A New Issue Baby Bond for Our Portfolio

By Tim McPartland

We always are on the hunt for new baby bonds for our short maturity-focused portfolios, and OFS Capital (NASDAQ:OFS) has just issued one which we will be purchasing for the model portfolios, as well as for our personal holdings.

Baby bonds are exchange-traded debt issues that comprise all issues with less than a $1,000 face amount.  In most cases, we are looking to buy $25/bond issues, since they provide the most liquidity.

Our best-performing portfolios, which are focused on shorter maturity term preferred and baby bond issues, are meant to give us a reasonable stream of income while avoiding substantial interest rate risk as we move through the current interest rate-hiking cycle. The Short/Medium Duration Income Portfolio, which has been in existence since late 2014, has performed excellently with an annual return near 7%. The Medium Duration Income with Zip Portfolio has performed even better with an annual return of near 8%, although only in existence since August 2015.

Both these model portfolios are designed to hold term preferred stocks and baby bonds with maturities of not more than seven years. This means that movements in interest rates do not affect these issues as much as “perpetual preferreds” and long-dated maturity baby bonds. The portfolios are not traded and are meant to be “low stress” portfolios for investors.

The new baby bond from OFS Capital has a coupon of 6.375% and has a maturity date in 2025.  The company may redeem the bonds early beginning in 2020. While the coupon is not as high as we would like, the risk/reward seems reasonable to us at this time.

OFS Capital is a business development company (BDC) which has had a recent history of fairly solid net income. BDCs loan money to middle market companies at fairly high interest rates. Because of this, we advocate investments in BDC-related securities are best held during economic expansions and that investors should consider exiting if the economy is weakening.

Further details of this issue can be found here.

This issue is not yet trading but will be within the next couple of days under the ticker symbol OFSL.