8:15 pm CST
As we had mentioned earlier today we planned to add a new issue to the Enhanced High Yield Fixed Income Portfolio today and we have done so.
We have added a full position of —
NuStar Logistics 7.625% Fixed-to-Floating Rate Subordinated Notes (NYSE:NSS) to the portfolio. We paid $25.45/share (or bond) for it.
This security is the 1st we have ever owned which is in the floating rate period. The issue was originally sold on 1/15/2013 and became floating rate on 1/15/2018. The coupon had been fixed at 7.625% until now.
The issue currently has begun floating at a rate of 673.4 basis points plus 3 month libor. 3 month libor is currently trading around 1.79% so the current rate of interest on this issue is 8.51%.
Caution—THIS ISSUE IS CURRENTLY CALLABLE BY NUSTAR. The issue became callable on 1/15/2018 and we had expected the company to call the issue and refinance it with a lower coupon issue. It has not happened–yet. The company will be announcing earnings tomorrow (2/8) and they could take the opportunity to call this debt at that time (although the issue is over $400 million in size)
The issue is now “accruing” interest and if it remains uncalled until the end of March the interest paid will cover the “call risk” we are incurring by paying $25.45/share for this issue today. This is a risk we are willing to take at this time to hopefully be able to hold this issue for the foreseeable future. We are well aware that there are investors that will not pay over $25, but generally we don’t mind having 20 or 30 cents a share of call risk–we have done it for years and it generally works quite well.
NuStar Logistics is a wholly owned subsidiary of master limited partnership NuStar Energy LP (NYSE:NS). NS has been under some pressure in recent years as energy prices fell as did the companies revenues and profits. In spite of some difficulties NS continues to pay a $4.38 distribution to common unit holders. Additionally the company has 3 high yield perpetual preferred issues outstanding with coupons of 9%, 8.50% and 7.625% and with assets of over $6 billion we expect they will be around for a long time to come. Net income while lower was over $120 million for the 1st 9 months of 2017.
While we could have chosen one of the companies high yield preferreds we believe this one is best because it is higher up the capital stack, plus since there is a chance it could be called there is a high likelihood that it will trade in a tight $24.75 to $25.50 price range lending some stability to the portfolio. Additionally while it doesn’t have a maturity date until 2043 and long dated maturity date is better than a perpetual stock in particular when you couple the “date certain” maturity with the floating rate feature.
Disclosure–we have owned this security for the last year or so.
NSS is solid pick for the current market, it is my largest holding. I thought it was going to be called, great to see it might be around for awhile.
Hi Martin–thanks for stopping by. Yes we have liked NSS for a long time, but I would caution against getting too much in it–surprises can happen. We (personally) have a full position–but won’t go any higher.
I agree Tim. I dont pretend to be a financial expert so lean on Moodys projections and other anecdotal infor, along with my “emotional radar”. I have tried stretching for yield in AFSI, Maiden, and Wheeler preferreds in past year and actually made a little money on all of them. But minimal amounts as my emotional radar said get out. Moodys is getting progressively negative on NS. My financial side is still in holding NSS mode. But my previous dormant emotional radar is starting to perk its ears up and pay more attention. If I ever get to a point of serious doubt, I always pull the plug a day early than a day late. NSS will fall under those guidelines too!
Tim, you may be interested to know today, NS on their website released a new projected balance sheet for the company due to its reorganization. On the last page of attached link you will clearly see NSS is projected to be on the books for 2018 and 2019. I have also been told NSS has been given permission by creditors to be waived from debt covenent requirements for this year, also. I think NSS is going to party on a while.
http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9Njg3OTMwfENoaWxkSUQ9Mzk4MTk3fFR5cGU9MQ==&t=1
Hi Grid–thanks for stopping by. I will try to check that out when I have some spare time tonight or on the weekend. We can hope that it remains out there for at least a year or two. Hopefully NS can get their finances pointed in the right direction–although being higher up on the food chain (bonds) I think we can sleep pretty well at night.
Good luck
Moodys downgraded their debt and preferreds today, Tim. I was expecting it.
Actually lumped them B1 with the preferreds, as basically they are. Except in the 2 most important matters…sitting above the commons and $700 million plus green shoe in preferreds. They need to get their Permian act together this year and get all those contracts coming due this year rolled over and at decent terms.
Hi Grid–I kind of was aexpecting the downgrade also. Makes little difference to me personlly. I did find the 2018/2019 projections you previously mentioned which would seem to indicate they fully expect them to be around a while–although they could call them–wouldn’t be the first time a company has indicated one thing and done something different, but given that this is no call risk to speak of there isn’t financial risk–just sends us scurrying again for a replacement security.