Everyone has their goals for their investing—and every single one has their beliefs on how to attain their goals. My goals are simple–I would like to attain a 7% annual return by buying a blend of investment grade preferred stocks and bonds with some sprinkling in of some mid grade quality issues (I.e. BB and Ba1 – just below investment grade).
Some would like to attain a 6% or so annual return and they want to do it with ultra safety–impossible to attain the last few years–but now is a reasonable time to begin to lock in those yields and do it with high quality issues.
One of our newer website investors asked for some ideas on quality issues–so I though I would write on the topic on occasion so here is my thoughts on a quality issue which also provides a superb current yield.
Today I am highlighting the RiverNorth Opportunities Fund Series A 6.00% Perpetual Preferred Stock (RIV-A). Note – of course this is not a recommendation, but I do own near a full position. Everyone needs to do their own due diligence.
RiverNorth Opportunities Fund (RIV) is a closed end fund which essentially is a ‘fund of funds’ holding near 1/2 the fund in other closed end funds , but also holding a large allocation to SPAC’s.
The fund has been around since 2015 and has attained a 8.7% annual return (through 7/31/2022)–not terrible, but significantly below the S&P500 return. The fund has assets of around $380 million, so not a large fund relative to other closed end funds.
As a closed end fund they need to maintain a minimum of a 200% asset coverage ratio on senior securities, in this case preferred stock. As of 7/31/2022 RIV had a coverage ratio around 281%. It is obviously less at this point.
The preferred stock (RIV-A) was issued 4/12/2022 and the company sold about 3.9 million shares (3.4 million plus the overallotment of 510,000 shares).
RIV-A is rated A1 by Moody’s – strongly investment grade.
A comparison of like rated issues shows that the RIV-A provides a current yield almost 3/4% above the Gabelli issues which are rated A1, A2 or Aa3–very similar. Why are Gabelli issues yielding less? In my opinion it is because RIV holds SPAC investments—additionally as many here know ‘names matter’ and Gabelli is a old manager of closed end funds and the funds are larger in terms of net assets and are more traditional common stocks.
So the bottom line for me is that the RIV-A issues has a very attractive current yield with fund performance that is adequate (not the best – just adequate). Would I prefer a more traditional issuer? Yes I would, but I would forgo the incremental yield and at an A1 rating I feel comfortable with this issue.
A reminder–if interest rates continue significantly higher the share price may suffer (i.e. it is perpetual)–but the safety remains.
Disclosure–I own a near full position in RIV-A and am not recommending this issue to anyone–do you due diligence–each of us is different. I may buy more of this issue depending on opportunities presented.
Love this value here below $23.. Yielding over 6.5% current yield similiar to when this article was written BUT….
Asset coverage in the 370% area now ($385mm assets vs $97mm pfds)..
A lot of fixed income exposure (bonds, CEFs, etc) plus $USD and plus SPAC Arb. A controlled way down is fine for owning the pfd.
Most importantly and interesting to note that the preferred stock price has gone down/current yield has moved up, while the 10-year UST has fallen more than 150 basis points from the highs. There is a recent disconnect here over the last few months. There should be a degree of correlation between the longer-dated UST yields and the yields of the A+ rated fixed rate preferreds
“safety & yield” what more do you want? That IRS announcement overnite is a good start!! at least for none itemizing peons like me, Quick look this morning looks like about $2600 savings in 2023, I’ll take it make up for some of these paper loses?
https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2023
With mention of the Gabelli preferreds here, I noticed at https://gab-misc-pdfs.s3.us-east-2.amazonaws.com/LevAnalysis.pdf that the two [A-2] 5 1/8% preferreds of GGT were right at the 2x 1940 Act mandatory coverage ratio as of 9/30/22. I wonder if that might mean they’re close to having to do something like possibly a partial call to improve the coverage ratio? GGT was down 3 1/2% today.. Both preferreds are both around 22.66.
2wr, Worth noting other 1940 Coverage Act cliff-hangers:
RIV-A: 211%
ACP-A: 206%
NCV-A: 191%
NCZ-A: 193%
NCV/NCZ were only a few months ago rated A1/AAA. It appears neither is currently rated. They also have a huge senior debt overhang which appears may compromise the 200% coverage.
Orginally purchased each during the very bottom of the March 2020 rout, I’ve recently sold all as they’d lost the luster that made me buy them.
Thanks A – I guess you have to dig deep into each prospectus to be able to figure out how long they can stay under before doing something to resolve the problem
Alpha:
So closed end fund RIV is near the 200% coverage cliff for RIV-A…..which directly refutes Tim’s article above?
“If the Company fails to maintain asset coverage of at least 200% as of the close of business on the last business day of any calendar quarter and such failure is not cured by the close of business on the date that is 30 days following the filing date of the Asset Coverage Cure Date, then the Company will be required to redeem, within 90 days of the Asset Coverage Cure Date, shares of preferred stock, including the Series A, Perpetual Preferred Stock, at least equal to the lesser of (1) the minimum number of shares of preferred stock that will result in the fund having asset coverage of at least 200% and (2) the maximum number of shares of preferred stock that can be redeemed out of funds legally available for such redemption. (see prospectus for further information).”
So it appears the current financial situation helps explain the 10/4/22 press release for RIV:
RiverNorth Opportunities Fund, Inc. Announces Transferable Rights Offering
https://www.businesswire.com/news/home/20221004006048/en/RiverNorth-Opportunities-Fund-Inc.-Announces-Transferable-Rights-Offering
Rob – Although the rights offering may help resolve the asset coverage problem, rights offerings have been an annual October affair for RIV for the past 4 years, so it’s not really a result of the current financial situation although given the current status of the stock market, you would think without the need to build asset coverage, maybe they would have been willing to skip this year.
2WR:
October 2022 might be the most important month/year for a RIV rights offering.
The problem with RIV now is that many of the closed end funds they own in this “fund of funds” CEF likely have floating rate debt that is unhedged. So obviously all those CEF holdings are getting blasted by higher interest costs.
I wouldn’t touch RIV or RIV+A in this environment for that reason, but that is just me. I will sacrifice some yield to buy much better asset coverage CEF preferreds like TY+P and GDV+K. Of course different opinions are what makes a market.
Good luck to all.
Rob – Don’t get me wrong – I’m not really an advocate for RIV common at this time – it’s just something I’ve owned for a long time and have chosen to accept the volatility rather than attempt market timing to get back in if I sold out. Ive got a few plowing these same fields and they’re all putting on a big hurt for now..
Yep Rob—to each their own. Of course I love TY-P as well.
RIV can issue all the common rights it wants. Just provides more protection for RIV-A which I have a full position of and not worried at all
The 200% coverage rule is there for a reason and should help one sleep well at night
RIV:
Tim is my friend and our host and I would never openly refute him as he may raise my subscription fee. The RIV coverage info is anecdotal and hopefully useful.
Like Tim, I have a near full sled of RIV-A, though have moderated adds-ons due to the positions deteriorating credentials. Still, I consider RIV-A a solid hold unless it loses it’s rating or materially violates the coverage ratio.
I can be lazy and sometimes react too-slowly, but hope and best wishes aren’t an action plan for me in issues that are supposed to be icons of safety. For that reason, NCV/NCZ were jettisoned after their proposition as sock-drawer holds fell apart. Don’t want to be a babysitter to any of them.
Rob–I just looked at the balance sheet as of 7/31/2022–the coverage should be 281% at that time. Currently less obviously–rights offerings are always good–the more the merrier.
Gabellis have a lower yield than RIV because their dividends are mostly qualified while RIV is not. So after tax yields are not as different as you think.
thanks added the schwab as well
Are riv-a and rmpl- related, one is rivernorth opportunities (perp) and the other is rivernorth speciality finance (term), or r they completely different animals simply having the rivernorth word in common? One safer than the other (besides being perp vs term)?
Same company but different CEFs they are attached to. RIV versus RSF. So basically examine them as stand alone preferred that belong to a certain CEF.
RMPL- looks safer by just looking at leverage.
https://www.rivernorth.com/riv
https://www.rivernorth.com/rsf
RJF-PA fixed to float with 6 3/4% coupon currently 24.60. Rated Baa3 / BBB+. 4/1/23 it converts to Libor +3.985%. Looks like a good deal here so I bought a bunch of it. https://www.quantumonline.com/search.cfm?tickersymbol=RJF-A&sopt=symbol
Yes–it is here.
https://innovativeincomeinvestor.com/security/tristate-capital-holdings-inc-6-75-fixed-to-floating-rates-series-a-non-cumulative-perpetual-preferred-stock/
I had orders hit on those too. Doubled my position there today on both the A and B.
Thanks for the alert. I took the opportunity to sell some BAC-K with a Baa3/BBB- rating yielding around 6.3% off its current price, book some small capital losses on it since I had it for a while from around par and replace it with the similarly rated and higher yielding RJF-A
It may get called next April when it is due to float but I can live with that if it happens
I believe that RIV owns only pre-business combination SPACs which are actually much safer than equities since they are backed by a trust invested in US T-Bills. Of course, this assumes they trade out of the issue before the business combination is formed.
I’m guessing you mean that the only SPAC shares RIV owns are pre-business combinations, not that RIV owns only SPAC shares. Owning pre-business SPACs is a low risk arb play, kind of another alternative for idle cash…. SA author George Spritzer explains it pretty well in https://seekingalpha.com/article/4506009-svfa-low-risk-spac-arbitrage-play and also mentions a couple of tiny ETFs now that specialize in this…I do not own any of them. RIV does have about 33% of its portfolio on SPACs as of 6/30/22 but this has not successfully prevented it from participating in the cratering experienced by so many CEFs this year. I do own RIV common.
Absolutely correct George–thanks for your input.
thanks so much Tim! exactly the type of investment I was looking for. keep em coming when you get a chance.
If one is just looking to get paid PSA-L is another solid choice that yields (6.39%) almost as much as RIV-A. Anything more you are stepping into the land of less than A/BBB+/Baa1.
Good idea fc—I haven’t even looked at the PSA issues for a long time.
thanks fc. added that as well.
Another option is SCHW-D. Yields 6.35%. and is qualified.
bogiefreeround,
SCHW-D…Great idea…
I placed my order today 10/19/2022
Thanks !!!
FC, thanks!. I am new to preferreds and learning so excuse my simple question.
Because PSA-L div rate is 4.625. is it likely that if I bought it I would be a perpetual owner? And at $18.94 it potentially may appreciate when rates eventually reverse down? I assume both of these questions TIA
Windy – the answer to both your questions is yes.
While PSA is a serial re-issuer, they would not redeem PSA-L by floating a new issue unless they can do better than the 4.625% rate. So that likely is a long ways off
But you will have the potential of capital appreciation when rates eventually reverse down
I just bought a little HPP-C for those reasons
Mav,Thanks!
I just started buying a small amount of psa issues. If a recession hits and j.powell reverses course than cool, we get some 25-30% capital gains. If yields continue to rise than yes, you will be an owner forEver, or until rates drop again. There are two upcoming rate hikes so I’m gonna come back in a month or two and contemplate more purchases. Preferreds take longer than commons to rebound so I doubt I’ll miss out on much if there is a Xmas rally.
How do you come up with 6.39% for PSA/L ? 4.625% @ $18.97 has my math with a 6.10% rate.
Thanks
JB/AZ,
That is my mistake for not checking the math from the sortable spreadsheet on the forum. It has the wrong quarterly payout on it. I just picked the PSA preferred that was the highest from today’s pricing. 6.1%ish is correct as you stated. The sheer majority of the PSA preferred are right around that. A solid 6%.
With my mistake now being corrected I still stand by it is a pretty good buy when stacked up against other options for safety. Thank you for noticing that and I should probably post so Tim can correct those errors.