Preferred stocks of closed end funds (CEFs) tend to be some of the safest preferred stock in existence. This is because of the requirements that the CEF have at least 200% asset coverage for preferred stock and 300% for debt asset coverage of “senior securities” which means debt and preferred stocks. While technically the coverage ratio can stay below for a long time the fund will be unable to pay common dividends or buy back common shares while they lack the asset coverage ratio.
The Investment Company Act of 1940 (sec 18) governs closed end funds–you can read it here.
As you can see in the chart below MOST of the issues are solidly investment grade.
It is CAUTIONED that most of these issues are perpetual preferreds meaning they are sensitive to interest rate movements.
In this case safety of the security doesn’t mean safety of the share price. While the shares are extremely safe the share PRICE can be decimated if interest rates move strongly higher.
We note that BDC’s are organized as closed end funds, but we do NOT include them here.
We note that the issues from Eagle Point Credit, Eagle Point income and Oxford Lane and RiverNorth are term preferreds thus they have mandatory redemption dates.
A click on the ticker symbol takes you to the issue detail page.
The few issues highlighted in Grey are Month Payers.
Asset coverage is calculated by dividing total assets by total preferred stock liquidation value
I add debt and preferred stock liquidation together for the coverage ratio below.
CLICK THE TAB AT THE TOP OF THE LIST TO SORT BY ALPHA OR BY CURRENT YIELD
Yes, that was part of the kicker and it’s dwindling as treas increase in rates and the time between call and 2/1/23 diminishes…. But do a calculation on YTC based on 2/1/23 at par on NEWTZ and do it again on NEWTL at 25.05…It’s still juicy for NEWTZ. The spread between them just doesn’t make any sense if you believe that what has to be done on one has to be done on the other at the same time no matter what time you choose.
Hi together, I am currently reading/studying a lot about trading options. I am planning to use around 200k for the options trading account at IB. It will take some more months until I will really start with this issue. Someone proposed that I can buy preferred shares for the 200k and use them as “cash backing” in my IB account. Benefit: constant flow of dividends that adds to the money coming in from e.g. “cash” secured puts, etc. My question: on this page you write, that preffered shares are quite sensitive to changes to interest rate movements. What do you think: to what extend might the plans of the FED regarding tapering affect the overall performance of the preferred shares sector. Regarding the 200k my plan would be to take 10 preferred shares from the list above (CEF) that are somewhere between 25 and 25.50 und buy 20k each. I want to do this pretty soon – so I have at least the dividends coming in until I start with trading options (once I feel “safe” with it). Feedback welcome. Regards, Tim
Be prepared to part with 18-20% of paper value from the start of the rate hiking till the eventual interest rates collapse on most investment grade 4-4.5% issues.
I’m not sure I would do this with preferreds. Since you are trading options anyway, have you considered buying some solid and liquid dividend paying stocks like KMI, AM, WMB, O, WPC, MAIN, etc and trading a collar around them? you can collect 5-6% income from them, a little more from options writing if you successfully wheel/collar them, and still use the rest of your margin for whatever option trading strategy you planned on using in the first place. The reason I say that is because you can hedge the high divvy common stocks with options, you can’t hedge the preferreds with options, and with legging into and opportunistically trading a loose collar you can earn a little more income than just the divvy alone. Now that being said, if you buy the non-investment grade preferreds, they trade on the credit worthiness of the underlying, not so much on interest rates. But of course, there is more risk of dividend suspension with them, but less interest rate risk. Another way to reduce interest rate risk is to buy term preferreds with a redemption date that is not too far off – unfortunately the best of those ECCB, just got called, but there are a few others, such as ECCC or any of the OXLC series. That mandatory redemption will reduce their sensitivity to interest rate issues.
Along the lines of mandatory redemption to consider, both NEWTL and NEWTZ are required to be called if NEWT is to become a bank as they plan and they expect that to be wrapped up by August or so, provided they get a positive shareholder vote in favor…..
2WR, Have you got any more info about this? Any feeling on how likely for these to be called given that it is almost August now?
No, 35s. I have no new info. The market recently has been differentiating between NEWTL and NEWTZ, but the language in the Stock Purchase Agreement and the Proxy that was approved by shareholders both say that it is a pre-condition to closing the purchase of NBNYC that “The Company having completed a refinancing of its outstanding notes, including the elimination of any provisions relating to the Company’s election to be treated as a business development company under the 1940 Act.” That seems pretty clear to me that whatever gets done will be done to both at the same time… Timing as per usual is out of NEWT’s hands because it is dependent on regulatory approval but as recently as July 1, Barry Sloane had a YouTube video interview with Brad Thomas stating he remains committed to becoming a BHC and hoped to still be able to close the deal in the third quarter… With NEWTZ presently offered at 24.64 and NEWTL at 25.05, something just doesn’t make sense…. Mr Market seems to me to be wrong on NEWTZ. The only way the market has these properly priced is if NEWT has been looking for and/or has found a way to leave these outstanding despite the language
2WR, Thanks for the update. We are both reading this the same. I am hoping I don’t have to hold to 2026 to get the redemption.
I bought more NEWTZ today; even if NEWT isn’t required to redeem this security, it’s a good place to park cash earning virtually nothing. Thank you for the tip, Azure
2WR, looks like they got the go-ahead from shareholders. From press release a few days ago: “Barry Sloane, Chairman, President and Chief Executive Officer said, “At Newtek’s June 1, 2022 shareholder meeting, the Company received overwhelming shareholder approval of 89% to withdraw its election as a BDC in connection with the Company’s pending agreement to acquire NBNYC, and convert to a bank holding company, subject to regulatory approvals. “
Yup, that’s old news now, Franklin…… the only hurdle I believe left as to timing would be regulatory approval AND, theoretically, the 30 day advance notification regarding “refinanciing” NEWTL and Z. And I suppose there’s always the possibility that they don’t get approved for some reason but you would think that shouldn’t be much of an issue. And 35, me, too, hope not to have to hold till 2026, but all in all there’d be worse things to own than a NEWT senior unsecured note…. It’s not a rose, of course, but I feel comfortable with it as a credit for that long..
Wasn’t the main attraction here the kicker from the make whole if NEWTZ is called before 2/1/2023? The longer it’s delayed, the less value there. I don’t want to hold until 2023, let alone 2026.
Wasn’t the main attraction here the kicker from the make whole if NEWTZ is called before 2/1/2023? The longer it’s delayed, the less value there. I don’t want to hold until 2023, let alone 2026.
right u r, 2WR…. w/out any insider knowledge, it sure looks on track to go through.
Best, F
Here”s link to Barry’s interview with Brad Thomas on July 1 https://www.youtube.com/watch?v=6S60mzn3upI&ab_channel=WideMoatResearch. 1’14” into the interview he talks about believing they will have, subject to approval, “closure” on this transaction (the bank purchase) in the third quarter.
For the record, in the past I’ve ended up having phone conversations directly with Barry Sloane when I contacted IR regarding these same points,,,, Given how the market’s been acting on NEWTZ specifically, not NEWTL, I’ve attempted to get in touch again, trying to ask a simple yes or no question about has anything changed regarding the language that seemingly requires both issues to be refinanced as a pre-condition to closing the bank deal. This time I was shut down by IR as they noted their concern about the thin line between public vs private information, so I guess no new news forthcoming to share..
of course, there’s always the possibility that there’s just a single large seller in the market presently and that’s all that’s happening.. Note the volume so far is 15x normal on Z today and next to none on L, and the price is holding pretty steady on Z. I just don’t understand how there could be any way around NEWT’s stated pre-conditions to refinance these before closing the bank deal. Even if they figure a way to wait until 2/1/23, I think the YTC is about 8.90% on Z if bot today at 24.58 and it’s 6.15% for NEWTL bot at 24.95. Only if the chances of them backing away from becoming a bank have increased does the price action make sense, and the July 1 interview sure didn’t leave that impression.
From memory, I think the bank acquisition is only a $20mm deal so they could walk away if that’s what they wanted to do. But given they just had the shareholder meeting to approve it and all the messaging from Barry, I don’t see that happening.
From July 21st:
Barry Sloane, Chairman, President and Chief Executive Officer said, “At Newtek’s June 1, 2022 shareholder meeting, the Company received overwhelming shareholder approval of 89% to withdraw its election as a BDC in connection with the Company’s pending agreement to acquire NBNYC, and convert to a bank holding company, subject to regulatory approvals. The regulatory review process is ongoing and while that process is moving forward, the Company will continue to operate as a BDC with the final decision on the timing of our discontinuance from regulation as a BDC to be made by our Board of Directors. In that regard, the Company has filed a Proxy Statement, as it has done in each of the 8 years since its conversion to a BDC in 2014, regarding share issuances. It remains management’s intention to move forward and acquire NBNYC and operate as a bank holding company, subject to regulatory approval.
NEWT will be closing the deal shortly; stay tuned financial warriors https://www.youtube.com/watch?v=V-OYKd8SVrI
Thanks for mentiong, AB… I should have mentioned that as a more up to date reference than the interview to NEWT’s ongoing commitment to getting this done…. I was obsessed with having a video link to share – ha…. And that Special Meeting announcement provoked one “yes or no” question I asked: “Given Proposal 1 [to be voted on at the Special Meeting Aug 26] has to do with the Investment Company Act of 1940 which you operate under as a BDC but will NOT be subject to after converting to a BHC, does the timing of this Special Meeting imply that NEWT now expects to still be a BDC by August 26?”
Radio silence was maintained in response….
rjz, your post got me to look at collars. I thought I understood the basic concept, but this example from https://www.investopedia.com/terms/c/collar.asp has me scratching my head:
“- Assume an investor is long 1,000 shares of stock ABC at a price of $80 per share, and the stock is currently trading at $87 per share….
– The investor purchases 10 put options … with a strike price of $77 at a premium of $3.00 and writes 10 call options with a strike price of $97 at a premium of $4.50.
– Cost to implement collar … is a net debit of $1.50 / share.
– The maximum profit is $15,500, or 10 contracts x 100 shares x (($97 – $1.50) – $80). This scenario occurs if the stock prices goes to $97 or above.
– Conversely, the maximum loss is $4,500, or 10 x 100 x ($80 – ($77 – $1.50)). This scenario occurs if the stock price drops to $77 or below.”
What I don’t understand:
1. It says “cost to implement is a net debit of $1.50/share.” But don’t you realize a net *credit* of $1.50 per share? That is, you pay $3/share for puts, receive $4.50/share for calls, for a net credit of $1.50 per share. What am I missing?
2. I calculate a max profit of $18.5k (underlying exceeds $97) not $15.5k: that’s -$80k cost of stock + $1.5k option premiums + $97k received when your underlying is called away. What am I missing?
3. I calculate a max loss of $1.5k (underlying falls below $77) not $4.5k: that’s -$80k cost of stock + net $1.5k option premiums + $77k received when you put your underlying. What am I missing?
Bur, I agree with you but I don’t do options so I’m not an expert. Hope someone with more knowledge responds
Bur, I also think you are correct. The investopedia text reads as if they switched the prices for the put and the call.
Suppose the put cost $4.50 and the call was sold for $3.00, the opposite of the first part of their text.
Then the rest of the text reads as correct. $4.50 debit and $3.00 credit nets out to a debit of $1.50 per share, as they have it in the description.
If the underlying drops below $77, the 1000 shares are sold for $77k for a loss of $3k, to which add the net debit of $1.5k for a total net loss of $4.5k, matching their text. Similarly, if the underlying rises about $97, the 1000 shares are sold for a gain of $17k less the net debit of $1.5k = $15.5k as their text has it.
Mind you every time I play the options market I either squeeze out a small net gain or I have my butt handed to me.
With Mike’s correction as a given, a question I have is a loss or gain compared to what?
Their calculation of the loss or gain from the collar includes the $7k already in the stock price. Without that, the max gain is $8.5k and the max loss is $11.5k. That’s what you get if you calculate the incremental gain or loss from the $87 per share that would be realized from the immediate sale of the stock, rather than from the original purchase price. It seems to me that in looking at the loss or gain due to the collar, the more relevant starting point would be the current value of the stock, not its original cost
Agree Mike. We too often look at our original cost rather then present value. The current price and what happens after that is what really matters. The past is gone. What matters most for successful investing is what is going to happen from today forward. Agree with your reminded that the if the current price is 87 then that should be the bases for forward gain or loss.
nhcoast, I think Mike’s gain/loss is what one would report on taxes if this was a trade in a taxable account ; they seem to be the taxable gain/loss.
You have overthought and thus overcomplicated this approach. If I understand your idea, you want to effectively trade “naked” options, backed by a 200k portfolio of preferred issues. Far too much risk here for the return.
I made $20k last year trading options to spice up my returns a bit. It ain’t easy and you will take your licks along the way.
I have only made a couple of hundred this year because the conditions just don’t seem right for me to trade. Too many things can go too many different ways too quickly.
And with interest rates rising I would not count on preferreds to do anything but draw down your capital unless you are VERY careful as to which ones you pick.
Does anyone know which of these funds have mandatory redemption dates? It would be a nice place to park some money without inflation risk. Thanks.
Assuming the info is correct when you click on the symbol I now see the information. I still don’t know if you can force TY to buy at $55 at any time?
No, TY preferred is callable at $55. There is no put provision.
Thank you. It appears it is only the higher risk ones that have a term date. None of the Gabelli or Alliancz.
Brett – Note that some of the Gabelli issues have puts which is as good as a mandatory redemption date from the owner’s point of view because it then is in your power, not theirs, to make that date the redemption date… Once the date occurs most frequently they become perpetuals so the characteristics by which the market values them changes frequently dramatically so most of the time you don’t want to miss putting them back on the put date, or at least not on the last put date as a few of these have had multiple put dates.
Thanks. I see there is not much yield after the premium is backed out.
Gabelli’s GDL-C terminates in March of 2025.
Or can be put starting next month, in case the price falls below $50.
https://www.sec.gov/Archives/edgar/data/1378701/000119312518045720/d424047d497.htm#supptx424047_3
Holder Put Options
The Fund will redeem all or any part of the Series C Preferred Shares that holders have properly submitted for redemption and not withdrawn during the 30-day period prior to each of March 26, 2020 and March 26, 2022, at the Liquidation Preference, plus any accumulated and unpaid dividends. See “Puts and Redemptions.”
There is also a one month window for Gabelli to call them in late January to the end of February 2023.
5/28/21
I note there are a lot of Q&As on this thread so thought I’d offer a tool you might find of use: https://www.quantumonline.com/search.cf
If you know the symbol for the fund or its manager, you can obtain details on the call periods, ratings, etc. Quantumonline is a free service and very useful in researching your preferred stock choices.
Can you for force TY to buy it’s preferred shares from you at $55 if interest rates rise significantly?
What’s the correlation between these CEF preferreds and other assets? I would think they’re most like HY bonds vs say equity or short duration Tsys.
If the long end of the curve continues to creep higher, these would start to hurt…
Hi DD,
I stumbled upon this screener the other day. I don’t think they have correlations for preferred stocks individually, but they do have them for preferred ETF’s. This can at least give you a starting point. They only give you so many “free” looks (but I just clear my browser and go back in).
https://www.etfscreen.com/price-chart.php?s=PFF
NWGG
I’m new to preferreds and stumbled onto an announcement in the news for RF that has me wondering. Is it common for a company to have a preferred dividend of $14 dollars a share?
Dennis – Welcome to the fray…. I’m guessing what you need to do is familiarize yourself with the difference between preference shares, which the RF $25 preferreds are and associated preferred stock… it looks complicated at first but it’s not really… Start reading prospectuses a bid and you’ll get the hang of it.. Try this RF prospectus – https://www.sec.gov/Archives/edgar/data/1281761/000119312514160111/d712697d424b2.htm The very first paragraph says the following “We are offering 20,000,000 depositary shares each representing a 1/40th ownership interest in a share of our 6.375% Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series B, par value $1 per share (“Preferred Stock”), with a liquidation preference of $1,000 per share of Preferred Stock (equivalent to $25 per depositary share). As a holder of depositary shares, you will be entitled to all proportional rights and preferences of the Preferred Stock (including dividend, voting, redemption and liquidation rights). You must exercise these rights through the depositary.” So I think you’re seeing the announcement pertaining to the preferred shares but RF preference shareholders are entitled to 1/40 of the amount.
Thanks for the info. We’ll chat again.
what is perpetual versus , i guess, non perpetual ? specifically, which of the 6 or 7 are NOT perpetuals ? is there a way to tell by loking at the table ? thanks
Perpetual vs. Term. The surest way to tell is by looking up the prospectus for any given issue. In the table, click on the ticker, which is a link to the detail page for that issue. Scroll down till you see a blue bar with a link to the prospectus.
Note, however, that even Perpetual’s most often have a first call date (given in the grey info box on the detail page for the issue). The prospectus will give info on that first call date as well.
so, whether its a perpetual ( with that name , id assume it cannot be called) or term, they can both be called ? if so, what other aspect of a perpetual separates it from term ? thanks in advance
bob t – It sounds as though you’re just starting out in this field so welcome aboard – you’ve come to the right place. Obviously not knowing exactly how much you do or do not know, I would suggest you get used to reading prospectuses of issues you consider to be of interest as you will learn a lot from that document. A search around this site will lead you to links to most prospectuses or alternatively, you can find links at quantumonline.com.
Specific to your question, “perpetual” is differentiated from “term” by being an issue that the issuer is never obligated to retire. It will not have a stated maturity at all. That does NOT mean that the issuer cannot retire it some day by calling it, only that he’s not obligated to… These days practically every new issue comes with an ability of the issuer to call it in eventually AT THEIR OPTION, even perpetuals, usually after the first 5 years (barring special circumstances) however, occasionally an issue will be issued as non-callable, but that’s far and away the exception. I hope this helps get you started.
thanks for the reply 2 whiteroses, thats the explanation i was looking for. thanks bob t
Bob, Perpetual preferred puts the asymmetric risk totally in your lap. Most newly issued pereptuals have the company optional choice of redemption if it favors them. Otherwise they can keep them outstanding. And when or if rates rise this could have an unpleasant effect on pricing of the preferred. Especially since many have been priced recently in very low yield environment. Thus it is quite possible in time one could never see the issue ever return back to “par” price. There are preferreds on market that have been callable since 1940s, and only recently have returned to par, after being way under par for the better part of 60-70 years running.
Is it possible to determine whether a fund’s payouts are qualified (lower tax rate) or not?
Sometimes. Tax treatment by the fund depends on the underlying assets. Ignoring ROC, take a look at the funds holdings. A fund made up of mostly QDI issues will make mostly QDI distributions, and vice versa. Some funds will even give you the figure somewhere in the fund literature.