Preferreds and Baby Bonds Holding Tough

In spite of all the consternation in the stock market preferred stocks and baby bonds are hanging tough, although the average share price has now given back 7 cents on the week. Of course averages are not always meaningful–they tell us there isn’t a broad based selloff going on now, but certainly there are individual issues that are weaker.

I haven’t done anything much all week–mostly just watching, although I had a Good til Cancelled sell execute for the 6.75% UMH-C, which I had bought on 4/24 for $24.91 after it had fallen on the announcement of a reopening of the issue. The issue went ex on 5/14 for around 42 cents/share and I sold it for $24.91 yesterday. We are happy with a 1.5% gain (net), but this issue may well go higher.

With the 10 year treasury as low as 2.16% earlier today and all the trade friction around the globe we are slowly coming to believe that late this year or early next year we are going to fall into a recession. Certainly the economic data doesn’t show this to be the case now, but the tariffs at some point will have to be built into prices–slowing demand, or alternately, companies will have to “take the hit” in their margins. No good can come of the friction.

I have not changed my investing plans at all YET. Just keep holding all of my “base” positions for now and doing a little dividend capture if an opportunity arises. It is likely that we will move to a bit more conservative stance until we can figure out the economic picture.

Lastly one needs to watch energy prices. Anything related to energy will become a dicier holding if we get a slowing economy. Talk of long term contracts and hedging don’t mean much to me at all. Some of you will recall that upstream (producers) MLPs always touted contracts and hedges back in 2010-2015–most of them went broke. You simply can not economically hedge all the risk. Caution is warranted.

61 thoughts on “Preferreds and Baby Bonds Holding Tough”

  1. FYI: Some anxious sellers late in the day. I was able to pick up some decent buys to replace issues that had recently been called plus ones i had to sell that were past call and had more than a year of dividends accrued. (not crying about that). IG grade PSB_Y fell far enough under par for just a few minutes to give me a 5.74% call. (I’ll take it considering the quality of the issue.) Also picked up PSB-W at a price for 6% ytc, good value i think. All of them didn’t budge all day and sellers dumped them at good price for me in last 5 minutes of market.

    1. Franklin- it is funny you and I gravitated to the same place yesterday. I was the other guy buying these. 🙂

  2. UMH-C going up at the close. I wonder if it was subject to index rebalancing because of the new share issuance.

  3. So with long term rates falling, doesn’t that make high quality preferreds and baby bonds more valuable? We are hearing more chatter about credit quality and too much corporate debt. But for companies with solid balance sheets, I would think bond prices would rise. As an aside, I noticed KYN-F had a big trade at 24.99. I missed it.

    1. Roger- I wonder if this had anything to do with their dividend payout. I see in my fidelity account the dividend is being paid Monday am.

    1. I was watching and waiting – didn’t catch the low of the day but snagged some for par ($50.00).

    1. You’re welcome, Gum! Grabbed more myself.
      I also own VER-F, William. It’s been a cash cow for years. Monthly cash flow like clockwork!

      1. I have VER-F; been a steady payer monthly, so no complaints. Hope it continues for a long long time!

        1. I love the monthly payers, inspy… All of the VER-F, the GAIN offerings, KYN.F, the IHIT/IHTA’s, and so on… Allows for faster compounding of my $ and that’s the game I like playing!

          1. Yep, yep. Totally agree. I own all of the names on your list – GAINL, IHIT and KYN-F.

            Thanks to Tim who first clued me in on IHIT when I joined this website, quite a long time ago.

  4. Likewise, I sold out of ALL-D (past call and a par + prem) after div and small position in BANC-E (good gain + div). Will add/roll more to old position on a limit buy in ALL-G (Call 4-23) and added new order buy limit on BANC-D on cheaper price. Looking to sell AEH and BBT-E (not alot of risk) on sell limits as they have shown a history of calling.
    The problem is getting QDIs!! Glad last month offered some issues.

    1. Joel A – You mention BBT as showing a history of calling that might put BBT-E at risk. I don’t see that history looking on quantum… AEG, yes, with AEH being the next in line since they just called AED, but BBT has BBT-D with its 5.85% coupon still outstanding and it’s been callable since 2017. What am I missing? I’ve been such a chicken recently that I’ve been looking at recently called bonds and buying for around a 4% annualized yield when possible, so I keep watching for these calls many times I see for the first time on III… I bot AED

      1. Using the same resource QO: Some of the calls were back in their history, but I give a bit of weight to their recent buyout as I think everything will be scrutinized and reorginized at some point in a falling int env. Debt/Money is cheap and getting cheaper, they are IG and the commissioned bond boys are always looking for a refi deal, esp IG. I have not rationalized the merger details at all (and am not really good at it). Of five pref issues only H is under call protection. Four issues worth of principal redeemed would make a nice big bond float for long term debt issuance at historically very low rates. Just what bankers love.
        Not really too far over par. May be some worrying over the nest.

        1. Thanks for the response. I sure agree about “the commissioned bond boys” (apologies to Amy) always looking for a refi, but for now, I think the possibility of an economically motivated refi of a 5 5/8% IG is iffy. That could change and who knows if the buyout might give reason to refi in of itself. BTW, note Moody’s has BBT on credit watch negative because of the merger, but they also have SunTrust on for upgrade, implying no big deal change, probably only to Baa2 from Baa1 if at all…

          1. Plus, one doesnt know how much of the preferreds are designated for Tier 1 Capital. If they are, there is no chance for a bond refi and that isnt legal anymore as Tier 1 capital.

            1. Grid, if the company is unable to do a bond Re-Fi, and the Preferred was designated for Tier 1 Capital, that should be grandfathered so that it would not be a good move to call/redeem them, yes?

              Would this mean that Preferreds designated for Tier 1 cap would have a good chance of survival versus other regular preferreds? Of course, this implies that the bank is interested in maintaining the Tier 1 presence.

              Am I reading all this correctly?

              1. Inspbudget, these will not be grandfathered preferreds. They are not trust preferreds and are not cumulative. So they could be redeemed and reissued at lower yields with Fed Reserve blessing if they were part of their capitalization plans. The preferreds may not necessarily be designated for Tier 1. In that case they could be redeemed and subordinated debt at lower yield be issued for other purposes. One would have to dig into their annual capitalization plan on file with Feds, to know exactly what is what.

              2. Good point, Grid – Prospectus does say on p S-10 Our right to redeem the Series E Preferred Stock is subject to an important limitation. Under the Federal Reserve’s current risk-based capital guidelines applicable to bank holding companies, any redemption of the Series E Preferred Stock is subject to prior approval of the Federal Reserve. There can be no assurance that the

                S-10 -11

                Federal Reserve will approve any redemption of the Series E Preferred Stock that we may propose. There also can be no assurance that, if we propose to redeem the Series E Preferred Stock without replacing the Series E Preferred Stock with Tier 1 capital that is not a restricted core capital element, the Federal Reserve will authorize such redemption. We understand that the factors that the Federal Reserve will consider in evaluating a proposed redemption, or a request that we be permitted to redeem the Series E Preferred Stock without replacing it with Tier 1 capital that is not a restricted core capital element, include its evaluation of the overall level and quality of our capital components, considered in light of our risk exposures, earnings and growth strategy, and other supervisory considerations, although the Federal Reserve may change these factors at any time.

                1. With Grid’s point in mind, does anyone follow CUBI preferreds? With CUBI-C 7% preferred having just gone x-div and callable 6/15/20 and last price 25.41, doesn’t seem cheap at 5.35% to call and 6.89% current yield? QO says “This security is possibly subject to an early call as a result of the occurrence of a regulatory capital treatment event which no longer allows the company to include the funds originating from this security as Tier 1 capital on their balance sheet.” I don’t own, but have been tempted.

                  1. I don’t follow CUBI, but maybe you would be interested in either COF-P or COF-C? QDI and a split IG rating. Seems to be a safer bet than CUBI, IMO. Yes, you have call risk at play but COF has a higher yielding item still to be redeemed so I would be more worried about COF-D being called before seeing them work down to the COF-P offering.

                    I own both the C and P flavors and the P flavor is selling at a very tempting current price of $25.16 or thereabouts. There was a major dump on Friday.

                    1. A4I, to be honest, despite what’s been going on with interest rates coming down in general, I’m not particularly interested in perpetual preferreds as a group… I know I’m just not quick enough on my feet (Grid, I know you’ll get the irony of that statement right now) to jump into the new issues for a flip like many here have been successful doing, and that same slowness leaves me in the lurch knowing I’ll never move quickly enough when on perpets when interest rates change and start moving up again. So I’m more interested in perpetuals that provide a very large cushion to prevailing perpetual rates because of a perceived call risk that’s not really there (such as CUBI-C imho moreso than COF-P) or perpetuals that are attractively priced to a call that WILL most likely happen in the relatively near future so I can consider them equivalent to a term security with an implied maturity. I could very easily be wrong, but I think CUBI-C meets my criteria better than the COF preferreds you mention, though I certainly agree that CUBI comes with a higher degree of risk. Thanks for the idea though….

                    2. 2WR,
                      I think the likelihood of CUBI-C being called in 1 year is pretty high once it begins to float. At today’s rates, it would jump from 7.0% to 7.82%. That’s insane for a bank to pay, especially a little guy like CUBI. I honestly don’t know much about the bank as I prefer to stay with the bigger boys – but they could newly issue at a 5.8-6% rate with success, I think. Then again, another little guy MBINP came out with a 7% FtF recently and that thing shot up real fast. But it also is protected until 2024 from a call. A lot to digest…

                    3. A4I – But that’s my point – even if CUBI-C does have a high risk of call next year, a risk that’s most likely mitigated by the Tier I aspect should it be called, it’s still a win because you get a 5.30-5.35% yield for a one year hold…. It might not be the 6.88% current you’d (the collective “you,” not the A4I “you”) be hoping for, but it’s still a great yield for a one year piece of paper… Assuming CUBI’s not a default risk, which I don’t think it is, it’s a win win situation no matter what happens…

                  2. During the latest earnings call, CUBI CEO Jay Sidhu made a statement saying “we have another unique opportunity to potentially consider buying back our preferred stock over the next two years or so.”

                    1. Shooligan – If you think about Sidhu’s statement a bit, you could come to the conclusion that it confirms the idea that calling them might be off the table due to the Tier 1 need for Fed approval to call because he talks about “buying back,” not calling. I would suspect they do not need permission to buy back in the open market but they do to call… That puts the option of losing them in the hands of the preferred holder as respondent to any offer to buy by CUBI as opposed to being in CUBI’s hands as would happen with a call….

  5. Tariffs on raw materials and components are a smaller fraction on consumer cost, tariffs on goods are a larger fraction on consumer cost. Hypothetically consider the 15% material tariff on Canadian lumber which added $5000+/- to the cost of a $400,000 house, it’s about 1.25% +/-. Consider a 25% tariff on a Walmart TV which cost $200 +/- and sold for $300 +/- after supply chain and margin, it’s about 16% +/-. Multiply this by however many things are affected throughout the entire economy and it adds up to a big drag. History shows the effect of tariffs and trade wars is usually not a good thing. The bond market has been increasingly signaling trouble ahead and the stock market gave us a warning shot across the bow the end of last year. Everything is leveraged to the hilt and if liquidity were to start drying up in current environment it could become more troublesome. I have no idea what comes next, it’s another day I suppose.

  6. Tariffs. Just curious if the tariff rates being discussed with regards to Mexico really have much of an effect on pricing and demand of goods at the consumer level. Doesn’t the strengthening US Dollar against the Peso pretty much offset the tariffs, at least on the lower end of Trump’s sliding tariff rate scale ? Also, the average hourly wage gains being reported on the monthly jobs reports is giving workers more to spend. Inflation is not a factor and wouldn’t that tend to maintain purchasing power if some of the tariff cost in excess of currency fluctuations are passed along ?

    I think people assume 5% or 10% or whatever tariff rate you want to throw out there equals a corresponding price increase in goods. I also think the same sentiment infects the markets movements. I just don’t think the correlation is 100% but the perception gets priced in anyway.

    No one ever said the market is rational in the short term.

  7. Tim,
    Hi, I am a loyal follower of your Innovative Income Investor. Lot of great information. Thank You.

    I am 65 and retired and depend on my fixed income portfolio for about 80% of my income. I currently have about half of the portfolio in high yield Corporate bonds with less than 5 years to maturity and the other half in BDC baby bonds (40%) and the remainder in traditional Prefs (10%). I recently read your 12/19/18 article on Reviewing Leverage Rules of CEFs (Closed End Funds). I understand and agree with why you feel BDC Prefs carry more risk than CEF Prefs. Having said that my Investment Advisor likes BDC Prefs and states that not one BDC defaulted duting the 2008 financial chaos. Therefore he feels they are very safe in the current environment. I would appreciate your view on this. Thanks
    Gary

    1. Hi Gary–yes as I mentioned on Wednesday here–

      https://innovativeincomeinvestor.com/interest-rates-spook-the-markets/

      It is true what your advisors says–and I hope that continues. The problem I have is the history is short–most BDCs are pretty young–most either didn’t exist or were very young during the crisis–in more recent years they have gotten larger and the leverage requirement has been lowered to 150% from 200% adding more risk.

      If you review the BDC portfolios you will see them receiving interest rates on loans of up to 20-25%–that obviously screams risk so the depth and length of any recession will determine the issues BDCs run into.

      Like you I have quite a few baby bonds and preferreds from the BDCs–so I am not worried at this moment–but I am going to have to monitor holdings closely.

      I will see if I can write an article on this topic in the next couple of weeks–its a topic worthy of discussion.

      1. 79,000 PRH shares sold at $25.08 at end of day. Did I miss a call announcement, or did someone just collect the dividend and move on? I understand this calls for speculation unless one of you had that position,

        Thanks.

      2. I’ve looked into BDCs and the only ones I would purchase are ARCC, GBDC, WHF and TSLX. I’ve met with the teams for Ares, Golub and Whitehorse. With that said, you need to be thoughtful about WHEN you buy them too. Do your own due diligence.

      3. Thanks Tim
        An article on this subject would be very appreciated.
        In the mean time, where’s the best source to see what’s in the various BDC portfolios ?
        Thanks
        Gary

  8. Thanks Tim! I followed on the UMH-C and sold a little sooner than you did after the EX. Made a quick 1%. If you’re ever around Nashville I owe you a steak dinner.

    1. Hi Pete–I will write that down. Maybe you will have to buy Gridbird a steak dinner–I think I owe him one and he is more in your neighborhood.

      1. Ha – maybe this is how the Great American Innovative Income Investor Steak Swaps get started. Grid, my terms are it’s in Nashville and my current debts to Tim and Tim’s current debts to you are absolved in this single transaction.

        1. Lol, Pete, Im sure you would treat me right with a belly satisfying meal and I love free meals…. But the drive would kill me. I live near St. Louis. 🙂

          1. Well, we all negotiated in good faith and I guess our debts will just have to remain outstanding. It appears that I am the big winner since I continue to take in a lot more than I give back to this site.

            1. Tim, I dont think I have ever been to Nashville. But I have been to downtown Minneapolis many a time. A great summer time weekend drink fest get away! The winter was not as much fun but all the “cat walks” were fun to walk around in though.

              1. Grid…
                I’m just west of St Louis and would be willing to pay for a steak dinner as I’m sure the information gained would be more valuable. Let’s Go Blues!

            2. You should hold the steak swap in Las Vegas…lots of entertainment, shows, restaurants, shopping and golf…all in a warm sunny venue. Structure it properly, and the whole trip becomes a business/education expense.

              1. Citadel, what did he do to you to cause such a venomous post? Pay for a steak dinner in Vegas? I did that last summer for my GF and it cost me $300 at the Wynn. She slept like a baby with a full belly, while I was curled up in a fetal position in bed crying like a baby on all that money wasted on food. 🙂
                We are returning there in a month, and she isnt getting treated to that this time. If she thinks that is happening again, she better be ready to open her wallet up to split the bill!

                1. Grid, you’re penny pinching in the wrong place.

                  If one has to blow the dough, the absolute best way is in Wine, Women and song. You got 2 of them covered.

                  If I regard your crying as song ( or some kind of music ), you’ve achieved all three.

                  So go out there and flip a couple things, you’ll get the money back in nothing flat.

                  1. Inspbudget, I admit I am cheap on food..Well, I might be cheap on a lot of things. I am retired and finally bought my first ever new vehicle a few months ago. Of course it had to be a last on the lot new 2018 Ford Explorer so I could get it for under $27k. :)… I just have an unsophisticated palate as a burnt grilled hamburger is as tasty to me as any high cost filet mignon. I cant really explain it, well, other than I am cheap. I paid for her and I return trip to Wynn next month, but dont plan on eating there, lol.
                    My friend and I were at the local Elks this week and he was complaining about his $12.75 beer at Wynn last month when he went. He said, I can buy one beer at Wynn for $12.75, but I can get drunk here for $12.75 ($1.25 a draft).

                  2. I tend to gravitate toward the buffet tables when I’m in Las Vegas. They’re usually open for business at all hours, offer a wide variety of choices and a fixed price point…with no reservation required. Not quite an elegant dining experience, but definitely not the food court either! Wynn has a very nice buffet too…especially if you like seafood.

                    1. Oh ya, Citidel…Great place. Last year we got a trip deal where 2 people daily could eat at the Wynn Buffett for free. We got the drink package also thrown in, so it was like $150 for a meal at a buffet…incredible, but thankfully it didnt cost us anything. This year we get 2 daily free breakfast buffets. That will be more difficult as it interferes with the pool time.

                  3. “Now, you like tomatoes and I like tommatoes
                    You like Chevys and I like El Dorados
                    You like caviar and I like ribs
                    But we want a life together and we’re gonna live
                    We got love in common
                    We got love in common
                    We got love in common, ain’t no problem
                    ‘Cause we got love in common”
                    The Fabulous Thunderbirds

              2. Nothing beats going to Las Vegas with someone holding a $10,000 winning ticket Grid…maybe you’d like the name of a good jeweler to visit also?

                1. CW, you brought back memories with the jewelry comment. I am lacking in knowledge on jewelry and women “accessories”… I got my first tongue lashing about 12 years ago when we started dating and was shopping. She made a comment about needing to get a new purse. I made a mistake of asking what they cost. She said she would pay about $300…Of course I immediately without thinking said, “thats crazy, I bet you can get one for $20-$30 bucks at Walmart”. I had no idea a purse wasnt just a purse… but I instantly found out as she had no interest in “crap” based on the chewing I got. 🙂

                  1. Grid, You’ve been dating for “12…twelve…years”! LOL. I’m with Citadel. She’s obviously not a flip at this point, though as long as there’s no early redemption or reset looming and YTM looks good, and considering the earlier referenced medical coverage ticker appears she’s a potential sock-drawer IG perpetual. 🙂

                    1. Alpha, you summed it up best, in the most investment forum way possible! 🙂 Tim, your IZOD reference brought back a memory. Those polos were the rage in early 80s. I remember in high school making $2.30 an hour and forking over almost $50 at a mens clothing store to get that prized turquoise Izod polo. I had to have it because everybody who was somebody had one. Now, 40 years later you can get them cheaper today than you could back then!

                  2. For our second date, my wife wanted to see the Sex and the City movie. I didn’t mind being the only guy in the theater and have gained a new appreciation for shoes, purses, and closet space. Me? I used Kohl’s cash and coupons to buy 3 pair of shorts and two izod shirts for $30 this week. Slight clash of cultures but it works.

                    1. Hahaha! This thread is hilarious. Come to get educated on income investing and get entertained as a dividend. This site just gets better and better.

                    1. HaHaHa! I showed that to my wife and she gasped. Said she’d rather spend the money on the Hawaiian condo remodel. Good wife!

                    2. Tex, I had to show her that one. I am relieved to know even she thinks that is an outrageous price to pay for a purse.

    2. Me – too – unloaded all my UMH-C near the close for what I paid for it back in April and kept the dividend. Thanks for the tip!

      1. There you go geodad–now if we could do that every month–successfully– we would do 18% annualized–haha–not likely to happen, but I can always wish

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