New Purchase Made in the High Yield Portfolio

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.

  1. The issue is fixed-to-floating rate meaning at a point 6 years in the future there is interest rate risk coverage.
  2. The issue is from a commercial mortgage REIT which helps diversify the energy heavy preferreds bought previously.
  3. 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.
  4. The commercial real estate portfolio RSO owns is primarily senior floating rate loans.
  5. 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.

7 thoughts on “New Purchase Made in the High Yield Portfolio”

  1. KYN-F is my largest single position–meager return but I can sleep like a baby.

    1. Tim, I am afraid KYN-F is the last rodeo with the KYN preferreds. They have 5 or so other ones, but they all were private placed. The previous KYN preferred that traded on the exchanges a couple years ago got called and replaced with a private issue. This is why GDL-B was of interest to me. Safe QDI does matter for me with my pension keeping my tax bracket up enough to benefit from 15% QDI in taxable accounts.

  2. Tim, this fits under “low yield safe category”, but it almost slipped my knowledge. Gabelli is offerring rights or conversion to a new GDL-C offer for existing GDL-B owners who are of record by 2/14. So one gets an upgrade on the 3% par and it goes to 4% with a max adjustable to 6% starting in a year. This is my favorite “puttable” type issue. You can hand the keys back to Gabelli at $50 par in April 2020 and again in 2022. A very safe issue.

    1. Hi Grid–yes that has been on my radar. I haven’t started the safest portfolio yet–of course most the Gabelli issues fit in there since they are so highly rated–but perpetual.

      The issue you mention I had only researched last week and haven’t gotten back to it yet–but will.

      Thanks for your valuable input.

      1. I mentioned it Tim, because an old SA article you wrote wisened me up to keeping part of my money in safer QDI shorter term dated issues. I never forgot that. I still have the KYN-F you mentioned. Im not loaded up on GDL-B but I had 200 shares and bought 100 today, so I can convert 300 to GDL-C down the road. I like the price stability these issues provide as I do stretch for yield in some areas.

        1. Is that a mandatory conversion or optional ? If optional wouldnt one stick with the higher yielding B until 2020.

          1. Hi Rick—will get back to this topic tonight. Have to head out of the office momentarily to do some ‘real’ work (work that pays moola).

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