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Gladstone Capital Issues a New Term Preferred

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September 21, 2017

By   Tim McPartland

Business Development Company (BDC) Gladstone Capital (NASDAQ: GLAD) has sold a new term preferred with mandatory redemption in 2024.

Proceeds from this new issue will be used to redeem the 6.75% term preferred (NASDAQ: GLADO) that became optionally redeemable in June. We should note that we hold GLADO in some of our portfolios, both personal and models, and on the call we lost about 20 cents/share.

This is always a risk when holding a redeemable preferred stock in a portfolio and we have, on many occasions, held shares past their first optional redemption date when it has been only a very small amount over $25. If we tried to maintain a portfolio of only issues trading below $25, we would have little selection from which to choose as 75% of the preferred universe is trading above that price.

Term preferreds are favorites of ours as they have a “date certain” for redemption versus the more traditional “perpetual” preferreds that are more normally issued. Additionally, because of the known mandatory redemption date, these issues tend to trade with less volatility.

The new issue from GLAD has a fairly low coupon of 6%, but will pay dividends on a monthly basis. We hardly have to mention to readers that this is another case of a less-than-investment-grade company being able to issue preferreds with a coupon that was until recently reserved for investment-grade issuers.

Gladstone Capital, as a BDC, is required to maintain at least an asset coverage ratio of at least 200% on senior securities, which gives investors somewhat of a margin of safety. This is partially what allows a BDC to issue preferreds at such low coupons.
The issue will begin trading on the OTC Grey Market under the ticker GDDLP today.

Further details on this issue can be found here.


Tim McPartland

Tim McPartland is a private investor with over 45 years of investment experience. His analysis, research and writing is devoted to the hunt for income producing securities of all types, but in particular specializing in preferred stocks, exchange traded debt and Master Limited Partnerships.

 

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