Drill Down on Priority Income Fund

NOTE THAT THIS IS MY TAKE AND LOGIC ON PRIORITY INCOME FUND AND THEIR TERM PREFERRED SHARES–NOT A RECOMMENDATION FOR ANYONE SINCE WE DON’T EVER MAKE RECOMMENDATIONS.

I wanted to spend just a little time doing a bit of a drill down on the Priority Income Fund, which is an untraded closed end fund (CEF).

Unlisted closed end funds have been around since 1992 so there is really nothing unusual being unlisted. Often we don’t hear of these funds simply because unless the CEF is selling preferred stock or baby bonds they aren’t on our radar screen. With the Priority Income Fund if they were not selling term preferreds I would have never heard of them. But in general these funds exist in order to have access to investments which are not very liquid. Additionally they have gain access to institutional type investment opportunities. All in all the securities held may well be very illiquid and may be very high yield.

NOTE that there WAS 1 other untraded CEF out there with a term preferred outstanding and that is RiverNorth Marketplace which has a 5.875% term preferred outstanding which you can see here. The company started trading their common shares publicly on 6/12/2019.

Since the CEF is untraded companies almost always offer some way to gain liquidity by the investors. In the case of the Priority Income Fund there is a quarterly “tender offer”. Priority limits the percentage of the total shares that are purchased in any given year to 20%. So investors in these funds do not have the instant ability to gain access to cash.

Of course as one might expect there many details to these issues that we can’t cover here, but for those with 3-4 hours to spare you can read all of those details right here in the companies supplements to the prospectus.

The bottom line is the CEF operates much like Eagle Point Credit (ECC) or Oxford Lane (OXLC), both of which are closed end funds also. The obvious difference is that both Eagle Point and Oxford Lane are publicly traded. Whether one fund is better than the other is certainly something that can be debated, but they all hold CLOs (collateralized loan obligations) which are somewhat of a ‘black box’ in that they hold level 3 securities (value can not be directly observed).

So as a preferred shareholder what do I care about?

(1) I care that the management are honest folks. (2) I care that the companies net asset value (NAV) is not moving sharply lower fast indicating poor management and (3) I care that my shares have a reasonably strong ‘coverage ratio’ (remember that by law they must have at least a 200% coverage ratio).

So my most important factor–that management is honest–is simply an unknown. How do we know? The only thing I can say about this is that longevity goes a long way toward lending credence to the company. For Priority Income they have been around since 2013–while not a long time, certainly 6-7 years is better than 2 quarters ago.

The 2nd factor–NAV is not moving quickly lower indicating poor management–is something we can put our finger on. Here is a chart showing the data.

I can see from this chart that the last couple of years haven’t been that great–but I am buying preferred stocks so I don’t care so much–I care that the performance has been reasonable–thats all–just reasonable.

Lastly I care about the coverage ratio provided—since I never FULLY trust values to be correct I want it as high as possible.

Here is a chart adjusting coverage ratio for the lastest term preferred sold (PRIA-E)

Each line on top is a preferred issue–a total of $150 million. The bottom line is total assets which we can divide by the $150 million to come up with 360% +/-. It is interesting to note that when they first began selling term preferreds their ratio was 800% or so.

So let’s assume assets are overstated (I always assume they are overstated by some amount)–by a lot. For us to move to a coverage ratio of just 200% they would need to lose $250 million!!! Yikes. Needless to say this is not likely to happen–I hope.

With all the above in mind–and just in my mind–I have started to build modest positions in some term preferreds of Priority Income Fund. I bought a small position in the 7% PRIA-D issue when it came to market and I will buy others soon. I may swap out the D issue because it is the longest term and I would rather be a bit shorter in maturity.

19 thoughts on “Drill Down on Priority Income Fund”

  1. Anyone have any information on the switch from Destra Capital as manager of Priority Income Fund to Prospect Capital as of the beginning of the month. No information is available on the fund on either web site.

    1. Rick – on 11/2 destra ended their distribution agreement. Prospect has always pulled the strings on this one–since day 1 I believe.

  2. Excellent overview on Priority Income Fund. I am holding 1/2 a position of C and I will look to buy more of the new issue after reading your overview. Thanks

  3. Tim – What’s your opinion of Prospect Capital? I suppose we all have our own inexplicable personal biases, and one of mine is being anti-Prospect…. I guess it’s mostly based on their penchant to be constantly issuing debt issues on a dime seemingly daily. Os sure, they maintain their IG rating, and I suppose that explains part of the irrationality of my opinion, but to me Priority is Prospect under a different name, set up to invest in even riskier investment vehicles than Prospect normally invests in…. They are managed by Priority Senior Secured Income Management LLC which is 50% owned by Prospect and under Risk Factors it says, “Our Adviser currently does not currently have employees but has access to certain investment, finance, finance, accounting, legal and administrative personnel of Propect Capital Management.” So to me, Priority is Prospect saying we’re going to choose to invest in CLO’s and similar Senior Secured Loans under a different name in hopes that if poo poo happens to CLOs as an investment class, hopefully our Prospect name won’t be tainted quite as much as if we invested in them under the Prospect name… Yeah, I know, this is a very subjective and personally biased view, but I just can’t on get past it on anything Prospect as Priority is Prosect imho for all practical purposes… It’ll probably be fine, but I’ll pass on the name

    1. 2wr—I haven’t studied PSEC really–I know their reputation is not good. In fact the reputation of Priority is not good either–which is why I chose to look closer. For me it is simply ‘what can you do for me?’ If I can reasonably earn 6-7% with an acceptable level of risk that is mostly what I care about. I own bunches of Gabelli issues, but I have never been a fan of any of their CEFs–they don’t perform well.

      1. Tim,
        In regard to your comments about PSEC – Most of my holdings are rated C by your III Rating. I only have one A – GDV-PG. You have PSEC issues rated B but you say their reputation is not good. Help me understand why they are rated B and is there a list available by ranking for all the positions you track ?
        Thanks
        Gary

  4. Thank you for for this look behind the curtain, Tim. Holding small positions of the A issue in a couple of accounts, cash on hand to add more if we have a market meltdown. Really appreciate your analysis, way beyond my ability to derive but I get the gist. Thank you very much

    1. D – I am very comfortable holding shares in MODEST amounts. I don’t think they are a very good CEF so I limit holdings just in case something blows up.

      1. Tim
        RiverNorth is actually a hedge fund in a cef wrapper. They do a lot of things but do have a significant focus on reits and actually have taken part of their property holdings public in a separate company. They also have some other jvs with names you would know and love as you probably already know. Thanks for all your information. SC

        1. Their price has been very stable too. That always helps when you are looking at your portfolio.

          Of course, the Medley stuff was stable too until it blew up.

    1. mikeo–I wish I had the time to break these things down better, but one could spend a full day on one write up.

    1. Tim – I think the information on the 2018 tax form refers distribtutions for the the fund shares (this is what I infer; the form is not clear at all). If that is the case, then it is unclear how the preferred dividends are treated. I emailed the fund to get the answer. I will post here if they reply.

      1. xwords–I believe that generally the common data will translate directly to the preferred shares. Virtually everything I hold is in tax deferred accounts so I don’t have to deal with qualified/non qualified etc.

  5. Appreciate the write-up, Tim. I’ve shared my concerns re: the problems of OXLC and why I sold OXLCO. ECC is doing better, but not hitting anything out of any ballparks. I still hold ECCA.

    Any idea of approximately how much of the divvy from these PRIF funds is qualified?

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