Looking for Stability

Finally by midday Monday stocks began to recover from early losses to climb to a closing gain. The bond market was closed so we will need to await trading today to see if we can find stability in the interest rate arena. Our best guess is that rates will stabilize today sometime in the 3.23% area. By stabilizing we are talking about for the next couple of weeks–then there will be more news, more economic releases etc and we can proceed to move rates higher or lower–of course we hope at a slow pace of movement.

Yesterday was a decent day for many preferreds and baby bonds as many issues bounced by 1-2%. Also REITs bounced after falling 5-6% last week. Personally we picked up some Independence Realty Trust (NYSE:IRT) on Friday as it fell into the $9.70’s, but this was just a flip and we have sold the shares already as IRT closed at $10.10 Monday. We do note that while we had some bounce in many income issues others fell 1-3%. Those falling on Monday were mainly very thinly traded issues–they “trade by appointment” and if they don’t trade prices are not shown up or down.

We are watching as even the term preferreds and short maturity baby bonds have moved slightly lower. Issues like the new 6.375% Gladstone Investment (NASDAQ:GAINL) which has traded as high as $25.60 in the last month is now around $25.15.  The safety play–Kayne Anderson 3.50% term preferred (NYSE:KYN-F) has been trading between $25 and $25.10–a great place to “hide out” as it has a mandatory redemption in 15 months.

Some of the issues we love are the CEF preferreds—mostly very highly rated–but also mostly perpetual.  We can’t buy them–we love them–but we can’t buy a bunch of stuff that we know will be pounded lower as rates move higher.  These almost all have coupons of 5-6% and most are trading at or below $25–unfortunately the current yields remain under 6%.  So super safety still pays an inferior reward (for a perpetual security)–we will wait as we want more–say 7% and up.  We are happy to hide out with too much cash and term preferreds a bit longer.

IF we were perpetual preferred buyers we would be watching the fixed-to-floating issues. We would be most interested in the issues with a initial coupon over 8%.  This gives one a little cushion from rising rates as compared to fixed rate buyers.  Of course we personally are not buyers of perpetual preferreds yet–but the time will come–probably some time next year.




33 thoughts on “Looking for Stability”

  1. Sorry – I was typing comment and went off to attend something else, unaware of last two posts from George and Bob’s. Very helpful. Thank you.

    Bob, thanks for explanation

  2. Gridbird,
    Thanks for the explanation. From best I can tell, you are “the illiquids encyclopedia.” Many thanks for all your help.

    Would a Canadian pfd be subject to C withholding tax? AQN is in the TSX but company profile suggests at least a portion of revenue is derived in US

    To a Short Form Base Shelf Prospectus dated September 18, 2018
    New Issue October , 2018
    % Fixed-to-Floating Subordinated Notes – Series 2018-A due October 15, 2078
    Preferred Shares Issuable Upon Automatic Conversion
    Algonquin Power & Utilities Corp. (the ‘‘Corporation’’ or ‘‘Algonquin’’) is hereby qualifying the distribution (the ‘‘Offering’’) of $ principal amount of
    unsecured % Fixed-to-Floating Subordinated Notes – Series 2018-A due October 15, 2078 (the ‘‘Notes’’). The Notes will mature on October 15, 2078 (the
    ‘‘Maturity Date’’). The terms and offering price of the Notes were determined by negotiation between Algonquin and Merrill Lynch, Pierce, Fenner & Smith
    Incorporated, J.P. Morgan Securities LLC, Morgan Stanley & Co. LLC and Wells Fargo Securities, LLC, as representatives (collectively, the ‘‘Representatives’’)
    to the several underwriters (collectively, the ‘‘Underwriters’’) named in Schedule A to a certain underwriting agreement (the ‘‘Underwriting Agreement’’) between
    the Corporation and the Representatives. See ‘‘Underwriting.’’ The closing of the Offering is expected to occur on or about , 2018, or such later date(s) as
    the Corporation and the Underwriters may agree (the ‘‘Issue Date’’).
    The Corporation will pay interest on the Notes quarterly on every January 15, April 15, July 15 and October 15 of each year during which the Notes are outstanding
    until October 15, 2078 (each such quarterly date, an ‘‘Interest Payment Date’’). The Corporation will pay interest on the Notes at a fixed rate of % per year in
    equal quarterly installments on each Interest Payment Date until October 15, 2023. Starting on October 15, 2023, and quarterly on every January 15, April 15, July
    15 and October 15 of each year during which the Notes are outstanding thereafter until October 15, 2078 (each such date, an ‘‘Interest Reset Date’’), the interest
    rate on the Notes will be reset to an interest rate per annum equal to (i) starting on October 15, 2023, on every Interest Reset Date until October 15, 2028, the three
    month LIBOR (as hereinafter defined) plus %, payable in arrears, (ii) starting on October 15, 2028, on every Interest Reset Date until October 15, 2043, the three
    month LIBOR plus %, payable in arrears and (iii) starting on October 15, 2043, on every Interest Reset Date until October 15, 2078, the three month LIBOR
    plus % payable in arrears.

    1. George it will be interesting to see what the kicker is to the Libor. Keep us informed if you dont mind. Im tracking another another similiar issue from WEC, (BAA2) but its kicker is just 3.22% so it gives me pause and I need a better entry point for now.

    2. Issuer: Algonquin Power & Utilities Corp. (“Algonquin” or the
      Security Type: Fixed-to-Floating Rate Subordinated Notes – Series 2018-A
      due October 17, 2078 (the “Notes”)
      Expected Ratings (S&P/Fitch)*: BB+ / BB+
      Pricing Date: October 10, 2018
      Settlement Date**: October 17, 2018 (T+5)
      Maturity Date: October 17, 2078
      Principal Amount of Notes: US$250,000,000 (before giving effect to the Over-Allotment
      Over-Allotment Option: The Company has granted the Underwriters an option to
      purchase up to an additional US$37,500,000 aggregate
      principal amount of Notes to cover over-allotments, if any,
      which may be exercised, in whole or in part from time to
      time, for 13 days after the date hereof.
      Denominations: US$25 and integral multiples of US$25 in excess thereof
      Price to Public: 100% (US$25.00 per Note)
      Interest Rate and Interest Payment Dates:
      Fixed Rate Period: From the issue date of the Notes to, but excluding, October
      17, 2023 at a fixed rate equal to 6.875% per year, payable
      quarterly in arrears on January 17, April 17, July 17 and
      October 17 of each year, with the first payment at such rate
      being on January 17, 2019.
      Floating Rate Period: From October 17, 2023, and on every January 17, April 17,
      July 17 and October 17 of each year thereafter until October
      17, 2078 (each such date, an “Interest Reset Date”),

      1. PART 2 showing float rates…..

        (i) starting on October 17, 2023, on every Interest Reset
        Date until October 17, 2028, the interest rate on the Notes
        will be reset on each Interest Reset Date at an interest rate per
        annum equal to the three month LIBOR plus 3.677%, payable
        in arrears, with the first payment at such rate being on
        January 17, 2024,
        (ii) starting on October 17, 2028, on every Interest Reset
        Date until October 17, 2043, the interest rate on the Notes
        will be reset on each Interest Reset Date at an interest rate per
        annum equal to the three month LIBOR plus 3.927%, payable
        in arrears, with the first payment at such rate being on
        January 17, 2029,
        (iii) starting on October 17, 2043, on every Interest Reset
        Date until October 17, 2078, the interest rate on the Notes
        will be reset on each Interest Reset Date at an interest rate per
        annum equal to the three month LIBOR plus 4.677%, payable
        in arrears, with the first payment at such rate being on
        January 17, 2044.

        1. Few thoughts ……..

          Cdn companies issue lots of prd. Almost always reset rate. It’s just the norm. What’s unusual here is they are doing this in US$ and registering the issue with the SEC. If you don’t mind issues in C$ there are many to chose from. Open a Cdn brokerage account. Just remember to file FASFA.

          One of the key things to look at with F2F or reset rate (whatever they are known by) is the reset rate relative to the initial interest rate. You want the difference to be as small as possible, or even in favour (this is a Cdn issue) of the reset rate.

          This issue is the opposite; the reset rate is well below the initial rate, by almost a full percentage point. A sucker rate in other words. The further the reset rate is below the initial fixed rate, the more likely you are buying a low yield perp, not a real reset.

          Look at ENBA in comparison.

          1. Slight correction; got my acronyms mixed up. Forget FASFA, it a “FBAR” you have to file if you have offshore accounts. But don’t worry about FBAR. The form is only 7 pages long, it only takes a few days to prepare, it’s signed under penalty of perjury and the Feds really will prosecute you for even innocent errors on the form. Usual government stuff.

  4. Tim,
    Your website is amazing! Your insights as well as the posters’ are invaluable. Very much appreciated.
    Many thanks for your insights. Can you please share how you are able to know (prior to other owners) when illiquids are called (or other pertinent news) ?
    Thanks to all.

    1. Aarod, generally I look to know ahead of time when board of directors hold their quarterly meeting. Then I start to check SEC filings daily for a period to see if anything will happen. A dividend from a preferred stock cannot be paid until its been declared from BOD. Debt “preferreds” do not need a declaration since they are a contract of interest to be paid. So you can start checking about 40 days prior to each payment. Once inside 30 days its usually good for another quarter since it is now inside 30 day redemption window. Presently I only have a couple like that. The rest are either call protected, uncallable, term dated, or like NSS and ALLY-A….to liquid to matter as market will know first anyways.

  5. Could someone please suggest the best place to catch a redemption notice for ALLY-A. Perhaps a filing at edgar or the ALLY website under news for ir????
    Thanks so much!

    1. The practical answer to your questions is it doesn’t matter where it first appears. It will go across Bloomberg instantly. The price adjustment will take nanoseconds, much faster than you would have time to react.

      That is one reason not to have open orders in issues with significant call risk. If it does get called you will get filled at the “old” price. Only made that mistake once.

      1. Bob, that is why I love illiquid preferreds. I find out usually before the owners do. And I can get out of dodge before the market knows…My favorite redemption notices were a couple years ago…KCC and Baltimore Gas and Electric preferreds…KCC was unusual in that its $25 par price was not its redemption price of $27.10. So I sold out before people figured it out. Then I waited for the knuckleheads who then started dump selling a bit above $25, not knowing they were redeemed at $27.10…That was some easy money!
        BGE had 4 preferreds and tickers were similiar, but they initially only redeemed a couple. People got confused and were dumping the wrong ones. I bought them near $100 par, and a few days later once everything got figured out I flipped them back at over $105…Those were the days…Now just about everything is a bland $25 par and same redemption price.

    2. Dave, since this is a very liquid preferred, all you really have to do is see it dropping immediately to par plus accrued interest payment and you will most likely know its being redeemed, lol..
      For these liquid ones, the market “knows” before we get the word. Sometimes companies issue press releases and/or SEC filings. Quantunonline when they catch word will also post it under security name and date to be redeemed.

  6. Grid–you do love this one and NSS. I haven’t tried ALLY-A yet but may have to mess with it.

      1. Micheal, the word trust serves no purpose on a K-1. K-1’s are only issued by MLP’s (Master Limited Partnership). Ally is a C-Corp. Oddly enough the fact it is a trust preferred almost ensures it would never be a K-1 despite who issued it. As trust preferreds usually hold bonds in trust. All bonds are treated as income. Keep in mind ALLY-A is no long term hold lay up. They have previously redeemed ALLY-B, and they are under no obligation to leave this outstanding….So one has to accept that risk, or look to flip.

  7. Found out today ALLY-A is a grandfathered trust preferred exempted from Basil regs and will be allowed as Tier 1 capital. This may keep life in the old issue since its tax deductible.

      1. Tim and Bob, an online friend sluethed this out from Ally. This really increases the odds of it staying outstanding. Yesterday really provided a good opportunity to buy, I got lucky and bought 500 more on a gamble, but did not know this until today.

        The amount of trust preferred securities included in Tier 1 capital was $2.5 billion at December 31, 2017. The amount represents the carrying amount of the trust preferred securities less Ally’s common stock investment in the trust.
        The trust preferred securities were issued prior to October 4, 2010, under the Emergency Economic Stabilization Act of 2008 and are not subject to phase-out from additional Tier 1 capital into Tier 2 capital.

        1. That is the problem with working day and night–I can’t have any fun. I really like being able to watch and execute a trade versus putting in a stink bid.

          1. Tim, you need to slow down and enjoy life. When you finally do, maybe next time you can snag some CNIGO at 25.30. 🙂

  8. Tim, don’t want to clutter up the thread, but if you’re noting minor errors, the NYMTN link on the recently added “losers + winners” list takes you to Navient JSM senior note instead. Works fine in the master list.
    Also, appreciate your sharing your cool headed observations during the recent flurry, reminds me again this is a marathon, Katie bar the door and keep the powder dry.

    1. HI D–thanks for the heads up–will fix. My cool head is mostly because I am so buried in appraisal work I am out of the office 1/2 of every day–ignorance is bliss I guess.

  9. With TNP preferreds it depends whether are you looking for highest coupon or greatest safety…TNP-B has the lowest coupon ($2.00) but is trading post-call date and has a failure to redeem clause that kicks in sometime next year. Your risk would be around 30 basis points for a very stable 8% annual yield. The TNP-C preferred also have the FtR clause written in and are callable at the end of this month.

    If your time horizon is a bit longer, the TNP-E and TNP-F preferreds have 7+ years of call protection as well as a fixed to float feature that kicks in after that.

    Personally, I’d avoid the TNP-D perpetual preferred shares which have neither the best coupon or a stablizing mechanism like fixed to float or failure to redeem.

    1. I think TGP is the best play in LNG as it has very little spot exposure and almost all of its ships are on long term charters. I am happy to have TGP-B in my Roth.

      1. Hi Greg,

        I held TGP-A in my Roth but then realized that 100% of the distribution is UBTI so I sold the shares and repurchased them in my taxable account so I would not have to file a 990T. Hopefully, you are not holding enough shares to generate $1K in distribution unless you don’t mind getting an EIN and filing a 990T.

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