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’.