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Loaded to the Gills With ‘Junk’

The incessant redemption of high coupon, quality issues has forced me where I don’t want to go–to the junkier issues.

Optionally I guess I could have stacks of cash earning next to nothing–not a great option.

In particular I am loaded to the gills with preferred shares (and baby bonds) from the finance companies–the CLO holders. I have shares from Eagle Point Credit (ECC), Oxford Lane Capital (OXLC), OFS Credit (OFSS) and Priority Income Fund (not publicly traded). There are a couple reasons why I like these–in particular that most of them pay monthly dividends and I love monthly payors–gives me a nice steady income flow. Additionally these issues need to maintain 200% asset coverage ratios–even though most of their assets are ‘level 3’ (no price/value is readily observable) there is some level of comfort with asset coverage ratios.

I am also loaded with the preferreds from Armour Residential (ARR) monthly payor, Gladstone Land (LAND) monthly payor and a small amount of a First Bancorp (FBP) monthly payor (I would buy more of the FBP issues if I could get them at a fair price, but they are fairly thinly traded and difficult to buy).

These are some of the largest positions we hold—and at position sizes that are either ‘full’ or ‘overweight’ positions—not my comfort zone really.

I think one of the key measures an investor needs to undertake when owning some of these issues is to do continuing due diligence. While we all might feel comfortable with owning Public Storage preferreds without doing deep dives on their financials that shouldn’t be true with CLO owners–we have to be on the lookout for abnormal losses in these companies. When credit starts to deteriorate we have to consider heading for the exits–no ‘auto pilot’.

42 thoughts on “Loaded to the Gills With ‘Junk’”

  1. Similarly loaded to the gills with high-dividend international telecoms, various utilities, pipelines, miners, tobacco companies, consumer stocks, financials – common stocks, plus BPOPO and FBP preferreds, like Tim – the majority international and emerging markets. Almost all semi-annual divs and nothing like the regularity in amount that I was used to. Still wary of the tankers, though, minimal exposure. It’s sure a lot more work than buying investment-grade preferreds at 6.5-7% used to be. I think it will be a looooong time before those days return.

      1. Sure, happy to. Investments vary from $2.5K to $50k depending on the apparent risk. In a couple years I’ll know how good an idea this was.

        1. Tim – Thanks for sharing. European providers seem most controversial.

          BCE – Widows and Orphans. Own BCE.PR.H

          ORAN – low debt 2.3x has a decent chance to turn around with Africa/Middle East growth and the ability to spin off tower infrastructure assets. No position.

          VIV/TEF – Selling off tower assets has deleveraged re-igniting growth. Brazil is the growth engine as Europe revenues have suffered due to 3yr cellular price war. No position.

          PHI – Not watching at all. Looks interesting with the potential exit of Dito. Low debt 3x with growing revenue. Bargain of the century just 7 days ago. No position.

          1. Thanks, appreciate your perspective. Former credit underwriter, debt ratio is one of the things I keep in mind. I was lucky to buy PHI when it was yielding 6.11%, now 5.28%, not buying more at this price.

            1. From a current Centurylink (Lumen) bag holder perspective its the key factor I pay attention. Surprised you did not like CCOI.

              1. I see the dividend rate was below my 5% review cutoff, so that’s why I didn’t see it. I would need to puzzle out the negative shareholder equity, fairly rare in my experience but with a set basis of mostly depreciated physical assets/physical plant it does happened. I remember Deluxe Corp had negative book equity and a high S&P rating in that type of situation.

                1. When I was recently reading through Orange propaganda I came across a term EBITDAaL and net debt/EBITDAaL metrics. When I compaired against 82 telcos that I track the following bubbled up.

                  CCOI, VIV, ORAN, TKC

        2. Do you get charged ADR fees and foreign government fees? The list is very interesting. Thanks.

          1. Waiting to see how burdensome any ADR fees are, will adjust yield figures to include this as they become clear. Foreign taxes are an offset to my US taxes so I don’t have an issue with those.

          2. David,
            We’ve owned BCE for about 6 years, give or take, and if bought in a taxable brokerage account – you’ll get hit with the 15% tax racket – yes, racket – not bracket. Since we like getting all of our divvies up-front at the time they are paid, we only hold BCE (and/or BCE preferreds) in IRAs – which shelters them from the 15% CA taxation. Never had to deal with any fees or charges from the brokerage, even for buying/selling. Fees varies with brokerages and $ invested, though. The one I’m speaking of in this instance, is Merrill.
            We held TU for years as well, if you fancy the CA telecoms, but sold it to consolidate holdings in just VZ, T, and BCE.

  2. Thanks for sharing Tim. I too feel the CLO Prefs are a reasonable risk in this low interest rate environment. Unless I missed it, I don’t think any CLOs went Bankrupt since the COVID downturn.
    I will share my favority Preferred. ET/PRE. Investment Grade Company. The Prefs coupon is 7.60% and not callable until 5/15/24. After that they float to LIBOR (most likely SOFR) plus 5.161%. Currently trading at $25.20… This is my largest position. They do issue a K-1 so understand the IRA implications before you put them there.
    Good Luck to everyone with their choices

    1. Gary, thanks for the tip. I looked at ET’s finances and was pleasantly surprised at the improvement. Net income and cash flow are both up, and there is a reduction in LT debt. Took a full position in ET-E.

  3. I can’t be bothered with deep diving into their financials. Seems to me there is no telling what they are currently doing. Invest accordingly.

  4. What’s happening here is what happened to the Municipal Bond Market.
    The only savior is to invest in decent dividend paying stocks. Yes you have to watch everyday for the ups and downs.

  5. Are you in LANDO just because you don’t want to bother with the series available at MyIPO and don’t think a call in LANDO is likely?

    1. I bought back into LANDO when it fell to 25.42. Nearly 4% YTC is the worst I can do, more likely there will be more trading opportunities along the way. Already bounced a little off the low.

  6. I have decided this year to play in the stacks of cash zone. While I have a few high quality Pfds left I won’t go into anything risky. I try to take a full cycle longer view and think of returns not in the short term, which are pathetic, but over a full cycle. When those liquidity shocks come, which they always do, one can buy high quality issues that get thrown out with everything, and returns can be strong double digits with relative safety. Just look at what happened in the Covid correction of 2020 alone if one was in mostly cash into that event and was able to buy quality into the dip the returns would be 20-40% .
    When too many folks are on one side of the pool, something always comes along that destroys it

  7. I have found a good clothespin helps with the smell when dealing in junk. I have lost too many to count good preferred stocks that were paying a nice rate to redemptions over the last year. The companies issue new ones at a lower rate to redeem the higher rate ones. Can’t say I blame them as I would do the same thing. Just business. Not much out there other than junk to replace them. My policy has been to buy the lower rate stuff being issued by a “good” company, but buy a half position of my original holding. The other half I get the clothespin out and buy some junk at the higher rate. Overall I end up with about the same income. I do spread the junk buys around. My hope is all of the junk will not got bad before I can bail. My fear is when whatever happens it will happen quickly and take everything out, both “good” and bad. Try not to be so danged pessimistic about the future, but it is hard!

  8. Redemptions and some profit taking this week leaves me with a pile of cash. Didn’t buy new junk this week but I will if nothing better comes along. Meanwhile keeping both eyes out for the next windfall.

    1. Martin, want to see how the market goes next week. Remember the old days? When the week before a holiday and the week after used to be traders pushing the market around until the crowd returned from vacation. Now people play sitting on the beach with their cell phones.
      Right now all I want is a steak dinner or Chicken Mcnuggets. QTS.PA came in as a loss after TD charged me a redemption fee so my wife paid for dinner.
      Did 4 flips last 1-1/2 weeks on same stock. Then I noticed on TD they consider someone a day trader if they do more than 4 trades in 5 days.
      With AI am sure they keep a eye on you.

      1. Charles – Are you talking about 4 trades in 5 days on the same issue???? I’m far from a trading fool, but most of my trades are done at TDA and it sure isn’t difficult to have more than 4 trades in 5 days and I’ve never been earmarked as a daytrader… Then again, they didn’t hit me with a “redemption fee” on QTS-A either and I can’t say I have that many trades on a single issue either or at least not buys and sells…. all buys or all sells probably but not buy/sell, buy/sell.

        1. A Pattern Day Trader is one who executes 4 or more day trades (options and equities) in a rolling FIVE business day period in a MARGIN ACCOUNT, provided the number of day trades is more than six percent of the customer’s total trading activity for that same five-day period. A PDT must maintain a minimum equity of $25k on any day that trades are made. If the account falls below $25k, the PDT will not be permitted to day trade until the account is restored to the $25k minimum equity level.

          There is no limit to how many day trades you can make in a cash account as long as you are using settled funds.

      2. I think what you’re referring to is the US Definition of a “pattern day trader”, which only applies to margin accounts, and only if you’re buying and selling the same stock on the exact same day, and you do that 4 or more times in 5 days. I don’t have margin accounts so TD doesn’t bother me when I flip.

        1. Non-margin accounts have harsher restrictions. You can’t sell with uncleared funds 3 times a year, and it applies no matter how much money in the account. That happens a lot more often than the pattern day trader restriction.

          1. Thanks everyone for chiming in. Martin I don’t have a margin account and probably never will, too much temptation. The account does have more than that minimum but with bids out on 3 other stocks. it technically had zero available. At one point I did cancel a few open orders to free up cash as I was pretty convinced on the pattern I was seeing.
            Can I pass the dice to you Martin ?
            Yes I did at least one flip maybe two on unsettled funds so good to know.
            TD has treated me pretty good, But after what 2WR said I think I may get back in the ring and badger them for that redemption fee back

            1. td has a milder version of a margin account for IRAs. You can’t spend more than you have but you are free of the 2-day restriction on unsettled funds.

      3. Pattern Day Trader is an SEC rule not a broker rule. You can avoid the restrictions by having more than $25,000 in the account. This rule was added when day trading was young and some of the traders were irresoposible. So they passed a rule incinveniening everybody.

  9. Tim, I haven’t been able to hold my nose tight or long enough to enter the junk arena. I have stayed in investment grade preferreds. I play the capital gains and qualified dividends game. Only take gains that are long-term and only qualified dividends. As my ordinary income is just about equal to my standard deduction, I only pay income taxes when I decide to take gains as I keep the qualified dividends in the tax free zone (married less than 80,800 or single less than 40,400). Still manage to get 6% or better on an annual basis. Good enough for me. No concerns about credit losses.
    Thanks for all you do. Your site is the Cadillac of preferred site information. You are greatly appreciated.

    1. Thanks bogiefreeround–looks like you have things figured out for your needs.

      Thanks for the complement!

  10. Tim—I personally am leary of the CLO’s because 200% coverage sounds great, but as you said, 200% of what? I don’t have the energy, or really the ability, to attempt to decipher the assets they own. I do own a fair amount of First Bancorp. If you’re patient, usually someone hits your bid, even though the spread is sizable. Do you think there is any call risk for these prefereds?

    1. randy–agree with you on the CLO’s–dicier than what I like, but I think ok until we hit an economic downturn.

      And yes on the FRB call. The other Puerto Rican banks have called most of their high yield stuff–Oriental Finance and Popular Bank adn with FRB’s financials improving dramatically of late I would think they might call them–which is why I am not chasing them at higher prices.

      1. Instead of the low or no rated preferreds, I am now 20% in common stocks, 7% in common stock ETF, 7% investment-grade preferreds, and the rest in cash. I am not making money, but covering all my yearly expenses.

        Continuing to be Mr. Ultra conservative until social security payments start at year-end. Will consider increasing my risk (as warranted) when that happens.

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