A Bevy of New Income Issues Being Sold
By: Tim McPartland,
There has been lots of action in the new issue market in the last week, which means there are too many older, high yield issues being called out of circulation.
Shopping mall real estate investment trust DDR Corporation (NYSE:DDR) has sold a 6.375% cumulative preferred stock. This new issue will be used for general corporate purposes and thus not used for “refinancing” an older issue as the 2 older issues outstanding have coupons of 6.25% and 6.5%. The issue is rated low investment grade by Moodys, although given their recent performance it may not be long before the company is downgraded. DDR common is trading at $9.23/share which is off the 52 week high of over $19.00/share. Like all of the mall REITs dealing with the retail marketplace the company has performed poorly and in our opinion this is a dangerous segment of the REIT market for the long term, although the preferred shares should be fairly safe. Shares will be cumulative in respect to dividends, but will not be qualified distributions for the preferential lower tax rate.
This issue is now trading on the NYSE and is trading at $25.45/share. Details of the issue are here.
Capitala Finance (NASDAQ:CPTA), a business development company (BDC) has sold a new 6% $25 note issue. The proceeds from this offering to redeem the outstanding 7.125% notes (NASDAQ:CLA) which have a first redemption date of 6/17/2017. Being a 6% coupon on the new notes the company will save over $1 million per year in interest payments.
Being a BDC Capitala Finance makes loans to risky third market private firms and thus they are a higher risk if the economy should fall into recession anytime soon. We believe that the 6% coupon does not compensate an investor for the risk. On the other hand it is an issue with a maturity in 2022 and being a BDC they must maintain an asset coverage ratio of at least 200% of their senior securities balance which adds a level of safety.
Oxford Lane Capital (NASDAQ:OXLC) has sold a new term preferred issue with a coupon of 6.75%. The company will use the proceeds to redeem the 8.125% term preferred issue (NASDAQ:OXLCN). You may recall that we wrote on 5/29/2017 that we had sold OXLCN from our portfolios because we feared a call was coming. By selling last week prior to the call we preserved the premium that was built into the share price. We sold at $25.63 while shares immediately fell to $25.10 per share when the call was announced.
OXLC is a closed end investment firm (but not organized as a BDC) and as such they must follow the leverage rules for senior securities and hold 200% of the value of their debt and preferred stocks in assets. As such these shares carry an added level of safety.
These new shares are monthly payers, just as was the issue they are redeeming and will pay dividends on the last day of the month. We love monthly payers as the share price remains fairly level on the ex-dividend date instead of dropping by 40 or 50 cents. Additionally it is a bit easier to smooth out income when payment is received monthly.
The shares should be trading soon on the OTC Grey Market under the temporary ticker symbol of OXXDP.
Lastly master limited partnership NGL Energy (NYSE:NGL) has sold a tasty fixed to floating rate preferred with an initial coupon of 9%. Proceeds from this offering will be used to pay down the balance on their credit lines.
NGL had some financial problems in the last 2 years which caused them to cut their distribution on the common units by 50% and thus their common shares traded down from a 52 week high of around $26/share to a close today of $12.25. NGL is a energy midstream company mainly in the energy storage and pipeline end of the business, although their businesses touch many other segments of the energy segment such as barges and rail cars, neither which are particularly attractive businesses at this time.
For those with a higher risk profile this might be a reasonable issue to own since fixed-to-floating rate issues have traded strongly in recent months. Currently we own common units of NGL and that has provided plenty of pain, but we may take a modest position in this new issue.
Holders of this new issue will receive a K-1 at tax time which may give investors pause over ownership.
Shares are now trading on the OTC Grey Market under the ticker symbol NGGLP at around $24.95/unit.
In summary we have a strong interest in the Oxford Lane Capital term preferreds as we have held their term preferreds in the past and they have always performed well for us. Additionally we may have a small appetite for some of the NGL issue. The coupon on the Capitala issue and the DDR Corp issue seem to be too meager for us, but others may find they fit their needs quite well.
To get more information on preferred stocks and exchange traded debt (baby bonds), screen them, set up your own portfolio and receive email alerts, go to www.preferred-stock.com now.