy a particular security. As you know each broker is supposed to know their investor–while this has been minimized for a long time that doesn’t alleviate a broker from some potential level of liability.
As far as a senior loan going bad—of course they can go bad and do everyday. As you know a singular CLO is a bundle of loans–if I remember right normally 75 loans or so. The expectation is some loan go bad—no surprise to anyone.
Why do I own some of them? I understand they quite well. I have studied the history of not only PRIF but other CEFs in the sector. The yield meets my hurdle rate. It is a tiny portion of a fairly well diversified portfolio. All in all a tiny part of a big puzzle.
Tim,
You have done a lot more work on this, and have a lot more experience with it than I. Your decision is reasoned, not rash.
By “bottom of the capital stack” I was referring to preferreds/ debt. I should have been clear.
I’m constantly expressing my “pop-up” opinion. Often, it’s wrong. There’s little cost to expressing an incorrect opinion.
On these I read enough of the offering/prospectus that it wasn’t something for me…at least not right now.
I’m always comparing yield. In this case , I’d take 4.1 % tax free on a 7 to 10 year A+ muni ( a port bond) subject to AMT . That’s about 6.375 % TEY for me, all in.
If I could find any unrated Nevada Improvement District bonds at 5% I’d likely choose those first as they are easy to evaluate. Heck, I’d load my portfolio with those if the improvements have been parceled to homeowners .
So, given the choice I have tomorrow of an A+ muni at 6.375 TEY –and I don’t worry at all (there’s still risk) or… preferred at more than 7? 8? I’m not sure exactly where on the yield/worry curve I find equilibrium. I’m also not at all sure I should ever look at credit rating.
Thanks for your response. We should eventually have a get-together in Vegas (mainly because it’s 3 miles from my house in Henderson to Vegas)
“It’s very much possible that using whatever level of inputs are available from the market–whether level 2 or 3– that NAV could decline massively in a very short period on senior secured loans”
Anything is possible but this didn’t happen in the GFC or pandemic crisis. Even if it did happen, there’s sufficient coverage on PRIF’s secured debt that they wouldn’t trip any covenants that would stop payments on the preferreds. Eventually once the liquidity crisis is over, the NAV will return to a level consistent with the actual default rates of the underlying loans.
“I just don’t see the value of holding something when I know someone higher in the stack has a better deal .”
The 6.5% secured loan is not available to retail investors. That rate is high compared to the preferreds which is why I don’t think the preferreds are great deal. But the loan is a great deal at 6.5% and if the preferreds were 300 bps higher at 9.5% (consistent with the typical spread between preferreds and secured loan), they would be a great deal.
Hi Landlord,
I thought overnight about what you said here about the GFC and pandemic.
Both true, however the federal government saved investors during the GFC, as well as pumped a lot of money into the financial system during and after Covid. Heck, we had to guarantee all depositors of several banks in 2023 or a contagion would have spread.
I’m asking myself, “Will the govt always be smart enough to save the stock market?”
My answer today is . “no”
If you recall, Congress originally voted down TARP . I was watching that vote. Markets fell dramatically.
Given I think we will all agree the level of intelligence in Congress has declined significantly since 2009 , I think a failure to act or some other misstep would be likely.
I think it’s likely a divided Congress would be stupid enough to allow a default on government debt in a shutdown.
That’s my deciding factor in always preferring insured CD’s as a decent portion of my portfolio.
LT, I can assure you my congressman is stupid enough to allow the government to shut down. But he might be busy elsewhere ensuring the government is looking for space aliens. I do not jest. He is a dangerous idiot.
losing
Help me understand…..
A default on government debt is possible;
So I prefer insured CD’s.
Insured by that defaulting government????
Westie,
By no means am I an expert on the following, but this is my understanding:
I’ve read, but don’t recall the source (please don’t make me look), that In the event of a government debt default, the holders of that debt are legally prohibited from receiving interest for the default period. I know there was a court case regarding a small default that occurred and the government settled it, so I assume interest was in fact ultimately paid.
As far as FDIC, I would not assume broad bank failures occur if the government defaults for a period of time. FDIC is funded by banks. The government only steps in with loans to FDIC. Lat time I looked FDIC could borrow $100 billion. Same with NCUA for credit unions.
There was a very large assessment to a small bank in which I was a shareholder during the financial crisis.
On a similar note, and perhaps less fair, SIPC isn’t at all backed by a full faith and credit guarantee. It does have borrowing capacity with the Fed.
I was worried about SIPC more than anything during the GFC. That worry is based on the fact a brokerage cannot file Chapter 11, only Chapter 7. If another broker cannot take over the accounts, the law states that all street name securities will be lumped together (I assume for sale)and only customer name securities will be returned to account holders.
The reason I say “less fair” is that although my firm did not have public clients and traded solely for it’s own accounts, we were required to be members of SIPC. When the Madoff scam used up the $1 bill or so in the SIPC fund, SIPC assessed all members 1/2% of profits until the fund was adequately capitalized. I don’t recall how long that lasted but it seems unfair to assess someone who cannot benefit from the fund. We did not have any customer accounts.
Here’s an interesting explanation of broker chap 7 from the time of the GFC:
https://katten.com/Treatment-of-Customers-and-Financial-Counterparties-in-Stockbroker-Liquidations-Under-SIPA-and-the-Bankruptcy-Code-06-04-2008
Don’t preferreds of CEF’s have to maintain at least 200% coverage ratio? If they fall below that they are required to pay them off?
Jeff,
Yes. I am positing the possibility this becomes impossible due to a large decline in NAV. That’s why a preferred based on a large group of stocks is so much less risky than one based on what may be illiquid, non investment grade loans
Tim,
This seems like you wrote it just for me. I need to rethink this. Traders are not used to thinking so much. I’ll put my accounting degree on the shelf for awhile while I decide if I agree.
What I’d ask, is “Why are the yields on these so high if they do not have substantial risk?” I do not think many public offerings of debt or preferreds are mispriced, but your comments seem to imply risk isn’t so high…which in my view indicates mispricing.
There are pricings I may not understand, like the 8% BOH preferred, but I make the assumption it’s correct and I just don’t understand the risk.
losingtrader–remember I am talking about preferreds–they the common shares. I have never owned any of Priority, Oxford Lane, Eagle Point etc. common shares and most likely never will. Is their risk–of course there is and I don’t minimize that for any security–but for me to reach a 7% hurdle I can’t limit my holdings to the safest securities, although I am fairly conservative compared to many.
ps–I didn’t write this just for you–but some perceive more risk in untraded issues than traded issues.
Tim,
Understood , about the 7% hurdle.
If I can’t evaluate the holdings–and I cannot, I’m asking myself, “What is the likelihood of BB and B or lower debt going down by 2/3rds?”
Beats me.
As mentioned, though, I don’t like the fact others are in front of me and getting what I perceive as a premium yield while having much, much less risk than my preferred.
I’ll pass.
However, this site did point me to some CEF preferreds that I think have almost zero risk. I had totally forgotten about CEF preferreds until I found your site. I’d owned some Nuveen CEF tax-free preferreds years ago.
I do think a preferred on the stock market as a whole or bonds/munis is where my risk appetite lies. I’m always Looking at after tax yields and preferreds so make a lot of sense.
LT it’s the back and forth conversations here that helps me think regarding my decisions.
What Private said today about his holdings and hoping he is positioned for any downturns in the market. He expects it to happen and wants things that he feels will recover. He doesn’t expect to be immune to a drop, just wants to worry less about any losses. Tatala’s comment about remembering 1999 to 2000 or maybe a little longer and remembering how the market got “frothy” and Yes, I remember that too. I read Bea’s comment that it’s not like having a job where you can replace lost savings with earnings.
Thanks for you for posting your thoughts out loud.
losingtrader –
In regards to your comment:
“There are pricings I may not understand, like the 8% BOH preferred, but I make the assumption it’s correct and I just don’t understand the risk.”
What don’t you understand about that security’s $26.60 price and 7.52% yield? This is one of my largest regional bank preferred holdings. It can’t be redeemed until 8/1/29.
It’s 4.375% BOH-A sister preferred (callable on 8/1/26 but will likely never be redeemed) currently yields 5.98%. Now that is one where I don’t understand the pricing.
Papa Doc,
I was referring to the original pricing. I don’t understand why it was necessary to offer 8% to get that deal done. I’m looking at a credit rating of “A” on the bank. I just would have thought this got done at a lower yield
TIM-
Looks like EPIIF is their non-listed fund which shows a class that can be purchased thru a brokerage?
https://www.epiif.com/fund-materials
Class A / Brokerage has some description in item 6. Quite illiquid- hence the regular ECC ( which has a much higher yld).
Seems similar to the regular ECC CLO equity fund, as it is far at the bottom of the pecking order vs EIC ( more debt holdings).
Gary –I do really like the weighting of more debt tranches as compared to the equity tranches.
Tim, this sounds similar to Blackstone and Brookfield PE funds. You have to meet a certain net worth to be able to invest in them.
Until last year they had no limits on withdrawals. Then one or the other limited withdrawals due to liquidity. Even high net worth people can panic.
In this case what you are explaining sounds similar, just no set amount redeemed only what can be purchased with monies available.
Be interesting to find out how much of any new issues go towards buying back their non-traded shares.
Charles–I haven’t looked at the particular terms for PRIF–but there are many securities sold where you need a certain liquid net worth to buy. I have no idea whether brokers actually follow the rules.
What is the appeal of the new ECC (ECCC) compared to ECC PRD? ECC PRD is perpetual and cumulative, yield is 8.6%. Priced at 19.40, it has greater potential for capital gains if (when) rates go down.
Anton, just depends how conservative you are and do you want to trade or take the risk with holding. These are two different things. Why they are priced the way they are. One is term BB (baby bond) which means people expect to get a set amount back on a set date. They consider it less risky so they pay more to own it.
This reasoning is illogical. Both of these have the same amount of asset coverage and safety.
ECCC is past its early call date, matures in 2031 and currently at a price of $23.50 yields 6.96% with a potential capital gain of $1.50, if called or held to maturity.
ECCPRD has a current price of $19.40, yields 8.73% with an early call date of 11/2026, with a potential capital gain of $5.60 if called any time after 11/2026
I would buy, and did put my money in ECCPRD staring in 2022 and have been adding more shares since.
There are a few things you’re not considering, et….. As noted ECCC is a TERM preferred and therefore, it “matures” in 2031 while D may never “mature.” So given the ’31 “maturity,” of C, then you should consider a normalized yield curve which is what the market usually incurs although not so much in the past couple of years… In a normalized yield curve with 2 bonds/preferreds, one of 2031 maturity and the other say with a 2071 maturity, the market usually says that you’re taking on less risk buying a bond/preferred that gives you your principal back in 7 years so it will value it higher.
Also even though both are trading below “par” and therefore Mr. Market does not consider either one a likely call d=candidate today, consider what could happen on C – If interest rates were to fall dramatically in the near future, it could be called quickly while D sits there while rates go whereever they go unpredictably in the next 2 years. So when bringing up the greater discount to “par” when favoring D over C as a reason to favor D, consider also the YTC on both.. You live with the possibility of a call right now on C on 30 days notice always now and some might consider that a plus while others a negative… Playing Devil’s advocate, though, without actually doing the calculation, I bet if you did a YTC on both C and D using D’s 1st call date of 11/29/26 as the date both get called, I suspect D would win…..
BTW, when you point out that C yields 6.96%, you’re using CURRENT yield, right? Given it has a “maturity” of only 7 years, I’d argue YTM is the more relevant yield and that at today’s close of 23.71 is 7.75% +.
Term issues typically have lower yield by as much as 1% because less long term risk, and they are higher in the stack in the event of bankruptcy for whatever that’s worth. But the perpetualss below par have room to grow and that sometimes makes up the difference, depending on risk assessment. In a few cases they have lower divs than the term issues, CIM MITT and MFA are examples of that. Of course there are always price anomalies on low volume issues and taking advantage of them can be profitable.
Martin -” term issues typically have lower yield by as much as 1% because less long term risk, and they are higher in the stack in the event of bankruptcy for whatever that’s worth.” Are they really? That doesn’t sound right but I don’t know for sure….. I would think they are treated as part of the class of which they are pari passu and I don’t think term preferreds are considered a higher class than perpetuals….. I think all bonds, no matter what maturity, are considered equal in BK, so I would think that should be the same for preferreds.. Please do let me know if you know for sure……. Thankfully I don’t think I’ve ever had to experience such an event up close and personally…
I don’t know the details. I’ve heard it argued a few times. Maybe just for specific cases? I wouldn’t expect to receive a dime either way so I don’t base my choice on that. “for whatever that’s worth”
Preferreds are pari passu*, bonds may or may not be.
* There might be some edge cases out there where one preferred is “senior” to another, but I can’t think of any.
We’re probably getting into semantics, but what I was getting at was that Ive never heard of Term preferreds being considered a different class than preferreds that were perpetual and, therefore, they would not treated differently or preferentially than other perpetuals. And since they’re all equal, term preferreds are pari passu with perpetuals … On the bond front, “pari passu” I think would be passable terminology for all bonds of the same class just like preferreds…… So I think it’d be OK to call all senior secured bonds pari passu, all senior unsecured pari passu and all even more esoterically described bonds like subordinated, etc, etc, etc, could be called pari passu with each other. It does not mean that all bonds themselves are pari passu… it might be improper usage of the term for all I know but as I used it, I thought it was OK…
to beat a dead horse just a little bit more, I think I should have used “in parity with” instead of pari passu….. it means the same thing, but is probably more proper usage in this case.
O.–today are correct–the term preferred are pari passu with the perpetual issue. Virtually all the time it is outlined in the prospectus–this is from the L series term preferred–
The Series L Term Preferred Stock will rank pari passu, or equally, in right of payment with our Series D Term Preferred Stock, Series F Term Preferred Stock, Series G Term Preferred Stock, Series H Term Preferred Stock, Series I Term Preferred Stock, Series J Term Preferred Stock, Series K Cumulative Preferred Stock and all other shares of preferred stock that we may issue in the future.
Tim – you are dead on.
The prospectus will say where an issue sits in the “stack” in comparison to other issues.
there are some “rules of thumb” we all use, but the actual position of one issue versus other issues from a company is in the prospectuses. If you really want to diagram the “stack”, you have to read the prospectuses for all the issues to be sure there isn’t a “special” issue with better terms.
Usually, debt is in a series of buckets (varying preference levels) but preferreds are usually all in the same bucket – but you have to read the documents to be sure.
A million years ago, I helped write several preferred prospectuses for issues that were senior to other preferreds. They were being issued as part of corporate transactions (takeovers) as a way to make the deals “work” for deal participants. Not really intended for the general public.
They were pretty uncommon (sorry, couldn’t resist the pun).
CHARLES-
Neither of those is a BB. Bonds are ECC V, W, and X
Gary, my mistake. It is a term preferred as everyone is pointing out.
At this point in my investing I actually have been rebalancing. A few perpetual and long dated holdings I bought have risen up in value and I have sold and moved over to the higher risk but shorter term dated holdings.
Not sure what the market is going to do, but if there is a hiccup then I may be able to buy back the higher quality but lower coupon long term stocks.
Anton-
‘New’ ? ECCC is 6 mo older, both IPO’d in 2021.