Little Buying–Not Too Much

Today I bought a 1/2 position in the Highland Income Fund 5.375% perpetual preferred (HFRO-A) for $23.67 – current yield 5.70%.

This issue is A1 rated by Moodys and since it is a closed end fund it is required to maintain a 200% asset coverage ratio–the ratio was around 360% on 12/1/2019—no doubt much less now, but it is the best CEF preferred available now that is investment grade.

Additionally, I went ahead and bought a little more of the AMG 5.15% Convertible Trust Preferred (AATRL) for $38.75 (6.5% current yield)–I just can’t help it–I am really overweight on this one with initial buys almost $10/share lower. It is now at $40.09 (but thinly traded and may fall off any moment).

Also I sold a little more of the Spire 5.90% perpetual (SR-A)–I thought I had sold it all yesterday on a pop, but found more in another account.

These add another 1% to the portfolio – now I wait and watch some more.

52 thoughts on “Little Buying–Not Too Much”

  1. Re: HFRO-A: Worth going to the prospectus (which is linked by Tim here!) and Control-f 200% as an easy way to read up on their coverage covenants. It is actually a fairly contorted methodology to understand and the assets are to be liquidated are only the assets of the fund…or more paper issuance as per Gabelli method. They actually have 300% debt covenants that come first.
    Also, the content of the actual fund which marks the asset to price, once a quarter. Just look what has occurred in the last three months! Consider the asset price actions over the past number of crisis and loss-of-faith. Maybe the large print giveth…now execute upon it.
    I would ‘prefer’ something like AIC or AIW or even the preferreds of the govt guaranteed mREIT with a big common divy to cut. There are four or so good choices. THey do NOT take a wave from a magic wand to give them support from the govt…they ALREADY have it.
    I do not really like to do research for someone when it is easy to try to follow my opinion. I AM suggesting to dig in to your own style and find what is good for you if you leave for a few weeks and come back to the choices made. Luckily, we have a lot of great tools and NEVER follow anyone’s lead. Put a mirror on your desk like Mr. Truman.
    Hey, got SR-A double position sold down to full position at 27.20. THANKS!
    PS: Pray for the oilys! A harsh discipline will have to be imposed globally with massive cooperation. Many ‘leaders’ are going to have to make many compounding decisions. That’s a tough spot. It’s going to be hard to continue selling off parts of a depreciating farm for cash. Go ahead…drill here, drill now, now what?
    PPS: Don’t forget to back up on LOTS of coffee! Good Morning! JA

    1. Joel, Its always easy to have a double down position in something like Spire when you see their trucks out and about, in the ol service area, while being around as Laclede since 1840s if memory serves. SR-A has been a lovely lady that likes to dance all the time. You just have to wait for the right song to ask.

    2. Joel A,
      I’m not in anyway arguing that we shouldn’t take risk, only that we be paid for it. Compared to other CEF preferreds, I think HFRO-A is a risk you’re not being paid for. If it was $20, that might be different. I own TWO and CIM preferreds – there is risk but I think I’m being adequately compensated for it. The biggest problem investors run into is not taking risk itself, but finding out there is risk where they thought there was none.

  2. This market is starting to remind me of the craziness right before the virus got started. Case in point: IPLDP which is callable “anytime” now trading at $25.37. I learned my lesson on these deals as I bought some COF a few months back at a small premium only to have it called a few days later at par. Won’t make that mistake again. Its a 5.1% coupon which translates to .3187 cents per quarter. So hence you buy it and immediately lose 5 cents per share if they call it. All the really high quality stuff is trading in the stratosphere as far as Iam concerned. I’ve had limit orders in on 4 things but they keep moving higher and higher every day so most likely will never get filled on any of them. No wonder that Schwab deal sold out in less than 2 hours.

    1. Chuck P, looking at past call issues under “par” VER-F might work for you. Slight higher risk but balanced appropriately with a 6.70% coupon. And a monthly payer if that’s appealing to you.

      1. THANK YOU Alpha8. I always welcome your input. Iam almost “always” looking because I pretty much always have something being called.

  3. Thanks for the hot start, Tim. I just put that Highland preferred on my tracking list Monday. But wasnt going to do anything unless pushed. So you forced me in at $24.77 and its already moving up nicely.

      1. Ha, yep that would be a loser. Yes, thank you it was $23.77. I bought shortly after your post. I scurried to my list as it rung a bell, and confirmed I was tracking to possibly buy. If its not on my preordained list, I am not buying. May ring the bell if it hits $25, as I bought 400.
        I also returned to the scene of the crime buying the older sister of flea bag sister UMH-D, that being UMH-B at $24.77 (maybe that is why I typed in $24.77). I barely got out of D with a nickel or dime profit holding for several weeks, giving up, selling right before it blew up. In a perfect world I will hold for a few divis and they redeem the thing this fall like they have mentioned wanting to do.

          1. Ah yes, I forgot yet again! I keep buying things and yet my cash doesnt seem to go down, because I am selling winners at the same time. It has gotten so bad, I bought back my KTN at 29.75 that I sold yesterday at 29.99 and yet I cant dent the stash pile. I am not in as much cash as others are stating though. About 15% cash or so.

          2. Hey I just crossed into the black on UMH-D thanks to averaging down….

            That was a wild ride felt like going through a thunderstorm in a piper cub.

        1. Here is what happened in UMH-D. Earlier in the year the issued shares as part of an At The Market program. The issuance grew the shares ourstanding from 2 million to over 5 million shares. Once that happened, UMH-D became eligible to be added to the index that PFF tracks, requiring PFF to buy 400,000 shares on the April 30th rebalance of the index. Professional traders knew this and bought shares in the week leading up to April 30th, and sold the shares to PFF on the close at the high tick. Once the rebalance was over, the shares fell back.

      2. Tim: I was able to buy some HFRO-A shares at $24.06 right before the close. Almost forgot about that one. I was debating between it and one of the Gabelli issues in early March, right before all hell broke lose. I had an order for HWCPL at $24.70 today but it never quite got that low, maybe tomorrow ? Do you think QVCC is too risky ? I don’t know why, I like it, but can’t seem to pull the trigger on it.

      3. Tim – given 200% coverage and similar “A” ratings, was always surprised to see HFRO-A sub-priced to NCZ-A. Picked up a full stash of HFRO-A at $21.71 during the event and topped off NCZ-A at $20.20. No flipping – they’re staying in the LT hold bucket.

  4. Going other way Tim and selling little bits on this rally..but overall net the same and have gone to about 30-35% cash.
    Prepared to forgoe a few months of dividends for opportunities that will surely come down the road.
    As an unrelated aside, even with 30m unemployed my college aged son just walked into a summer job at Whole Foods at $15/hr here in CT. They were literally begging him to start immediately. Those stimulus checks seem to be working (or not…)

    1. grocery stores have seen their employee costs soar through the roof with all the extra work required to maintain the stores.

      1. Grocery stores where I live are open fewer hours to account for the extra maintenance. Existing staff are flexible and being repurposed for the most part. Stores are hiring, but with the ranks of newly unemployed swelling its doubtful there is a lot of upward pressure on wages.

      2. Justin: Ya know, I am really starting to like this “senior’s only hour” thing at the stores and I am way ahead of everyone with this social distancing thing, been doing it for years already,. Going to hate to see it all go. 🙂

        1. Me too, but I hate that walk of shame on leaving and having to pass all the young people waiting in line to go in!

  5. Market rise is credited to Remdisivir news. Reminds me of the trade talks. Every day the market went up or down based on daily news blurbs that meant nothing.

    1. Ya, the market has jumped thousands of points on this same news before. Overhyped and just an excuse. This drug is no solution even if it worked. It may help prevent some deaths, which is great but this darn virus is causing long term organ damage and one still needs to be in very bad shape to even get this drug. Just another excuse for the algos to run the market higher as with the china trade news last year.

      1. AKJ, Well there is always this option…I guess it beats swallowing Lysol.
        He was referring to a study by researchers at Pitié-Salpêtrière hospital in Paris that showed that smokers were less infected with the virus than other people. It also showed that nicotine could prevent the virus from entering cells.

        Researchers warned nevertheless that smokers who did become infected with coronavirus would develop more severe cases of the COVID-19 respiratory disease it causes.
        https://www.reuters.com/article/us-health-coronavirus-france-nicotine/france-restricts-sales-of-nicotine-substitutes-after-coronavirus-study-idUSKCN2262K8

    2. Nice jump on my GILD, they report earnings April 30th I believe. Bought with 3% dividend nothing to write home about but was a play on growth and dividend

  6. GDP worse than expected and likely getting worse, market skyrockets. Companies miss earnings and tell you they have no idea what comes next, markets jump. No worries, Gilead has a treatment for severe cases of the virus. All one has to do is get seriously ill, get hospitalized, get an IV treatment, be sidelined for a month and you’re all set to go out and buy stuff and maybe even go on a cruise. Might as well go back to 3400 on the S&P and pretend like it’ll be back to normal in a couple of months. Fed liquidity market, not a stock market.
    Makes it difficult to evaluate stocks and what’s worthy of investment and what to avoid when all fundamentals are being tossed aside by a market practically anticipating that the fed will next start buying not just high yield bonds but stocks and ETFs.

  7. I’ve been making trades for forty dollar profits. Can’t squeeze much more out of it, too gun shy to make the big bets.

    1. Martin, would you rather punch a couple buttons for $40 or manually dig ditches for a couple hours for $40?

      1. No, that’s why I’m here. I’m no stranger to $40 trades, it’s just that after the wild month we’ve had the market seems so tame these days.

        1. I just have a nagging feeling that this will be the calm before another storm that is more fierce than the one in March. I am more surprised that a big bankruptcy hasn’t been filed yet.

          1. Justin, I’m not sure another storm is coming, but I think the states that are opening back up almost totally are the canary in the coal mine. If there isn’t a great rise in infections in two weeks the market will continue to rise. However, if infection rates go up considerably, the markets are going to get chopped. In that case, it means we wait until the end of the year for the nearest vaccine. Another few weeks should really paint the picture going forward. JMHO.

          2. A lawyer friend says they’ve been hiring heavy to handle the expected wave of filings.

            A commercial broker friend indicated 74% of his book is not paying rent – including the big players.

            An insurance friend indicated there has been a plethora of new work-comp claims (quote: “amazing how many people suddenly burned their hands, hit their hands with a tool, tripped or have sudden onset work-related psych-issues”), but when calling the employers – mostly smaller outfits – many indicate they are now out of business.

            Another insurance (national) friend indicated now realizing how effective their employees are working from home, they are actively moving toward closing smaller offices, already non-renewing a number of leases.

            The filings are on the way.

      2. I laid sod to help pay for college and have always said that “Any job with air conditioning and a chair is a good job!”

        1. Laying sod is a young man’s sport, Ben. Im glad I bucked some hay bales and speared and stacked tobacco back in the day. It convinced me I needed to pay attention in school so I could work in AC with a chair, ha.
          Moved in my house I had built 16 years ago and still have to get my mail at a PO Box, because I havent found the energy to dig a hole in the ground and plant a mailbox post in the ground….One of these days….

          1. Funny Grid, 12yrs ago was bucking 3 ton of alfalfa on an off my truck and stacking in a 10×12 shed. I let the flock get down to one old ewe and cut the field myself by weedeater 2yrs ago then hired a young guy to do it last yr. This year he doesn’t answer his phone, wonder why? So back to building up the flock!

  8. Tim,
    I have a position in HFRO-A, established around the time of the original offering, before I started following this forum. It’s been a real laggard. There seems to be a degree of skepticism out there about the A1 rating. Based on CEF Connect, the coverage looks to be about 250% now. Looking at the holdings, I have a nagging concern HFRO might be something of a BDC in CEF clothing.

    1. nhcoast–yes always a laggard. I reviewed their portfolio this morning and I hate it–pretty junky–loaded with level 3 investments (values are not directly observable). I held this before when it tumbled based on an old lawsuit.

      On the other hand I put less emphasis on the portfolio and more emphasis that they have the coverage—which I believe is the same for Moodys with the A1.

      The CEF senior securities are pretty resilient–the most recent example being Tortoise Midstream fund (NTG). When energy got hammered last month shares in the fund fell from $11ish to 75 cents. They crashed through all their leverage ratios–but in the end they sold off assets and redeemed all of their leverage. Essentially the common holders almost got wiped out while the senior holders were just fine (but likely scared shixless)

      You can read about it here.

      https://finance.yahoo.com/news/tortoise-announces-leverage-reduction-closed-031700354.html

      1. Not sure why anyone would buy HFRO-A for a modest amount of extra yield compared to actual safe CEF preferreds. As of 12/31, 20.9% of common portfolio was in Creek Pine Holdings LLC and 9.6% in NFRO REIT SUB, LLC. Does anyone even know what these are? Creek Pine seems to be in timber, but not sure about anything else.

        Throw in 20% CLOs that are worth who knows how much and the entire portfolio in junk credit, it’s not inconceivable that a liquidation would leave preferred holders impaired. Now, I’m not saying that will happen (as I imply above, I don’t have a clue what’s going on with most of the porftolio), but why take the risk for a tiny amount of extra yield/capital gain?

        1. Moody’s has HFRO-A at A-1, which they aver takes into account the quality of the loans. If that’s accurate, then $24 is a good price now. If not, then who knows? Holding it now means hoping the price soon reflects the A-1 rating. As of now, it doesn’t.

            1. The rating was Sept 2019… Things have changed since then including the coverage ratio down. I read the summary and knew it would be weaker. Tim is personally backstopping my trade from his own wallet, so I have little worry.
              Ok, on a serious note, for me this was the butt end laggard trade thesis playing out for me. Even though this is rated higher I consider is dreg purchase along with my recent UMH-B, and FPI-B purchases. So far so good. The ripcord will be pulled soon enough, so I have little fear in owning it. My reference to the dregs is these are the last issues being pulled back up from the mud pit. I dont hold these as long. FPI-B is already up a buck since my purchase last week.

        2. karma- HFRO owns a 10.25% preferred in Creek Pine Holdings LLC, not the common shares. They do own about 20% in CLOs, but mainly the bond classes (not CLO equity which is much riskier). Compared to some other CEF preferreds which own equities, HFROs portfolio of mainly preferreds/bonds seems less likely to suffer a massive drop.
          I think the reason why the HFRO preferred trades lower is the bad corporate governance of Highland/Dondero. But it is in their interest to do whatever it takes to keep the preferred alive to maintain the higher management fees they earn in managing HFRO.

          1. morphy23,
            I meant the common shares of HFRO have a huge stake in Creek Pine. And yes, it’s better to own preferred than common, but do you have any idea what the risk of this investment is? A preferred stocks that had a 10.25% yield last year would qualify as a distressed company. What condition is it in now? Remember that if a company is highly levered, preferred doesn’t do much better than common in a liquidation.

            As for the CLOs, I see a lot 8, 9, even 10% yields. These are clearly subordinated tranches that could see cash flows shut off at some point and probably don’t have many strong bids in the market right now if you want to sell. Unless you’re in the CLO business or regularly invest in them (meaning you work for an institutional investor) and can model these cash flows, why would you trust the valuations?

      2. As for the Tortoise funds, what if the asset values continue to decline? I don’t follow these at all, but typically in a situation like this they end up selling their best, most liquid assets. If the asset coverage is breached again, they might find their NAVs to be overstated in a fire sale. Buying preferreds that are backed by junky illiquid holdings is far from safe, and I know you have made that point before. But it should be made clear that the real safety is in funds that are backed by liquid investments that can be readily sold to meet the “margin call”, such as in most of the Gabelli funds.

  9. Tim and all you Guru’s; I have a question. Many of us I suspect own lots of preferreds where when the call date comes up they are then tied to the 3 month libor + a specific percentage outlined in their prospectus. The other day somebody said the 3 month libor is going away. So if that is correct then what happens when these issues get called???? As I type this the 3 month libor is 1.11% which is not too bad. And not to beat a dead horse but there really are no bargains out there regarding high quality issues. I own lots and lots of preferreds of all kinds and its amazing at how fast they all went from $22 and $23 to now all well over $26 and even over $27. Things can certainly change quickly and a guy needs to act very quickly. On a separate not that Schwab 5.375% issue from monday is now trading well over $102+. Schwab’s level of service on this situation was absolutely horrible in my opinion.

    1. Most LIBOR based f/f issues have a section within their prospectuses that deals with what happens if lIBOR goes away…. I don’t think you can generalize on an answer but in most cases, the answer is theoretically there somewhere in the individual prospectuses.

        1. Yes, they are always there….Even old ones…But interpreting what it means still needs to be comprehended though for it to mean anything.

          1. A handful of securities for some odd reason never put an alternate rate in. Those are likely to be redeemed by the issuer, since they have no allowable rate to switch to. There was a big Citigroup issue that comes to mind.

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