More New Preferred Issues and Baby Bonds Trading
By: Tim McPartland,
The flow of new preferred issues and baby bonds has continued at a rapid rate, which means that the number of higher-yield issues available to us income investors continues to shrink. So far, all of the Federal Reserve’s rate hikes have not been of benefit to us in the least. Since longer-term treasury yields have hovered at very low rates, companies are able to issue preferred stocks and bonds that have low yields.
Below, we touch on some new issues that have been sold and which we have not previously commented on.
Stellus Capital Investment Corporation (NYSE: SCM) has sold a new shorter-term baby bond with a coupon of 5.75%. While the coupon is low, the issue matures in 2022 and shorter durations are always quite attractive to us. SCM is a business development company (BDC), so thus it has an added margin of safety with the requirement of asset coverage of 200% on any debt. SCM will use the proceeds to call the smaller 6.50% issue of baby bonds which is currently outstanding. The issue has just begun to trade on the NYSE and has moved in a range of $24.80 to $25.10 before closing at $25.07 on Friday. We may consider purchase of this issue for one of our short-duration portfolios.
Details on this new issue can be found here. Please note that interest payments are not eligible for preferential tax treatment.
Cedar Realty Trust (NYSE: CDR) has sold a new preferred issue with a coupon that is unbelievably low for a very marginal operator. The coupon is 6.50%, which is too little for the risk of owning an issue from a low-quality retail real estate investment trust (REIT). While the issue is likely to be safe as long as the general economy remains firm, if we were to move into a recession, it would be at risk. The common shares have traded in a range of $4.90 to $8 in the last 5 years and recently closed at $5.18.
The new issue is changing hands at around $24.55. Dividends are not qualified for preferential tax treatment. We will be staying clear of this issue.
Ashford Hospitality Trust (NYSE: AHT) has sold a new 7.50% preferred issue. AHT has some of the higher-yielding preferreds outstanding, with coupons of 8.55% and 8.45%, respectively. The company has called for redemption of the 8.55% issue and a partial redemption of the 8.45% issue with the proceeds from this latest one. After these redemptions, AHT will have three issues outstanding — two 7.375% issues and the new 7.50% issue. The 7.375% issues are trading around $25, so we would expect the new issue to trade very modestly above that same price.
Be forewarned that Ashford is a lodging REIT and carries a large amount of debt. As a result, the company has seldom been “respected” in the marketplace. This lack of respect means that, from time to time, the preferred shares plunge sharply before recovering. We have no interest in this particular issue, although it is fine for those who are willing to incur a bit more risk for a decent coupon. Dividends are not eligible for the lower tax rate as the company is a REIT. No dividends that are paid by REITs can receive the preferential tax rate.
Shares are now trading on the Grey Market at a price of $24.65. Details of the issue can be found here.
Finally, insurer Arch Capital Group (Nasdaq: ACGL) has sold an investment-grade preferred issue with a coupon of 5.45%. The company has also announced that the proceeds from this new issue will be used to execute a partial redemption on the company’s outstanding 6.75% preferred issue.
Dividends from the new issue will qualify for lower tax rates as dividends from insurers and banks are considered “qualified” distributions. Dividends are non-cumulative. Shares are now trading on the Nasdaq in a range of $24.80 to $25.10.