Gladstone Capital Redeems Term Preferred

Again one of our holdings is being redeemed.

BDC Gladstone Capital Corp (NASDAQ:GLAD) announced the intention to redeem their 6% term preferred effective 10/2/2019. Fortunately this call only cost investors a few pennies as the issues was already trading with a potential call in mind. The earliest the issue could be redeemed was 9/30/2019.

The company is using their current credit facility to make the redemption. Our suspicion is that the company will come forward with a new term preferred with a coupon in the 5.25% to 5.50% area in the next month or two–and they will get it done because of the almost desperate need by investors for yield.

For years I have set 7% as a goal for our accounts. It is obvious that most likely this is 1 or even 2% too high (over the next year or two). Certainly an investor might garner some capital gains, but when I am studying quality issues with 5-5.50% coupons you find something that “works” in terms of call protection, 7% annually doesn’t really seem likely.

5 thoughts on “Gladstone Capital Redeems Term Preferred”

  1. 2whiteroses,
    Thx 4 ur reply. I misspoke with “preferreds” instead of notes.
    HTFA is a 6.25% while SCA is 5.75%. I wonder what is the cost for a company to redeem and reissue lower? What would be the minimum difference in coupon (old coupon vs new one) worthwhile for a company to redeem and reissue lower; is a 0.5%, 0.75% difference worthwhile?

    1. Daniel – That’s a good question and I don’t know the answer. I’m sure it differs from company to company and in many cases the answer also involves accounting because in general, refunding an outstanding issue normally shows up as a hit to earnings as they have to write off amortized costs associated with the called issue that have been calculated for the actual maturity date.. In addition, the new issue will in general cost about 3 points. So in other words, NEWTL’s last issue at par generated only 24.25 in proceeds to the company so a 5.75% coupon issue like NEWTL costs the company closer to 6.50%.

  2. Though GLAD will have the ability to economically replace GLADN with a lower coupon issue, as the company’s been saying for probably a year, this refunding would have occured even if they couldn’t as GLADN had language in it that prevented GLAD from taking advantage of the added leverage afforded them by SBCAA, The Small Business Credit Affordability Act. There are probably other BDC baby bonds that have similar language that might motivate refunding under any circumstance but the only one I know for sure that has it is KCAPL which has its first available call date of 9/30/19…. PTMN is now the parent of this bond and they’re not as strong as GLAD, so PTMN may not act quite as quickly as GLAD did.

    1. Two other term preferreds (which I think have been discussed sometime in this website) are callable on 9/15 :
      HTFA ($25.75) and SCA ($25.90), both trading higher than the $25 plus the next dividend.

      Any speculations (knowledge?) regarding the likelihood these will soon be called too, so it is still time to sell with some gains?

      1. Daniel – For the record, both HTFA and SCA are term NOTES, not preferreds. There is a difference….. Pure spec on my part but the fact that they are notes might give some added incentive to refund because with the search for yield, both might very well have the ability to issue less restrictive issues such as a preferred instead of notes…. Market giving them the ability to do so with very little penalty in rates would give them greater corporate flexibility should we go thru recession… Obviously with HTFA having the higher coupon, it’s more likely to get called. plus, though I don’t own either company, I think Horizon is probably the stronger credit.

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