The Hate For Prospect Capital Preferreds Continues

This falls in the ‘whoa is me’ category.

Large business development company Prospect Capital (PSEC) sold a perpetual preferred some time back–7/2021. The issue has a 5.35% coupon with a BB rating from S&P and a Ba2 from Moody’s–not investment grade, but a reasonable rating at the time for the coupon.

This issue has fallen to as low at $20.85 today–a current yield of 6.35%.

As a holder of this security I have pondered selling–on the other hand I have pondered buying. I think at this point I am more likely to buy–not going to sell as there is no fundamental reason to sell and the coupon is good. A review shows the balance sheet strengthening somewhat in the last year–it has all I need–except the reputation.

At this point I am a holder.

18 thoughts on “The Hate For Prospect Capital Preferreds Continues”

  1. I’m noticing that there is some short interest here, which means that someone(s) is shorting this in anticipation on the interest rate hike (my best guess). A perpetual preferred is likely a great short candidate as a way to play interest rate increases.

    The further you are out in regards to duration with a bond, the more affected you will be by interest rate changes. So if you own a 5% coupon bond that matures in 3 years and you own a 5% coupon bond that matures in 30 years then the Fed raises the Fed funds rate by 0.25 or 0.5, you will see the greater decrease in price on the 30 year bond. This is related to the time value of money difference and discounting the interest rate change over a longer duration (this also works in reverse). Also, credit quality plays a role here.

    Personally, I stay away from any type of perpetual security for the reason above; unlike a 5 year bond where if I think they are solid to repay in 5 years, you’ll just hold till maturity. With a perpetual there is no guarantee of principal recovery.

    1. Zestious:

      But when somebody directly “shorts” a dividend-paying perpetual preferred stock they then have to PAY the dividends every quarter (unless you decide to trade around them). I disagree that they are “great” candidates on the short side. They require much work, the borrowing costs are high, and they are illiquid.

      The only preferred shorts I even look at are those that are no longer paying dividends and investors still seem to think they have life (like the PEI and SOHO preferreds).

      The way I bet on upcoming interest rate hikes is to buy long-term put options on junk bond ETFs like HYG and JNK, and potentially on Treasury related ETFs like IEF and TLT. With junk bond ETFs sitting today at yields less than 4%, they really have only one way to go.

      1. Hey Rob, your points above are good and well taken. I actually looked and buying puts on JNK, the spreads on the options were unattractive, it would require a significant amount of movement to payoff. Did you up end buying any of those puts? If so, at what strike and what month; if you don’t mind me asking?

        1. Z:

          The JNK puts are too illiquid versus HYG so they are tough to buy.

          I have some “pizza money” in some HYG 6/17/22 Puts at a strike price of $80. Starting to buy some insurance in case my income portfolio gets hit hard during the first half of 2022.

    2. 12/22. Feature note in marketwatch about boom times for storage stocks. Seems to me this should ease worries about defaults.

  2. As long as we’re looking into distressed issues, is anyone familiar with HMLP-A? There’s a cash crunch and the common dividend was reduced to 1 cent. This, of course, cratered the common and also dented the preferred which at current price is yielding around 12%. I had a 1% position but bought a little more just over 18. The parent has made an offer to buy the company and I assume will take over the preferred which is perpetual with first call 10/2022. No k-1. Anything at this yield selling so far below $25 is obviously risky. But this isn’t in my ‘investment grade’ account.

    1. I’ve seen enough of what can happen to preferreds after a buyout. They’re the redheaded stepchildren. No thanks.

    2. two thoughts:
      -HMLP-A is not a stock or debt. It is a perpetual “unit” in a limited partnership. It is callable next year, but the company never has to redeem it. It is cumulative, but that is not necessarily a protection in a “go private” situation (i.e. if the issuer can just never pay, cumulative payments is not meaningful). You would have to go read the prospectus and related documents very carefully to see what protections there might be (I haven’t – I just read the summary) .

      -HMLP is based in the Marshall Islands – not exactly known for fairness or transparency in corporate governance. FWIW – It is a haven for people wanting to set up trusts that are not transparent (including to hide assets). I wouldn’t want to be a limited partner there of a company that has gone private. It might be fine, but it is just a risk I don’t need.

  3. I’m a buyer of this but it does fall into my higher risk bucket
    but it is yield just over 6% / under par – right now a good deal
    My 6.8% PBC is being called and I’m just rolling over the money in advance to the same company for about the same yield – neat.
    My cost basis is $21.5
    I have 200 shares and may only buy another 105
    The common has a yield that can be cut to protect the preferred dividend
    and the 6.8% PBC debt is being called which theoretically should help

    This might be a 6% sock drawer issue – the handle for these used to be 4%
    how times have changed

  4. I bought some a few day ago because the price fell so much. Then it kept falling. Kinda like the house I bought in 2008. Took 7 years to break even and now it’s worth double.

  5. I bought 200 because.. well… this post. I put a lowball bid for another 200. The current price action does not make much sense for a BDC. I will do some more research over the next few days besides ADS Analytics article on SA.

  6. Tim…looks like your post has generated some buying interest! This will be one to watch. Should be an excellent tax bounce candidate in January…perhaps for the rest of December.

  7. Bought a little at issue
    Bought a little more down in 23’s
    Bought a little more in 21’s and high 20’s.
    Cost basis still in 23’s, so way underwater, but will continue to nibble. Only just over half a position so far. Didnt intend for this to be a full position, but it may end up being! Just nothing else of equivalent quality yielding close to this.
    Why does the song “Bad Reputation” keep popping into my head?

    1. How is ABR’s perferreds not equal in quality or even better and yielding similar. I believe your investing in management as much as a company, and PSEC management is of no equal. Just my take on all this.

  8. I entered this one around $21.60 and have been adding small amounts on the way down. With a yield now over 6% I view this as a long term hold and maybe a decent cap gain down the road.

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