After thoughtful consideration we have exited our sizable personal position (around 1000 shares) of the Gladstone Investment 6.25% Term Preferred shares (NASDAQ:GAINM).
Investors are aware that GAIN recently called for redemption of their 6.50% (GAINN) and 6.75% (GAINO) term preferreds for 8/31. The company did this through the issuance of a 6.375% term preferred issue (NASDAQ:GAINL).
The company (a business development company) did this because both issues required asset coverage ratios of 200% and with law changes and a board of directors vote the company will be only required to have a 150% asset coverage ratio of senior securities effective on April 10, 2019. While we don’t agree with reductions in asset coverage ratios as this will raise our risk when the economy softens, but it is what it is and we have to make the best of it.
Why did we exit the GAINM issue? Simply because it contains the same terms as the GAINO and GAINN requiring 200% asset coverage ratio and it makes no sense to redeem the other 2 issues and not redeem the 3rd issue since the singular issue outstanding would require the maintenance of the higher asset coverage ratio. Additionally we have captured the August dividend as well as 2 more dividends by selling in the $25.25 area. This issue becomes redeemable on September 30, 2018 (in 1 month) and we believe they may well call it for that date meaning only 1 addition dividend (a monthly dividend) will be paid.
Investors should be aware that they have the time frame of 9/30/18 until 4/10/2019 to redeem the shares and still be able to apply the lowered leverage ration, but with rates highly probable to rise in the months ahead we think they will want to get this done sooner rather than later.
Will they redeem a 6.25% issue by issuing a 6.375% issue? We think this is not a very relevant issue. The increase in dividend cost is virtually nothing at all–we are talking $65,000 annually on a $50,000,000 issue (2 million or so shares). The increment leverage available to the company will have ‘earning power’ of over 100 times (or some such huge number) the increased dividend cost.
Will the company issue more preferred stock for this redemption? Probably will eventually but the company has had no problem raising money with stock sales and they have just raised their revolver to $200,000,000 which may be expanded to $300,000,000 (as seen here) and they only had $102 million outstanding on the revolver on 6/30 so raising money will be no issue whatsoever.