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.