Our site runs on donations to keep it running for free. Please consider donating if you enjoy your experience here!

I’M Buying Undervalued Preferreds in this Closed End Fund

Today I bought shares in the RiverNorth Opportunities Fund 6.00% perpetual preferred. I had this as one of my good until cancelled orders and it executed at what I think was a true bargain ($22.50). I already had a position in this security and this was an addition.

This security is rated A1 by Moodys and has an asset coverage of 379% as of 1/31/2023. The fund had raised funds through a common share rights offering late last year and it bolstered their coverage ratio significantly. For those not familiar with closed end funds ‘senior securities’ (preferreds and debt) – they must have a minimum coverage of their senior securities of 200%. Truly a safe haven in these times of danger.

I believe that this security is undervalued by $1.50-$2.00 per share. For comparison sake–it has a current yield of 6.68%. The 2 perpetuals outstanding from RiverNorth Double Line Strategic (OPP) have current yields of 5.94% and 6.04% respectively–obviously something is out of whack here.

If this security goes lower I will be buying more (how much and at what buy price is yet to be determined)–maybe a GTC order at $22.00.

13 thoughts on “I’M Buying Undervalued Preferreds in this Closed End Fund”

  1. I think the OPP preferreds might trade at a lower current yield than RIV-A because they sell at a much bigger discount to par value.
    1) There is less chance they will be called if interest rates go back down.
    2) Sometimes a CEF buys back preferreds trading at a big discount to par because it is accretive to the NAV of the fund. RiverNorth may not do this willingly, but activists could come in and advocate for doing this.

  2. Apparently only 2 ‘40 act funds have ever defaulted on their debt, and the borrower recovered 100%+ of their value.

    1. Defaults are not rare these days. All issues are different and proponents impose backward looking conditions on the cases to make it look look nobody in their circle ever defaults.

      1. Martin- Where do you see defaults for ‘40 act funds?

        95% of the names in this space are safer than ANY corporate bond. The 200% asset coverage test is – huge risk reducer.

  3. I have picked up a few RIV-A opportunistically since late last year and am trying to build a position, but I couldn’t resist the temptation to flip a few for almost a dollar profit last month (now re-buying).

    I have also been picking up a few NSS and ALL-B in some of our smaller accounts the last few days as their prices have fallen. If my math is correct, ALL-B is once again trading right at redemption value (with the month of divi. counted in).

    About the only bank shares I am buying are some Farmer Mac (AGM) preferreds. They are falling with the rest of the financial sector, but there isn’t really a risk of a run on AGM.

    1. Private–love the Farmer Mac issues and have some in small quantity–impeccable financials over the years.

  4. What is the current discount to nav? What’s the leverage ratio??

    And Tim what are the rules on open leverage vs nav for a CEF? Somewhere I remember 33% or is it 50% of nav?

    Ps I’m very long here….

    1. If you Prefer – I don’t dig too deeply into the CEF itself–more of their history and a cursory look at their portfolios (which I hardly ever like). RIV has 3.79 dollars of assets for every dollar of senior securities.

      Section 18 of the 1940 Act effectively limits the amount
      of direct leverage in which an investment company can
      engage. This section limits a closed-end fund’s issuance
      of an evidence of indebtedness, unless the fund has
      300 percent asset coverage,and preferred stock, unless
      the fund has 200 percent asset coverage.

  5. I have been a selective buyer of CEF preferred in this market as well. Currently holding TY- (5%), RIV-A (6%), and GNT-A (5.2%). Not barn burners by any stretch but fills out my Med/High IG need niche.

  6. An A1 rated preferred. I’m surprised it has so much daily volume. I see leverage so there is concern about what happens if net asset value goes way down. And what happens if market is wrong and rates push from here?

    But overall I think it is a good one. The Q is…..
    Is 6% enough… For three square meals a day?

    1. If you Prefer, Mickey D’s or Waffle House? I’ll buy lunch, we are each on our own for the other two

    2. I bought small number of GRBK-A, 5.75%, unrated except Egon Jones rating for A. The issuer does not pay dividends but the price chart comparison vs. many bank related Moody/SP rated (of course, it probably would get some double level downgrade appears to be positive. Issuer is the home building and land development biz. So far, no loss yet. My SR-A did climb above par. With all the market risks, it shrank quickly to below like a freighted turtle. Ditto for NI-B. Picked up some at $24.9 after it above par and then down. Now worse than SR-A. This is a tricky biz. As I recall from Doug Le Du’s higher rating does not mean better. A balance of YIELD and rating perhaps is best, EXCEPT bank trashing is a New peril never experienced in my 20 years or so. BTW, I sense the market makers who may have kept some of the unsold preferreds could be selling now, e.g. ATLCL. I know the fake electric utility in Texas, now called VIASP and VIA. I am glad to I got out. Very bad quarter both in earnings and EBITDA.

      Got beaten on EVA, a supposedly renewable energy with burning forest fallen wood chips in high temp oven aiming to sell in Germany and Japan. This was once a Rida Morwa. My 2 times unrealized gain has now become 50 percent unrealized loss. Raymond Jones kept on revising target but keep it as BUY rating. Too late to sell perhaps. I unloaded most of my common BX (Blackstone) thanks to Tim’s writeup on how Blackstone did so many unethical things. CNBC pundits finally turned around and opined J. Powell’s ignoring or appear to be undisturbed bank spanking. It seems that it is never good to trash the economy and attempt to raise unemployment. Just MHO.

Leave a Reply

Your email address will not be published. Required fields are marked *