More Calls, More Cash–a Never Ending Cycle
By: Tim McPartland,
We noticed once again that a nice Baby Bond was announced for call late last week. This time it was the KKR Financial Holdings 7.50% Senior Notes (NYSE:KFI) with a maturity date of 3/20/2042 that was called for early redemption on 4/24/2017. Holders will receive $25/share plus accrued interest. Since this was a long dated maturity issue we did not hold any shares (bonds), but for income investors this is just another slam to income stream.
We did have 1 issue that was recently called which we have replaced today. The Homeowners Choice 8% Senior Notes (NYSE:HCJ) with a maturity date of 1/30/2020. This issue was called for 4/3/2017 so we removed it from the Short/Moderate Duration Income Portfolio. This portfolio was already at a 15-20% cash position prior to this call and as such moved up to about 25% cash. Honestly this is really unacceptably high level of cash. Since we began publishing portfolios 11 years ago it has always been a struggle to keep cash levels down–a big part of the problem is that our standards for ownership are simply too strict. In particular our requirement that issues be shorter maturity issues has handcuffed us and while we have been very happy with our returns we may have to delve into some perpetual preferreds to remain more fully invested.
We have added more shares of the JMP Securities 8% Senior Notes (NYSE:JMPB) to the portfolio mentioned above to soak up some of the excess cash, but we remain with too much cash on hand. We should note that this issue is already in the optional call period and thus we could lose it any time we are taking the risk because of the lack of other reasonable options.
Investors that have remained in shorter maturity income issues (baby bonds and term preferreds) need to weigh the safety and lack of volatility of these issues to the superior coupons available with some perpetual preferreds. With the Fed hiking short rates and the marketplace continuing to push longer term rates lower we continue in a goldilocks market, but companies can issues $1000 notes at very attractive rates with which they can use the proceeds to call baby bonds that will mature in the next few years. Do we need to move to more perpetuals?
These markets remain very “dicey” as global tensions are apt to cause a panic of some sort in the months ahead, although attacking the Syrian airfield had only a very short term effect (we were watching the futures market closely). Irrespective of the bounce backs we have seen in all the income markets (i.e. preferred stocks) there WILL come a time when we have a full on panic–it will happen and we could be very wealthy if we knew when–but we don’t so we have to remain at least 90% invested with a bit held for bargain hunting. We write this even as we find ourselves continually short of that 90% goal. Investing takes time and investors must pay attention–that includes us.