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Income Issues Can’t Get Any Traction

The average $25/share preferred or baby bond is off about 1/2% today thus far–the last couple weeks have been painful as the average issue is now just about 2% above the 2022 low on 10/17/2022.

Almost without doubt we can’t get traction to the upside with interest rates moving higher and higher–up 10 basis points today again (the 3rd time in the last 6 trading days) to 3.85%. On the other hand we have had opportunities to search for ‘bargains’ again and again.

I haven’t done anything today–like most days recently. I have a little nibbling money available and have looked at the Bank OZK 4.625% perpetual (OZKAP) which is trading at $15.89 today for a current yield of 7.28% and of course a huge yield to 1st call of about 17% (not that this will be called very soon if ever). This is a solid $26 billion in assets regional/community bank that someone mentioned in comments last week (can’t remember who) that checks most of my boxes–we’ll see. If I nibble this one it will be my last banking issue as I will have 4 issues. Just a note that OZK has had some write downs, like most all the banks and insurance company’s have had, as their available for sale securities have gotten smacked down.

I am going to move onto the BDC baby bonds soon and see what I can find there (if anything)—of course I have a huge concern that the business development company’s are going to have massive write downs if we see a weakening economy from here. I don’t think thus far the BDCs have been severely ‘tested’–it is yet to come I think.

29 thoughts on “Income Issues Can’t Get Any Traction”

  1. IN the BDC space today, OFSSH traded down to 20.08 today, down 5.28% with a single seller it looks like….. I didn’t see it until the close so don’t know if there was more being offered…. OFS Capital Corp., 4.95% Notes due 10/31/2028 YTM = 9.57% OFS had a history of calling including calling a 5.95% due 2026 on Nov 22, 2021. Not pointing that out as a possibility of this one being a call candidate but to give a comparable look at perceived quality of the issuer… I don’t know much about the company’s quality ranking in the BDC sector…

  2. JMO: The other, I think much better side of the coin of declining prices is the increasing opportunity. I’m viewing price down trends, especially the more severe down days as welcome and looked-forward-to opportunities to continue driving down the basis of existing positions and maybe add a few new issues. The last few trading days have been terrific as re-balancing or whatever is triggering these sudden price drops here and there has been fabulous.

    Counter-intuitive to lamenting and sitting-out declining prices, embracing them via relentless opportunistic buying increases the propensity for a “rising” portfolio value (especially on reversals to the upside), and remaining focused on higher IG issues generally equates to buying on a balanced basis ad-infinitum.

    No nerves, no emotion – just rote buying at pre-determined levels over and over and staying focused on the staying power of the dividends and yield – never bothering to look at the portfolio value. Even as I write – I have no idea what the exact portfolio value is or whether it’s up or down and will not look – but I do know I am “up” on nearly every one of 44 positions and exactly what the income of the portfolio is and that it is rising near daily – especially on down days and especially through down trends.

    While hoping for more peace, common sense, altruism and sanity in our world, Wishing for everyone a Happy and Healthy New Year.

    1. Alpha, Its a little more complicated than the following quote, I get it, but it resonates with your thoughts. A portfolio manager said yesterday, something effect of, “ Your best buys are in a bear market, you just wont know it at the time”.

  3. Tim
    After three 10 basis points interest increases in the last few days it makes the 4.2% 90 day treasury bonds look that much better.
    As long as the federal reserve keeps saying more interest rate increases are coming makes me hesitant to buy preferreds. I hate to own principle losers. There will be a time when interest rates become stable or actually go down. Timing is everything

  4. Tim – Regarding the BDC space, the BDCReporter (bdcreporter.com) offered a very extensive rebuttal of Barron’s negative article on BDCs dated Nov 25, “BDCs Sport Lofty Yields, But the Risks Are Growing. Time to Steer Clear.” BDCReporter’s article is too long to post but here are his conclusions. For the record, historically I would not consider him a rah rah rah guy for the BDC space. He calls them as he sees them, good and bad, with extensive research digging deep under the hood into the actual companies BDCs are investing in.

    “Conclusion: At the end of the day we have no view about whether investing in public BDCs or in “open- or closed-end funds and exchange-traded funds focused on junk bonds or loans to large, leveraged companies” is better or worse. Our market knowledge only extends to the former.

    “Furthermore, we concede what both Barron’s and KBW suggest: BDC prices could go much lower than they are now in a recession, or even the promise of one. That holds true for just about everything but BDCs do have – unfortunately for investors seeking to sleep well at night – a history of high price volatility. Long term investors remember the drastic price drops of 2007-2009 and in March 2020. There were less drastic – but still gut wrenching – price drops in 2011, 2016 and 2018 just on the possibility of economic trouble ahead. Currently, we’re living in one of those dire periods of uncertainty which tend to foster articles like the Barron’s one. The long term BDC investor has to have nerves of steel and the market timer has to hyper-alert because prices usually swing back up very fast.

    “Where we differ with Barron’s is using net book values to determine where to invest. The author’s assumption seems to be that the bigger the discount taken, the better bargain. Ah, if things were that easy…The long term earnings/dividend power is what ultimately matters in our view – and that of many others – and BDCs are well positioned in this regard, even if a recession occurs.

    “Still, to quote Alexander Dumas: “All generalizations are odious – even this one“. Given the varied nature of BDCs – from size, to strategy, to years in business, etc – one has to pick and choose carefully. (Yes, this is an argument for subscribing to the BDC Reporter but also happens to be true). Recessions do tend to separate the wheat from the chaff and there are a number of weaker players amongst the BDCs we track who might not survive in their current form. We’ve never had a BDC go bankrupt but plenty have been forced to recognize that their business model was not working. We can think of a dozen right off the bat.

    “All in all – and even with all the drama associated with a recession still to come – our big picture, long term view is that the sector’s enormous AUM growth in recent years – mentioned in the Barron’s article – is primed to continue. More controversially, we believe BDC earnings are going to reach – and maintain – record heights for years to come. Our unsolicited advice: Don’t get distracted by the noise and miss out on a sector where annual total returns are likely to be in the mid-teens or higher.”

    1. 2WR, I am sure you recall the BDC blowup in 2008-2009. The largest one, Allied Capital, was the feature in a David Einhorn book ” Fooling Some of the People All of the Time.” BDC’s have the same problem that other vehicles have that hold one-off investments. The question is how you set the marks on them? Since these one-off investments are not traded on any exchange, what their true market value is at any given instant is unknowable. Should serve as a reminder for many different types of vehicles, including CLO’s which are a common topic around here.

      1. So true, Tex, but as a subscriber to BDCReporter, I’ve been amazed at how deeply he can get in the weeds on the individual companies involved…. So there are sources out there now that make the task slightly less daunting..
        This is an easy one, because the news came from Bloomberg but here’s a snippet of the info he had on Serta. What I’ve seen on more of the not known to nobody companies that are listed as holdings of each of the BDCs is really something. Point is, there are ways to potentially stay slightly ahead of the curve on monitoring the unmonitorable… –

        According to Bloomberg, bedding manufacturer Serta Simmons is “preparing to seek” bankruptcy protection as early as January 2023.

        This would likely be a “pre-packaged bankruptcy” given that certain lenders are involved in “confidential talks” with first lien lenders who might gain control in a debt for equity swap or similar transaction.

        Serta’s entire debt load of more than $2 billion matures next year. Its approximately $843 million first-lien term loan due November 2023 is quoted at around 9 cents on the dollar, according to data compiled by Bloomberg…

        Facing financial distress in 2020, Serta cut an out-of-court restructuring deal with creditors that added “super-priority” debt and pushed down some lenders back in line for repayment. A group of funds including Angelo Gordon & Co. and Apollo Global Management recently sued Serta and rival lenders, seeking to invalidate the transaction.

        The company’s debt load stems from Advent’s roughly $3 billion leveraged buyout of AOT Bedding Super Holdings LLC in 2012. 
        Bloomberg – “Mattress Company Serta Simmons Prepares to File for Bankruptcy Protection” – December 13, 2022


        In The Cards

        The Bloomberg story is no great surprise – credit trouble has been brewing for some time at Serta Simmons.

        After the controversial restructuring in 2020 there was a period of stability, but since the IIQ 2022 the BDCs involved have been discounting the value of their first and second lien loans.

        By September, there were already multiple stories from multiple sources about an ongoing restructuring and there was also a downgrade by Moody’s.


        Over at the BDC Credit Reporter, Serta went from CCR 2 – performing as planned – in the IQ 2022, CCR 3 in the IIQ 2022 and CCR 4 in the IIIQ 2022.

        A move to CCR 5 – non performing – is all but inevitable, whether through this possible pre-packaged deal or other routes.

        In The Line Of Fire

        There are two BDCs involved with Serta, with total exposure at cost of $12.4mn, and an FMV of $9.9mn as of the IIIQ 2022.

        One is Barings BDC (BBDC) – with the bulk of the exposure at cost – $10.6mn.

        Sister BDC, non-traded Barings Capital Investment Corp, has a $1.8mn position, all in second lien according to Advantage Data.

        1. 2WR, I guess it comes down to if you have the stomach or appetite for high risk roulette.
          Currently these BDC’s and asset management companies could be or are under distress. Example is Blackstone selling 2 Casinos in Las Vegas. It could be to deploy money elsewhere or for covering investors withdrawals. Apollo is testing the waters with renaming Club Corp. that they bought in 2017 for 1.1 billion cash and 1.1 billion in assuming their debt. They are going to call it Invite, as in everyone is invited to use the properties not just the members. Club Corp posted like 27 million positive profit in 2017? Seems like a great time to bring a company public.

        2. “Burning Bed, Part II”?

          I recall a junk bond issue in ‘91 to finance an MBO of a bedding company, maybe Simmons, underwritten by First Boston. The issue sold fine but didn’t make its first interest payment before defaulting. Thereafter, the financing was referred to as The Burning Bed.

  5. Seeing as how I grew up in the Ozarks, it must be fate. I’m gonna look into this issue. Probably fair value for this thing now bc it’ll likely never be called. I remember seeing this come out at 4% and wondering why anyone would pick it up for $25. But for $15.xx and 7.xx%, I am tempted.

    1. Thanks Eladio–think I missed that conversation–but will check out you link closely.

      1. Charles,



        Put the link you want to see in the bottom blue search box. Gets you around paywalls.

        I have serious concerns about the commercial RE market. Especially office RE. Another fed induced bubble.

        1. Thanks Eladio, v. good link to read the article. Even though it is 3yrs old it makes me wonder about OZK during this recession. Yes, I am calling it that even though consumer spending is up there are other weaknesses in the economy. Multiple references to them being into commercial construction loans. Every boom in real estate has lead to a over building then a drop.
          In my area, North bay just see so much condo and apartment building and all finishing about the same time is going to lead to competition for renters to fill them. Been around building business too long.

      2. Charles, thanks for the link. https://seekingalpha.com/article/4377811-bank-ozk-might-be-hiding-up-to-1-billion-in-bad-loans refers to $977M worth of loans “currently under deferral”. Any idea how to find out how many loans are under deferral today? Since this article was written in October 2020, I assumed at first that was referring to a pandemic policy of allowing debtors to defer payments, and that that must now be past. But I don’t know how to double-check that assumption.

        1. Bur, good question not sure. I just read the 3rd qtr. report for my local bank and it was interesting. The income from PPP has been winding down, income from loan origination is down due to lower volume of loans, profits from current business is up due to higher interest rates, but higher cost of operations mainly due to increased employee costs. Income from 1.6 B in investments hasn’t changed much, but the value is down on those assets. No losses as bank intends to hold to maturity. So overall EXSR is going to end 20022 making less than 2021 and they are pretty conservative

          1. Bur, Sorry no help there. Went off topic at 4 am. I have 3 to 4 holdings in bank preferred. In the past, what stressed banks was consumer credit like auto, equity loans on home values, and credit card loans. Then there was banks with commercial loans for development that got in trouble last recession. Similar to the Savings and Loan crisis. I got caught in that one.

  6. I own a few hundred shares of OZKAP, purchased at $17.03 unfortunately.
    Will hold on, and might add more if it goes down further.

    Thanks to those who wished me a speedy recovery, progress has been slow but it’s only been 5 months since my stroke. The doctor says it may be 1-2 years for progress, and to keep exercising as the fastest gains are seen within the first year.

    Appreciate the incredible amount of wisdom & experience on this site!

    1. inspbudget, My boss’s wife had a stroke at 32 or 34. long recovery and one of the things that helped her was doing swim classes at the WMCA and the local JC. Wishing you luck.

      1. Charles, that’s a great idea, swimming.
        I live in a HOA development that includes a clubhouse and pool. will look at going when the weather warms up in a couple months.
        Thanks !!

        1. Hi inspbudget,

          I’ve only just started lurking, so we haven’t met. You also might want to look at aerobic water classes. The workouts are in the pool for a great low impact workout. Good luck with your recovery- wishing you the best.

        2. BTY, with all the talk here lately on OZK I’ve been tempted to buy the preferred but trying to limit my exposure to banks. Not saying CRE loans are bad, but with the exposure REIT’s have had and the affect on them it is sending shivers down my spine.
          In my area, Hotels have continued to be built due to the tourist trade and being a urban area, rental construction has boomed with multi-story condo’s and apartments. Of course a lot are finishing up at the same time and competing for renters. Our local bank has only lost money twice in its 132yr history. Once in the depression and in the great recession. Guess what caused the second loss. FYI the bank can never be sold or bought by another bank. Hope it goes to 5% yield it would be a Alpha stock

    2. Inspbudget,

      I’m rooting for you to make a great recovery. 10 yrs ago I too had a rough go, including lengthy hospitalization and years of rehab (some of which I still do). Your efforts now will pay dividends 🙂 Bravo on your work towards recovery.


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