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Priority Income Fund Annual Report

Non-publicly traded closed end fund Priority Income Fund has posted their latest annual report–or as it is called ‘Certified Shareholder Report’, for the period ending 6/30/2021.

PRIF has been a serial issuer of ‘term preferred’ shares over the last 3 years or so–no one has sold as many term preferred issues as PRIF.

Many of us love to hate companies like Priority Income Fund–a company that owns bunches of CLO’s (collateralized income obligations)–most of the ‘equity tranche’ variety. While these are no doubt higher risk investments, over the course of the last 10 years, I have collected a lot of dividends from PRIF and company’s like them (Eagle Point Credit, Oxford Lane, OFS Credit).

While we all know there is plenty of risk in these issues they have offered some of the best coupons in these skimpy coupon times. Of course it is helpful that they are required to have a 200% asset coverage on their preferred issues.

The company has a good selection of term preferreds outstanding – the list is here.

Have a gander at the annual report here.

13 thoughts on “Priority Income Fund Annual Report”

  1. What I’d love to see is some analysis that shows what default rate would be necessary to make CLO equity worthless. This would seem to be a fairly straightforward calculation for anyone knowledgeable about CLOs but I’ve been unable to find this anywhere on the internet.

    I’d even settle for some basic info on how much value is in each tranche of a typical CLO. You could basically back out what I’m looking for if you had that info. For example, in a typical CLO, X% is the A tranche, Y% is the B tranche and Z% is equity. I’ve also heard that there’s some kind of cushion built into the equity tranche so that the first $1 lost does not actually hit the equity tranche.

  2. Gotta love the wild swings in these PRIF preferreds. A few weeks back it was PRIF-F. Today PRIF-D. Someone bought 1000 shares at the open today at 26.44. That represents a negative yield to call…and one has to assume it will be called given PRIF ability to sell lower coupon preferreds.

  3. I am highly suspicious of both the CLO valuation and the asset coverage. Why is is that NONE of the four, Priority Income Fund, Eagle Point Credit, Oxford Lane, or OFS Credit existed and SURVIVED the 2008-2009 Great Financial Crisis? All four of them appear to have started after the crisis.

    When everything is rosy like right now, it is easy to “mark” the value of a particular CLO at X. It is not traded on any exchange, so the value today might really be X, but in a GFC type situation, maybe it is still worth X or maybe it is worth one tenth of X. No way of knowing. Maybe all of these CLO based funds continue to make timely payments on their preferreds/terms/babys but I do think they deserve a lower credit rating than some here suggest. Not a sell recommendation, but something to consider for long term holders.

    We have held some of them in some accounts in the past and currently hold PRIF-I in many accounts. Do NOT plan to held it long term.

    1. Well, they did survive the COVID (thus far). I think the 2008 to 2021 comparison may be a bit unfair.

      Here are some interesting tidbits from Pinebridge that make the case (summarized with full link below).

      “The first vintage of modern CLOs – which focused on generating income via cash flows – was issued starting in the mid-to-late 1990s. Commonly known as “CLO 1.0,” this vintage included some high yield bonds, as well as loans, and were the standard CLO structure until the financial crisis struck in 2008.”

      “The next vintage, CLO 2.0, began in 2010 and changed in response to the crisis by strengthening credit support and shortening the period in which loan interest and proceeds could be reinvested into additional loans”

      “The current vintage, CLO 3.0, began in 2014 and further reduced risk by eliminating high yield bonds and adhering to the Volcker Rule and other new regulations.”

      “The vast majority of CLOs are called arbitrage CLOs because they aim to capture the excess spread between the portfolio of leveraged bank loans (assets) and the classes of CLO debt (liabilities), with the equity investors receiving any excess cash flows after the debt investors are paid in full.”

      “Leveraged loans are more than simply the underlying collateral for CLOs: They’re the fuel that powers CLOs’ attractive income streams and the first of several levels of risk mitigation built into the CLO structure.

      Standard & Poor’s defines leveraged loans as senior secured bank loans rated BB+ or lower (i.e., below investment grade) or yielding at least 125 basis points above a benchmark interest rate (typically LIBOR or EURIBOR) and secured by a first or second lien. Several characteristics make leveraged loans particularly suitable for securitizations. They:

      Pay interest on a consistent monthly or quarterly basis;
      Trade in a highly liquid secondary market;
      Have a historically high recovery rate in the event of default; and
      Originate from a large, diversified group of issuers.”

      https://www.pinebridge.com/en/insights/clo-beyond-the-complexity

      1. Here is the recent default risk for those that may be interested (summarized with full link below).

        It is partly based off of a Fitch article so I put that link as well.

        2021 is looking much better than the same time last year…..forecasted 2020 default rates never materialized and forecasts have become materially sunnier…….Fitch nearly halved their YE 2021 loan default forecast to 2.5% (from 4.5%) and further reduced their 2022 loan default forecast to 2.5-3.5% (from 4-5%). And they see upside risk, noting that a “continuation of the current strong economic backdrop could result in the rate dropping even lower to around the 1.8% mark”.

        While those numbers are good, the default rate in CLO portfolios are (necessarily) even better. In March, LPC Collateral said that nearly 50% of CLOs had zero defaulted assets and another 38% had less than 1% defaulted assets.

        https://www.lsta.org/news-resources/defaults-are-down-investors-are-up/

        https://www.fitchratings.com/research/structured-finance/us-leveraged-finance-clo-weekly-default-rates-to-challenge-10-year-lows-fitch-hosts-virtual-clo-meetings-21-06-2021

        1. And finally ARES Capital:

          Dispelling Myths about CLO Securities: “Didn’t they all blow up?”
          Cash Flow CLO Securities have performed remarkably well for two decades with no defaults,
          including through the Great Financial Crisis – in stark contrast to CDOs and Market Value CLOs

          The CLO market has grown at a similar rate as the overall Loan market
          • Loan default rates within U.S. CLOs generally are well below those of Loans and bonds broadly
          • Minimal to no cash flow CLO defaults have occurred throughout the 20+ year history of the asset class (1)
          • Assuming Loans default at 2x the rate of Loans held within CLOs during the Great Financial Crisis, the
          most junior tranche of CLOs (i.e. equity) would still generate a positive 4.0% IRR
          • We find that concerns over lower recoveries caused by ‘cov-lite’ loans to be exaggerated because they
          fail to account for several mitigating factors, including:
          o Asset security and the senior position that first-lien loans enjoy matter more than covenants, and always have
          o Credit discipline and fundamental credit risk underwriting are critical factors in loss mitigation, and always have been
          o We expect today’s cohort of loans will deliver a range of performance outcomes based on all of these factors.
          Covenant terms are certainly one of these factors, but we consider the other factors to be more important

          https://www.aresmgmt.com/sites/default/files/2020-02/Understanding-Investments-in-Collateralized-Loan-ObligationsvF.pdf

    2. First off the top a lot of people still associate CLO’s with CDO securities. These are different and distinctly different.

      Good – 2nd and 3rd generation of CLO debt securities have not defaulted.

      Ugly – CLO debt market is highly illiquid as only institutions can participate causing large mark to market moves especially on the lower equity securities.

      Sneaky – CLO do not have any duration or duration related risk.

  4. Thanks, Tim. I happen to appreciate the PRIF funds. I have collected and keep collecting those qualified dividends with a coverage of over 200%…
    In my portfolio, they are stars that shine brightly. I am grateful for the bounty.

    1. Malka–me too–just bought a little more today. They are ‘hated’ but they have performed better than Eagle Point, Oxford Lane etc.

      1. I got Priority out the wazoo now. Yes they are hated and for good reason. I think many don’t understand the asset coverage. People just see CLO’s and say “that fund sucks”.

        I thought I saw somewhere that the recovery rates are in the 60%-30% range under the tough market conditions. Your recovery rate depends on where you are in the stack/tranche/debt/equity obviously. But let’s say you are at the bottom of the stack and it goes bust. Well if the coverage ratio is 200% and the recovery rate is 30%, then maybe .60 cents on the dollar might be received. I saw somebody on III put the current ratio at 272% for Priority, so it gets better at the 30% giving you almost .82 cents on the dollar.

        So even if the Titanic hits some rocks, there are some lifeboats available (with some holes pre-drilled). You also have the wildcard that maybe you picked up a few divvys or the money manager was able to finagle more money out of the ashes somehow.

        I recommended DYFN previously on this board and just sold all of it for a 12% cap gain and collected 8% dividends paid monthly. They say they invest in primarily IG, but who knows with these funds really. I still like DYFN and would buy it again under $20 as long as than can keep paying the .122 cent/mo divvy.

        It did really hurt to see it go though.

        “It’s so haaarrrrDddd to say GgggoooodddDDdbbbBBbye to yesterdayeEEeeEEeeeEEeeeEeaaahhHHh”

  5. Thanks for the update Tim. So if I did the math correctly, it looks like current asset coverage is ~272%.

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