Four New Baby Bonds Come to Market
By: Tim McPartland,
Four new issues of “baby bond” recently came to market.
Among those baby bond issues, which by definition feature debt instruments that have par value of $1,000 or less, only one ranked as investment grade. As usual with bond investments, the issues pay investors interest, which means that all quarterly payments are taxed at ordinary income rates, versus a “qualified” payment taxed at lower capital gains rates.
For those not familiar with “baby bonds,” please peruse our primer on this topic. Here is an overview of each of the four issues of baby bonds.
On Dec. 1, Eagle Point Credit Company (NYSE:ECC) brought a $25.00 par value issue to market. This issue’s coupon is 7%, which is the percentage of interest paid to it holders. The terms of the offering typically involve quarterly interest payments but these particular baby bonds feature an optional (at the option of the issuer) call date approximately 2 years after issue and maturity of the bonds 5 years after issue.
ECC is a closed-end fund (CEF) but not a business development company. As a result, ECC is regulated under the Securities and Exchange Commission Act of 1940, which spells out the form and terms of securities offered by closed end funds. A CEF is required to have an asset coverage ratio of 300% on senior securities, which consist of all securities except common shares.
These shares are now trading on the NYSE and have been trading during the last week in the $24.25/share area.
Details of this issue can be found here.
Prospect Capital Corporation (Nasdaq:PSEC), a rather large business development company (BDC), sold a 6.25% note issue on Dec. 9. This issue is investment grade, as rated by Standard and Poor’s, and BDCs are closed-end funds that are governed by the SEC Act of 1940. As a BDC, the company must have an asset coverage ratio of 200% on senior securities.
The terms of this issue are typical, with three years to an optional call date and a maturity date that is nine years out in 2024.
This issue just began trading in the $24.70/share area. Details of this issue are here.
THL Credit Inc (Nasdaq:TCRD), another BDC, sold a 6.75% note issue on December 10, 2015. As a BDC, the company must have an asset coverage ratio of 200% on senior securities.
Again, the terms of this issue are the typical ones with three years to an optional call date and a maturity date that is seven years out in 2022. This issue has been trading for a couple of days and is around $25.00/share.
Details of this issue are here.
Lastly, business development company Medley Capital Corporation (NYSE:MCC) sold a 6.50% note issue on December 15, 2015, which is due in 2021. The normal terms apply (3 years to an optional call). As a BDC, the company must carry an asset coverage ratio of 200%.
This issue is not yet trading, but likely will trade in the next week.
Details of this issue are here.
Each of these issues have rather modest coupons due to relatively short duration (the length of time until maturity) and the requirement that each of them is required to carry either an asset coverage ratio of 200% or 300%. With our conservative bend, we like the Propspect Capital issue the most since it is investment grade, although the duration is longer than the other issues. With interest rates pointing higher, we are most likely to wait for a week or two to observe how these issues are trading prior to seriously considering whether we will make a purchase.