Stability Returns to Income Issues – For Now

After weeks of prices tumbling we now note that stability has returned to the preferred and baby bond markets.

The average share is off just 4 cents this week which, thus far, is much better than we have seen the last couple of weeks when share prices fell by 41 cents in total.

We have personally lost about 3/10% the last couple of weeks–almost all in our perpetual preferred holdings.  We have been in the mode of losing a little capital each month, but recouping it the end of the month when dividends and interest hit (since we hold a lot of monthly payers).

Watching volumes on preferreds stocks leads me to believe there is plenty of action still occurring in the preferred stock arena.  Yesterday we saw heavier than normal volumes in the shipping issues (Tsakos and Teekay) as well as in the regional banking area (TCF Financial and MB Financial).  We also saw the Gladstone Investment 6.25% term preferred (GAINM) fall by 39 cents on 10 times the normal volume.

29 thoughts on “Stability Returns to Income Issues – For Now”

  1. I have some 100-yeard old preferred certificates on my wall. Still waiting for them to be called.

    1. Bob, If you an oldest paying preferred on the market, you have to buy DMRRP. A continous perpetual preferred that hasnt missed a payment since issued in 1863.

      1. Grid, DMRRP Dayton & Michigan Railroad was issued when Lincoln was President and The Thirteenth Amendment (Amendment XIII) to the United States Constitution abolished slavery and involuntary servitude, except as punishment for a crime was passed. It’s beyond impossible to buy and I’ve tried for YEARS! Nomad

  2. Tim — Why is GLOP-C down to $22 Today? A loss of $3 from the offering in such a short time.

    1. Hi Jeff–there is no answer to that question as there is no fundamental news out. It is simply some folks want out–NOW. GLOP is the most solid of the LNG carriers and I own a full position. If it goes another 25 or 50 cents lower I will be adding some more as I am hopeful that we will see a bounce once the end of year positioning gets out of the way.

  3. So the key element here is the maturity date (which is none) rather the redeemable date. Thank you both for a lesson learned.

    1. Jay,
      Correct. The 1st call date is relatively meaningless in this rising rate environment. In this environment, and as Tim and we have been preaching, one ‘should’ do much better with shorter term duration holdings, i.e., TERM PREFERRED’s and BABY BONDS. They are not so exposed to rates continuing to rise and rise, which causes pain to the company servicing that debt. Examples for you:



      But be careful of buying these close to the redemption/maturity date.

  4. Tim et all, for a newbie to preferred shares finding this site is simply a gift. The information exchanged here is a great learning source, .so thank you all for sharing your knowledge and foresights about this otherwise intriguing form of investing.

    A simple question to ask is why would a preferred that’s past its redeemable date still trades below par, e.g. KIM-I redeemable Sep 2017. Isn’t this like free money? 😉

    1. Jay something to remember…The declining interest rate era is over for now anyways. When rates got this low back in 1940s and 50s, companies issued preferreds then too. And guess what? Many of those are still outstanding 70 years past call. Dont buy a perpetual under par with sole expectation of a freebee redemption.

    2. Jay–the shares are ‘perpetual’ meaning they may NEVER be redeemed–thus the 1st call date is pretty meaningless. The KIM issues will remain outstanding until the 10 year treasury maybe falls to 1.75%–a level we may not ever see in our lifetime.

      For a solid baby bond or term preferred trading below $25 would be great if it was redeemable in the next year because that would be more like ‘free money’.

      1. Gridbird/Tim, 1.75% TNX implies a 4.25% margin over TNX for the partially-called BBB- KIM 6% coupon. Not say a 3% margin over TNX around 3%?

        1. OK…Last KIM IPO (KMI-L on 8/2017) was at TNX plus 2 7/8 resulting in a 5.125% coupon. So issuing new preferred today (TNX 2.9) would basically be a push relative to highest outstanding KIM coupon at 6%. OK, got it. Unlikely to use cash to pay off remaining $175M of KIM-I anytime soon especially as Q3 10-Q evidences cash of $146M, which is a declining balance from previous 9 months. OK, got that too. Only question is why KIM-L IPO wasn’t for the full $400M so entire KIM-I could have been retired. Probably based on their expectation of market acceptance. Might have been some irrational exuberance in this trade. Getting this Retired? Thank you Grid and Tim for the collegial illumination, though one upside the head would have sufficed.

          1. Alpha, I havent researched it, but your logic would be in agreement with my off hand guess on the partial call. As a general rule quality preferreds trade in a band of 200-400 basis points of 10 year. This is a wide normal variance which can equate up to $6-$7 in negative price movement. Not many newly buying preferred owners have been subjected to it. I have been spoiled too. I see a preferred I own drop 30-40 cents and I think I am getting pummeled, lol.

            1. Closed KIM-I for a loss of half a steak dinner. Its potential to be a perpetual might be OK for some but that was not my objective in the trade. Thank you Tim and Grid for sliding up the dimmer switch. Go III.

              1. I bought KIM-I hoping it is a perpetual. Different strokes for different folks Alha 8. I’m not really a trader. My goal is an annuity of my own making and so I’ll hold it and may add.

                1. Hi Retired, Like you not a big trader though seeing KIM-I (KIM’s highest coupon) partially called and trading below par, must confess to envisioning full redemption in up to 24 months for an easy TD. Wonderful math, but probability is less than initially understood. The lesson is archived so thats the silver lining. Though KIM is a well-above average company in that space, my REIT pfd allocation is full so the trade didn’t make sense anymore. And if it does get called, will be cheering you on. Best to you.

  5. UBTI bothesr me because it’s levied at the highest individual tax rate (37%). At least it was before this year’s tax bill and I haven’t seen anything which makes me think it’s changed. Between the complications and high percentage tax, it’s easier for me to just avoid it. Just my opinion…

    1. Well, it seems I may be wrong (again). The new tax law applies a 21% tax rate to UBTI. This is another area where your own due diligence is needed.

  6. Stability has trigged my urge to buy some of the Investment Grade issues. Just today I added KIM-I and PRE-G and I have an order in for another IG issue. Also added to my OAK-B. I’m trying to move up to better quality issues as I’m feeling that rate increases are leveling off and everyone keeps talking about a 2020 downturn. I guess time will tell if that is the right move.

    1. I am kinda of shaking my head at the drop in OAK-A and OAK-B. Coupon’s of 6.55% and 6.625% both yielding about 7% at current prices. Investment grade by S&P and not even on the last rung on investment grade. In my mind, a smart buy Retired.

      I took my position up from 3% to 4% of my portfolio ( my maximum without over-weighting) a few weeks ago.

      Yeah, may be early for both of us but I like the quality in this one

      1. Agree and I am not really a flipper. I prefer to hold issues unless something fundamentally changes with the underlying company. I’d like to add more to OAK-B but I hold this in an IRA and K-1 concerns prevents me from doing so.

        1. I have a hunch I am going to find out how painful having a K1 in your IRA is. Like you, I am retired so I will find the time to figure it out if I have too much UBTI

          1. SteveA–guess it is the cost of learning all the ins and outs–we all go through it–and then we continue to make mistakes.

            1. actually, I did this eyes wide open. I looked at the issue and said, okay I need to pay the UBTI tax for this issue in my IRA but any non-UBTI is still non-taxable so how bad can the paperwork be? It is a good year for me to find out. I may be cursuing when find out the hoops I may have to go through.

              1. I’m wondering though if you can just assume that the income from OAK-B is simply the interest paid on the issue. This from Quantum Online:
                “Holders of the Preferred Units will receive specific tax information from the company, including a Schedule K-1 which generally would be expected to provide a single income item equal to the preferred return”. Please correct me if I’m wrong but that seems to me to imply the K-1 will show a return equal to the interest paid. If that’s the case I can afford to hold a few more shares I’m my IRA which I will gladly go out and purchase today.

                1. From motley fool 2nd paragraph), it looks to me like only the portion of the K1 that includes UBTI income. When others have posted in the past, is sometimes the entire K1 is UBTI, sometimes it is not. No way to project the portion that will be UBTI.

                  “Schedule K-1 will include any UBTI figure, and if the total UBTI for all investments in your IRA exceeds $1,000, then you’ll need to prepare Form 990-T to submit to your IRA custodian for filing. You’ll end up having to pay tax on the UBTI, even though you own the investment in a retirement account.”

                  1. OAK-B is my only K-1 issue. With 400 shares I don’t see any UTBI issue this year as this issue just came to market. Also, in reading the prospectus, the company states: “The gross ordinary income allocated to a holder of Series B Preferred units will generally have the same character as our gross ordinary income (e.g., interest, dividends, rents from real property, UBTI, etc.) and “we expect we will have sufficient gross ordinary income in calendar year 2018 to allocate gross ordinary income to the Series B Preferred units in an amount equal to the distributions paid on the Series B Preferred units”.

                    That says to me that unless all of the gross ordinary income resulted from UBTI (highly unlikely), UBTI allocated to the preferred shares will be less than the payments to the preferred shares. With only 400 shares I appear to be ok… but never say never.

                    I may transfer these shares to my brokerage account next year as a distribution from the IRA. I just don’t like having k-1 issues in the IRA but I want to keep the shares.

                2. You will get a K-1, and it will show distributions equal to the par times the coupon rate. What you don’t know, and can’t determine in advance, is how that distribution will be characterized. Could be dividends, return of capital, guaranteed payment, etc. And none, some or all of it can be characterized as UBTI. You won’t know until you get the K-1. I had two K-1s last year that were 100% UBTI.

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