We have been asked about some potential purchases that could be considered after the tumble that has occurred over the last few days (and really over the last month–the last few days were just steeper drops while the prior weeks were a slow slide). Investors need to realize that the biggest drubbings took place in the lower coupon issues and higher coupon issues have not been as badly knocked down, thus there are relatively fewer bargains in issues we would consider purchasing.
As folks that have read our writings for the last couple of years know we have been advocating for “term” preferreds and baby bonds for the last 2-3 years. We gave up maybe 1% in coupon by holding these issues as compared to perpetual preferreds, but it is likely with the fall that perpetuals have taken in the last month we are net winners.
Regardless of the fall in perpetuals and long dated baby bonds we will remain invested primarily in the term preferreds and short maturity baby bonds, but we have already started to deviate for some opportunities (hopefully good opportunities).
1st off we took a medium sized position (medium for us) of the Spark Energy 8.75% Fixed-to-Floating rate cumulative redeemable preferred today.
Our logic here is simple. 1st off we wanted a high yield perpetual, preferably a fixed-to-floating rate issue (as they are more likely to hold up as interest rates rise). 2ndly we want the issuer to show acceptable financials in recent years and lastly we want a bargain price.
We reviewed potential buys and the vast majority of available issues that fit our high yield needs are shipping issues and at this time we have always limited our exposure to the shippers although there are some issues which deserve consideration. For now instead of a shipper we honed in on energy retailer Spark Energy (NASDAQ:SPKE) as our best high yield choice. The company recently announced a reopening of the currently outstanding “A” series fix-to-floating issue (NASDAQ:SPKEP) which compounded the fall in the preferred share price to the bargain level of $24.50 from $27.25.
We closely reviewed Spark financials and we were surprised how well this energy retailer (of electricity and natural gas) had performed over the years (founded in 1999) and they now have near 1 million customers in 16 deregulated states. Debt level are relatively low and revenues are in the $800 million area which is sharply higher than last year as the company has been acquiring other smaller energy retails. This issue ticked all the boxes so we made a modest 400 share purchase.
We must note that this company is closely held with the founder owning 60-70% of the shares thus he has control of the company.
The next issue to highlight is the newer Cowen Inc. 7.35% notes due 2027. This $25/share baby bond was launched in December 2017 and traded fairly strongly through December up to $25.80/share. With the higher interest rates in January the shares have come back toward $25 closing today at $25.10. A 7.30% current yield by a relatively solid issuer is nothing to sneeze at and while we have not purchased it yet for ourselves we are considering a purchase. Relatively solid financials and a maturity date in 2027 are prime considerations for us.
Lastly bargain hunters should consider any number of the mortgage REIT preferreds but one that seems reasonable would be the AG Mortgage 8.25% cumulative, redeemable preferred. This issue will become redeemable later this year, but presents little call risk as it is trading at $25.02.
It is unlikely we would personally buy this issue as we think there may be better opportunities ahead this year–within the next 3 months and when buying a fixed rate perpetual we want a super bargain–not just a decent bargain. While we have purchased the perpetual Spark Energy Preferred mentioned at the start of this article it is a fixed-to-floating rate issue which recently announced a reopening of the issue sending the shares reeling.
Note that these are not recommendations to buy any particular issue, but just a couple issues we have bought or may buy and some thoughts on a 3rd issue. Since we don’t know anyone’s particular circumstance these may or may not be appropriate for you.