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.
Brighthouse have traded extremely poorly for a long time. Almost the same as anything tied to apollo….(Aspen Athene).
They offer insurance on mutual funds that wraps them in a structure not dissimilar from ‘living benefit’ payment streams on VA’s. I don’t think they’ve been very successful getting participation,
Also see some analysists have sell ratings on BHF common, seven holds and three sells! . Their 3 segments are Annuities, Life, and Run Off. Supposedly the companies mortgage loans are principally collaterized by commercial agricultural and residential properties.
We can guess where some risks are!
Tim, FWIW I am inclined to agree with you on the decline that we saw in equity. On Page 88 of the Q there is a nice table articulating credit quality of the various components of their fixed income book.
The vast majority of the corporate bond portion is well above investment grade and focused on AAA, AA, and A rated issues.
The line items for RMBS, CMBS and ABS immediately catch ones eye. Again the vast majority of these are AAA, AA and A rates issues. 82% of the RBMS book is agency paper.
The fair value of the RMBS and CMBS holdings are articulated in tables on page 89. Here we see that fair values have been negatively impacted from Dec 2022 to Sept 2023. The fair value of the RMBS book has declined by $477M and the fair value of the CMBS book has declined by $303M.
So this would appear to account for $780M in the decline in equity. Based on the credit quality these assets look like they will return par, and the decline in fair market value would appear to have been driven by the 2023 interest rate environment.
They also have a $22B whole mortgage book. Of which $13B is commercial (the rest is residential and agricultural). Looking at slide 10 of the investor slide deck they seem to have done a good job in cutting exposure to office loans and only 6% of their commercial mortgage book matures in 2024. So this is favorable.
So yes in a more favorable interest rate environment and as these assets mature these book values should come back.
This looks like a good find.
FWIW
I believe the reduction in equity relates to the mark to market decline on long dates fixed income securities on their balance sheet. With the decline in rates some of that depreciation in value will reverse.
Goldshoe–yes you are correct as I noted. What we can’t know is their hedging operations–they MAY realize less than I might expect if they have large hedge losses.
I bought BHFAN shares at the end of 2022 @ 18.47 and 18.74; they currently sit at $18.00. Not a disaster, for sure, but their lack of appreciation in a favorable market for debt is concerning. For those not familiar, Brighthouse Financial is a spin-off of MetLife.
Based on my experience, expect a volatile ride with BHF preferred shares
donocash–yes it is about the risk reward. I think they will get their act together soon (like now) and we will see some nice capital gain in the next 6 months.
I’m always surprised when firms have a 2-notch differential in their investment ratings. Is it just a matter of timing or are there just different factors in how moodys/s&p/fitch analyze companies? just wondering…..
Metlife bought Travelers (and some other retail insurance/annuity operations), rolled them together with some parts of Metlife, then spun the whole thing out. BHF is a fairly big company (fortune 500), but not the quality of Metlife.
I have been involved in several of these corporate spinouts over the years. It usually seems that the spun-out company doesn’t get the prime assets. the spinner keeps the cream and spins out the rest. Not necessarily junk, but the spinner’s management gets to pick what goes in each pile, and is rewarded for how well the spinner does, not for how well the spun-out does.
I picked up a little in my taxable account in Oct/Nov (to get the qualified divi). I thought it was a good buy at/below $20.
randy–yes 1 notch is understandable–but 2 notches makes one wonder.
Mine just got filled at IBKR Jan 5, 2024
Buy 21.76
Jos–surprised I got a fill at 21.75.
I took your lead Mr Tim and also got in at that price!!
Tim -I didn’t understand the comment about falling equity. I think reduction in equity may be due to buy back, which is a good thing, am I missing something in your comment?
I think he meant the equity from the asset under management (AUM), not the equity from the outstanding common shares.
this looks like an Insurance Company to me . Do insurance Cos have assets under management ? don’t think so ;
Could be the assets they own have gone down in value over the recent period because they lost market value .
There are an annuity and life company, so yes, they have AUM. They also hedge their indexed products so they have huge swings (gains/losses) each quarter depending on the market.
> I think reduction in equity may be due to buy back, which is a good thing
For the common, sure, but not the preferreds.
Cash is not equity but cash is the equivalent of equity because a $ of cash can be converted into a $ of an equity ; therefore ; stock buybacks do not reduce the broader use of the term equity as in equity/debt , would not be effected ; imho
Jay – pretty much is assets minus liabilities (not exactly but close). The assets have been reduced by falling bond prices which they ‘mark to market’. With interest rates down bond prices are up and they should see asset growth with flat liabilities=growing equity.
Tim, I cruised Fido’s bond page on Friday and set parameters of 6% to max on Yield and Dec 2024 to Dec 2035 came up with 74 offerings not even a full page. All my bond holdings in utes and oil related are up. This should be true for anyone holding bonds even longer end ones
Charles, Just for fun I tried to recreate your search on Fido…. I just came up with 137 issues and of note, these would be 137 issues that are investment grade rated only and would have Yield To Worst between 6% and 7.88%. Don’t know why I couldn’t come up with the same number of issues you did…. maturity range = 12/2024 to 12/2035. And of course, this would be for only bonds that are IG or higher…… The list is 321 CUSIPs long if you search for only below investment grade issues with yields to worst starting at 6.00% and ranging higher.
Want to compare what we did?
Hard to say 2WR, I did it about 6am Friday morning. It was a rough guess going off memory that I set it for Dec. 2024 between 6% to 6-1/2% to Dec 2035 at that time I came up with about 74 issues of Corporate offerings only.
I don’t set any other parameters like IG
I just ran it now from 6.3 to 7.8 % and came up with 72 issues.
Nothing really appealed to me. Financial, REITs, BDC’s one oil and 3 international. Not a single ute, or a manufacturer.
Not even a PCG !
Now if you go for a walk on the wide side and go for below investment grade
there is some interesting stuff. Even QVC!
Oooooooooew!!!! So close! I come up with 74 for some reason, not 72 but that’s close enough for jazz to say we’ve come up with the same list… lol. Yay…. As far as not setting parameters for IG, it does it for you by default. You have to use a different search – selecting “HIgh Yield (secondary)” to search for anything under IG status…. and then you can choose what ratings you’re willing to even consider, all the way down to C rating if you want…
Glad you replied so we can compare how we’re using Fido Fixed Income search
2WR, sent you a pm on that other site. Seeing QVC bonds on the junk list reinforced my opinion of them.