Investment Grade Issues In the Early Redemption Period

We have seen some early redemptions recently that caused some investors some consternation as they got ‘caught’ holding issues that were trading way above liquidation preference ($25). In particular those holding the Gladstone Commercial 7.75% preferred (NASDAQ:GOODP) and the Gladstone Commercial 7.50% preferred (NASDAQ:GOODO) took quite a spanking as both issues were trading 8-10% above $25.

With this in mind we thought we would review current outstanding issues to see which ones were going to ‘put the hurt‘ on holders. We started by looking at just those issues (baby bonds and preferreds) that are investment grade. We were surprised that there are only 23 investment grade issues that are in the early redemption period (NOTE–we left off some low fixed coupon issues that are in the early redemption period–with fixed 3-4% coupons they trade much below $25). I guess thinking about it more it only makes sense that the top quality issuers are able to readily ‘refi’ issues when the financials make sense.

Below if you click the link you will find the current list of investment grade issues now in the early redemption period (actually a couple will become eligible for redemption on Monday). NOTE–the Yield to Worst doesn’t calculate accrued dividends or interest in this list so the CALL RISK is very minimal for most issues. What this list tells me is that there are 2 issues that I would NOT hold under any circumstance–these 2 issues from Assured Guaranty are trading at sky high premiums. These issues have been redeemable for over 10 years and investors seem to think they will never be called.

Additionally there are 2 issues from PS Business Parks that are at higher premiums than we would hold, but not at crazy levels.

Lastly the PPL Capital Fund issue is at a premium that is too high for us, although not crazy–we know that some readers have been playing this one off and on for quite some time.

HERE IS THE LIST

44 thoughts on “Investment Grade Issues In the Early Redemption Period”

  1. As far as the Assured Guarantee, aren’t they 100 year bonds? I wouldn’t call them either if you don’t have to pay them off until the year 2100.

    1. If I was AGO, I think I would issue a new 100 year bond with the sole purpose to pay off AGO-B (6.875%). Given that AGO-F (5.6%) trades at $25.63, I think the new bond might only need to yield 5.45%.

      According to the prospectus, the par value of the Shares is $100M. The yearly savings would be $1.4M for then next 82 years (but it would cost them a little over $3M upfront in underwriter fees, unless they roll that into the loan, free right 🙂

      1. Derek – Don’t issuers ammortize the cost of issuance over the length of the issue? So it’s really not an upfront cost in a way….. I keep wondering whether that issue of remaining ammortized cost has something to do with why RILYL call date has not yet been announced… If they don’t announce by Tuesday, I think RILYL will be outstanding beyond the next coupon payment, but back to your theoretical AGO issue, I don’t their issuance costs hits them on the books 100% in the first year… It’s an accounting choice I think if they did that..

  2. CBKLP is one some people may own which is IG, past call and above par. It is a $100 issue though so probably beyond the bounds of what Tim tracks.

    I have made good money on this one.

    1. Cobank hasn’t called an issue for years, last one was back in 2014, which was yielding 11%!!!!.
      All their outstanding preferreds are yielding just over 6, and they haven’t issued new securities in years, so this one looks safe for quite a while.

    2. CBKLP is a good one to trade because of the wide spread. You have to be patient though, while the frontrunning robber barons steal most of the bargains. Then Surprise! you get a fill. I trade PYT and GYB the same way, lots of patience and thick skin required but eventually it pays off. KTBA is another good one though it’s priced high now.

      1. Challenge them to confirm it with the issuer. It has 144A in the description but that designation may be no longer valid.

        1. Cannot hurt to ask but Schwab is correct. A registration statement was never filed on the Cobank issues.

      2. Yeah, I think it was Vanguard who made noises like they were going to make me sell my shares of CBKLP and then they backed off. No new purchases allowed though IIRC.

        None of the Cobank issues are past call except this one so we really only have this one example to go on. I am sure they could get a better rate so they may just be waiting for rates to bottom out since this one has been callable for a little over a year.

        1. I suspect they might not want the hassle of calling and and reissuing just yet. This preferred costs them $12.2 million/year. If they reissued at something like 5%, it would be $10 million/year. Net income last year was $1.2 billion.

      3. Schwab limits CBKLP to institutional or accredited individual investors, so you have to fill out the accredited form. Also, you have to order through the Restricted Stock Team. I talked to them a few weeks ago.

  3. These are examples of names one can own with less downside risk if markets move against preferred. Same with many negative ytc. But also next to no upside. When they go past fall dates a call the bonus time. Mainly because most my purchases at done over par with a lower ytc then coupon rate.

    I’ve been protecting friends against higher rates for 38 yrs aren’t changing stripes now

  4. It is somewhat curious that PS Business Parks has not been issuing new preferreds with lower rates in this environment, (the last time they did was in 2017)

    But the last 2 times they did, they called a higher rate issue within 1 day and and 2 weeks.
    That time, they replaced a 6% with a 5.20, so we are definitely in a range where the U and V are really dicey to hold at these levels.
    If I had to guess, I am expecting that they issue a new preferred and call both the U and V by January 1, 2020.

  5. This is a very tough time for investing in safe yield. I have 10 to 15 that are on this list. As rates continue lower, I see no way to avoid the inevitable.

    They have been a great investment for me; but, we are entering a safe yield drought I am afraid and I see no way to avoid it.

    Starving for safe yield here and new safe places to get it. I don’t know of any.

    1. I am building cash levels from called securities & uninvested cash and putting it into SWVXX which has just recently lowered its rate to 1.85% I think.

      Now, I think it is a conservative bet that when the next financial crisis occurs Schwab will lower the rate on their money market security even more, let’s say (very conservatively) down to 1.5%. Do you know how much principle you will need to produce a liveable income of say $65K per year from that rate of return?

      I will spare you the heart-break that will come once you realize the amount required. We are all being silently herded into a box with no clear way out. And as Forrest Gump once said, “and that is all I have to say about that.”

      If You still have your day-job, I suggest you hang on to it as long as you possibly can. I am paying down debt; but, even if I was debt-free I would not feel comfortable in this kind of financially repressive environment.

      Tim, I love the site and am always here reading, listening, learning; but, you can’t deny the presence of that white elephant in the room. It’s unmistakable.

      1. $4.33 Million @ 1.5% = $65K/year. It’s terrible. People who should (because they are beyond their working years) be invested in fixed securities are effectively forced into riskier alternatives (i.e. stocks).

        The government can’t afford the past debts they have run up, nor can they stop spending more than they take in on a current basis piling more on to the debt (really would you invest in a company that had such management?). The only way the governement can keep the current game going any making hard decisions is to do everything they can to keep the interest rates down. When they can’t do that any longer, the path of least resistance will be to inflate the money supply.

      2. I have been finding some odd paradox purchases. Old illiquids at sub 5% IG issues, but yet buying at 5 year lows.

  6. I am curious as to why some of the A- rated baby bonds from Entergy aren’t on the list? Specifically EAB ($27.25, 1st call date 12-1-17) and EZT ($27.84, 1st call date 6-1-19). The Call Risk is around 2 years worth of dividends for both of these. That’s more than I am comfortable with.

  7. Here’s another one I own: RF-A It’s been callable since 12/17. The current price is $25.98 when it usually is about $25.60 when it is nearing an x-date.

    It’s coupon is 6.375

  8. Not sure if this is a positive or negative, but I hold an inordinate number of the issues on this list.

    NTRSP, for example, has its October 1 dividend assured, so if one had bought before XD on 9/15/2019, dividend is greater than the premium. Since NTRSP cannot be redeemed except on a dividend payment day, the next call ( if it occurs ) will be Jan 1, 2020, with 30 day advance notice the company has to announce by end of November latest.

    Some on the list were bought below par, so I intend to hold these until redemption, sorta like betting they won’t call. If they do, I’ll take the cap gain & whatever accrued dividends.

  9. I am relatively new to investing in baby bonds and preferred stock, but
    by “In the Early Redemption Period”, do you mean issues that have simply passed their 1st call date or something more? Thanks

    1. Tom–you are correct–in the early redemption period–meaning they have passed the 1st call date.

  10. PPX is my red headed step child I beat all the time. What an easy money play. But currently I am out selling at 25.80. Will wait for a more suitable reentry point if it presents itself.

    1. Grid – was thinking of you. You must watch it close–each time I check it I miss the buying opportunity

      1. Tim, I doubled down when it hit 25.30 a week or two ago then sold out again. I dont get greedy on this one.

  11. How about WFC-P? Coupon 5.25%. Call Date 6/15/2018. Current price $25.09 which is a tad below the accrued interest (pays in 2 months)

    1. Inspbudget made a good point on NTRSP call timing. I checked WFC-P, the same is true. Call timing is on payment dates only. I always assume, it is anytime after call date with accrued dividends for call’s that occur after payment dates.

      So WFC-P will get it’s 0.3275 cent dividend payment on 12-16. So even if it is called then, you’ll net 0.2375. So no call risk at all.

      1. Are there any lists of which issues are only callable on payment date? These are tempting to buy. shortly after call option expires. Then maybe sell shortly before next call option. Not a foolproof strategy, sometimes calls are announced more than 30 days ahead.

        1. Martin, I doubt there is such a list as you described. The information is usually found in the prospectus.

          QuantumOnline is a good resource, each preferred stock has a link to the prospectus which can be clicked on to be read.

          1. I have a shorter method Martin that can save you some time, if you have an account with Schwab. Click on the stock quote to expand it out. For preferred stock, you will get

            Call Timing On payment dates only (using WFC/PRP as an example)
            Call Timing At any time (continuous) (using AXS/PRD as an example)

            I do not fully trust this information, so if you are buying relying on the call timing being on payment dates, I would still check the prospectus as inspbudget suggests above. This will simply narrow the number of prospectus you need to do this for

        2. While I may lose WFC-T for foolishly having forgotten to sell earlier, it is still for me to post its call risk. Both WFC-T and WFC-V are 6% SWAN from Wells Fargo. The T shares are already callable on 9/15/2019. The V will be next year, 12/15/2020. So far I have NOT received notice for call for the T. Wells have the highest coupon R, 6.625% with fantastic call protection until 3/15/2024. Market capitalization for the T is 700 million and 900 million for the V. Market trading action seems to suggest that the T will be called. So, I stay put, but certainly NOT interested to buy more. I may consider to sell the V if there is some SWAN QDI opportunities. Fat chance IMHO. I continue to hold onto WFC-Y which I bought slightly above par selling all my WFC-X with small cap loss as “preventive measure” for Taper fear. Several neophytes at Doug’s WEB were trying to convince each other that WFC may suspend dividends from lawsuit and negative news (before the new CEO was namely a day or 2 ago and the commons gapped up). I wrote an opposite comment. I continue to hold onto WFC-L, not fantastic CY but a good protection for recession or market irrational behavior as experienced on the last Christmas Eve de facto “massacre”. IMHO, there is no call risk on WFC-P, way too low coupon. There is some subtle hints of taper fear sort of thing, when the 10 Year US Treasury shows up with 2 to 4% gain from ridiculously low value. There are some inflation with tons of federal debts. In general, preferreds are still the best place to be IMHO with the Feds restrained and enormous trade war fear. Seems unpredictable as nicely summarized by Fed’s chairman. Too bad that too many people blame him. Yes, he was wrong but he seems to be doing and saying the right thing IMHO. Stock market pundits just want to blame someone when the market refuse to show strength.

        1. I’ve been slowly scaling out of WFC-L and into WFC-P. 80% of the way there and may get to 100% soon at this rate. Granted WFC-L has much more upside if rates go lower but WFC-P will be a lot less volatile if rates go modestly higher.

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