We’re a Buyer of this Low-Coupon Preferred

September 19, 2017

By  Tim McPartland

While we are not fond of low-coupon preferreds, we are more open to a low coupon of a solid investment-grade issue which provides a near guarantee of safety.

The Ellsworth Growth and Income Fund (NYSE:ECF) is a closed-end fund that is part of the Gabelli fund family. The fund dates back to 1986 and the total returns since inception have been 8.3%.

Total assets in ECF are around $130 million, which makes this a small closed-end fund (CEF). As you may recall, closed-end funds must maintain an asset coverage ratio of 200% on senior securities, which include preferred stock.

This is an added level of safety for holders of the preferreds. In the case of Ellsworth Growth and Income, it has assets of $160 million after this offering and there is no debt and there are no other issues of preferred stock. As a result, there will be an asset coverage ratio of more than 500% to provide investors with extreme safety. Additionally, this new issue is rated a very solid investment grade by Moody’s with an A1 rating.

The new issue carries a very modest coupon of 5.25%, is cumulative with respect to dividends and is qualified for the lower preferential tax rate. The issue is now trading on the OTC Grey Market under the temporary ticker symbol ELLWP and last traded at $24.90. We had an order in to buy on Friday and executions are very slow. In fact, all day long our order did not execute.

Further details are available here for this issue.

Remember that the performance of the closed-end fund itself should not be a huge factor in a potential preferred stock investor’s mind with an issue such as this one. The key item is the asset coverage ratio and, at more than 500%, this is a very safe issue.