We have added a full position to the Enhanced High Yield Income Portfolio of the 8.625% Resource Capital Fixed-to-Floating rate preferred (NYSE:RSO-C).
This purchase brings this particular model up to 43% invested so we will need another 4-5 issues to finish up construction of this model.
Here are the reasons we have purchased this security for this model.
- The issue is fixed-to-floating rate meaning at a point 6 years in the future there is interest rate risk coverage.
- The issue is from a commercial mortgage REIT which helps diversify the energy heavy preferreds bought previously.
- Resource Capital has recently (15 months ago) drafted a plan to divest residential mortgage businesses as well as non core businesses and has executed the plan leaving them with substantial cash on hand. Impaired assets were sold or marked to market and are for sale.
- The commercial real estate portfolio RSO owns is primarily senior floating rate loans.
- RSO was able to issue a convertible note at 4.50% while paying off convertible notes with coupons of 6 and 8%.
While we believe this issue, like all perpetuals, is susceptible to loss of capital as interest rates increase, we are willing to incur that risk to own a high yield security. Reasonable higher yield preferreds are in somewhat short supply, but given the improvements in performance coming from RSO we think this issue fits right in.