Gladstone Investment — Update on Term Preferreds

We were alerted to a potential item with Gladstone Investment (NASDAQ:GAIN) term preferreds–there are 3 issues outstanding, by an astute reader–BlueJoseph.

GAIN (a BDC) has lowered the required asset coverage ratio from 200% to 150% for senior securities effective in about a year. BlueJoseph noted that the offering prospectus specifically noted a need to maintain a 200% asset coverage. We checked and he is correct.

Just to make sure we had the bases covered we checked with the company and the following is our question for them and their reply.

The following comment was submitted via the Gladstone Investment Corporation website.

Hello–I am wondering if the recent change in the asset coverage requirements in 2019 (from 200% to 150%) will be applied to the currently outstanding term preferred stock issues? The original offering prospectus specifically states 200% (versus a more generic wording such as “as required by law). Thanks for your help. Tim McPartland

Gladstone Investment Reply.

Good morning Tim
The change does not impact the currently outstanding term preferred stock.

As you can see GAIN IR notes that the issues are not affected. This likely means that all 3 outstanding term preferreds will have to be redeemed prior to maturity–UNLESS they maintain the 200% coverage ratio.  The 6.75% (GAINO) issue is now redeemable. The 6.50% issue (GAINN) becomes redeemable on 5/31/2018 and the 6.25% issue (GAINM) on 9/30/2018.

All 3 issues do not reach ultimate mandatory redemption until 2021-2023.

So what does this mean to us that hold plenty of these?  Not much as they are all trading just 2 monthly payments above liquidation preference ($25) so not much is at risk.  BUT new purchases of the securities should NOT be made at high prices – i.e. $25.88 – or just understand the yield to potential call might be very small or negative.

25 thoughts on “Gladstone Investment — Update on Term Preferreds”

    1. Must have been a market sell order. I have a buy limit order in for higher than that and it didn’t trip. Was hoping for a flash crash of a % or 2% so I could swoop in to the clearance rack like we did last week on SPKEP.

  1. Just looking for opinions: Overall, is this switch from 200 to 150% that big of a deal to anyone?

    It ‘could’ increase the call risk, but many of us own past call issues and don’t get bothered that much if the price is right.

    We also own issues NOT protected by the 200 or 150% asset coverage minimum, so again, while this change doesn’t thrill a lot of us, does it really change how you play the game that much?

    Not trying to be confrontational – please know that. Just trying to further the discussion and garner some insights from varying angles…

    1. Hi Grant,
      If I am understanding this situation accurately, Tim is saying that if the coverage drops to 150%, then due to the prospectus language, they *must redeem the issues* and then that will lead to a negative YTC if purchased now.

      Hopefully, someone will correct me if I am misunderstanding this situation.

      1. Hi Amy–yes you are correct. If purchased NOW at a high price – i.e. 25.75 or whatever it COULD lead to a negative yield to call.

    2. GW–it is only a big deal in that – in my case – I look to the 200% as a decent margin of safety and they are removing some of my ‘safety’. Personally I don’t own BDC’s–just the preferreds of BDC’s (and in particular term preferreds) and being pretty conservative I look for the safety.

      1. We do still have about a year, so that’s a plus.

        Is it not possible that they will keep the 200% coverage ratio in effect on these issues already trading, yet apply the 150% ratio to new issues?
        There’s just some ambiguity here, at least to me. They answered your query by stating that the existing issues would not be impacted by the ratio change. Still seems clear as mud to me.
        They didn’t state any intention to redeem or to drop the ratio, forcing a redemption.

    1. Hi RW—I haven’t check Gladstone Capital yet–also a BDC. Gladstone Land and Gladstone Commercial are both REITs and not subject to any leverage requirements. Gladstone Capital (GLAD) has also implemented a change in asset coverage–but they only have 1 term preferred outstanding (which I own also), but I haven’t had a chance to check it out closer.

  2. Good find Tim. Interesting though that when reviewing GAIN’s issues on Quantum Online, they all contain the 200% asset requirement except…LANDP. There is no mention of maintaining a minimum required asset coverage for this one. Hopefully, this issue will continue until 2021 rather being redeemed early next fall.

    1. RW, LAND is a reit, not a BDC. So no asset coverage is needed… LAND sits out on its own island compared to the other Gladestone issues. So LANDP is just your garden variety preferred, though with some nice term features to it.

      1. Thanks Grid…LANDP is the only issue from the Gladstone group that I own. Those Gladstone term preferreds Tim was highlighting are issues on the no go list at Fidelity so I’ve passed on them. LANDP though is an issue I like. A lower yielding issue but shorter duration and pays monthly with a nice 3% yield bump if not called at maturity. Fidelity does allow purchase of this. Thanks for your clarification.

        1. RW, I like it too.. Have held it often…And just missed out from owning it again this week.

        2. Are you sure about Fid….i owned GAINM theu fidelity,,,,call fixed income desk at fidelity

          1. Hi Rick—it is funny because some of the Gladstone issues I can buy online with Fidelity and some would require a call. When I have to make phone calls I tend to not do the buy. We have 4 different accounts and when Fido requires extra steps/time I just flip over to eTrade.

        1. When and if I ever get more time I will cover these new issues more completely — these ‘quick hits’ are easy to miss.

  3. Thanks for the detective work, Tim. I’m a long time holder of those GAIN term preferreds.

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