Time to Build That Watchlist

It appears obvious that we finally have a period of interest rates hikes or, at minimum, interest rates that are going to creep higher because of the “run-off” on the Fed balance sheet lessening demand for income securities.

While the average preferred stock and baby bond share price has moved lower by nearly 50 cents in the last 1-2 months, we have started using the opportunity to build our watch list of shorter maturity issues that are slowly moving closer to prices which are attractive to us. As we have written about time and time again, term preferred stocks and baby bonds with maturity dates in the near future (within five years) will move lower by less than perpetual preferreds as interest rates rise.

This doesn’t mean that term preferreds won’t move lower, but it should be a rate that is above ½ that as compared to perpetuals.

We own many short maturity term preferreds and baby bonds and wrote about a few of these last week. You can find that article here. But beyond these few there are many other issues that are available that have moved a bit lower in price over the last two months. If they were to fall just a bit more, we would be adding significantly to positions.

Gladstone Investment Corp (NASDAQ:GAIN), a business development company, has three term preferreds outstanding with coupons of 6.25%, 6.50% and 6.75% trading at $25.42, $25.60 and $25.59, respectively. These have maturities in 2021, 2022 and 2023, so they will be redeemed four to six years from now.

With these “date certain” redemptions, it is highly unlikely that these share prices will tumble dramatically even with higher interest rates. If perpetuals were to fall by 5% over the next year, these issues likely will fall just 3% and, of course, further out if rates are higher. Yet we are not overly concerned with share price of the term preferreds because we will receive $25/share on the mandatory redemption date. Eagle Point Credit Corp (NYSE:ECC) has a 7.75% issue outstanding, which is trading at $25.64 with a maturity date of June /2022. Gladstone Capital has a 6% issue with a 2024 maturity date. The ultra-conservative investor may like the Kayne Anderson 3.50% term preferred with a maturity date of 2020.

While we are not advocating taking full positions in the above issues now, we do encourage investors to consider positions if they fall another 25 cents or so per share. With reductions in prices of 25 or 50 cents, much of the “call risk” is removed from the issues as some issues are either now redeemable or may be soon.

In the same vein as the term preferreds there are many short maturity baby bonds which have moved a bit lower in price in the last month or two and are becoming more attractive as the current yield rises. We currently have 58 issues we watch with maturity dates of 2028 or before.  As they move closer to the call price of $25/share, they become ever more attractive as the redemption risk is removed. Some of the shorter maturity baby bonds beyond those we currently own that we would have an interest in are the following.

Cowen (NASDAQ:COWNZ), Eagle Point Credit (NYSE:ECCY and ECCZ), Hercules Technology Growth (NYSE:HTGX), Oaktree Specialty Finance (NASDAQ:OCSLL), Saratoga Investment (NYSE:SAB) and THL Credit (NYSE:TCRX and TCRZ). These issues carry coupons of between 6 and 7.5%, which certainly won’t make you rich, but will give you a good return for the next 3-5 years at which point interest rates could be significantly different than they are today. Additionally, the ride through the next few years may be much smoother if we continue to see higher rates.

We list the term preferreds and shorter maturity baby bonds here. Note that the page may take 10 seconds to load so a bit of patience is required.