Tortoise Energy Infrastructure Term Preferred is Still Our Favorite
By: Tim McPartland,
At the risk of sounding like a broken record we are once again reiterating our absolute love of Tortoise Energy Infrastructure 4.37% Term Preferred Stock (ticker:TYG-B). Tortoise Energy Infrastructure is a Closed End Fund (CEF) focused on midstream energy MLP’s. It is necessary to know why preferred stock or debt of a CEF is pretty close to bullet proof. The reason is that the holders of the common shares of the CEF would get zip in a bankruptcy–while the debt and preferred holders would likely get 100% back (yes, even the preferred holders). The reason for this is the asset coverage ratios that are required to be maintained for both debt and preferred stock–this is law and is mentioned in every filling document (10q’s, 10k’s, Registration Statement etc) that a CEF makes with the SEC. Debt must have a asset coverage ratio of 300% and preferred shares must have a ratio of 225%. Here is the info from the SEC on Section 18 of the Investment Company Act of 1940. It should be realized that the TYG-B Tortoise Energy Infrastructure issue is not the only preferred issue covered by this act. There is also another Tortoise Energy Infrastructure issue–TYG-C, the Gabelli preferred issues (8 issues), the Kayne Anderson preferreds (KYN-E and KYN-G) and the General American Investor preferred (GAM-B). NOTE that each of these issues is HIGH investment grade and most are required to maintain this very high rating. Also note that all preferreds and debt issued by BDC’s are also covered by the asset coverage ratio by law.
We have written on TYG-B in this space at least 4 times in the last 18 months. 13 months ago we wrote a relatively detailed article on the issue on Seeking Alpha (no we don’t get a payment if you click and go to Seeking Alpha to read our article–we chose to accept no payment for the article) when the $10 par shares were trading way down at $8.32/share with a yield of 5.23%–the shares are now trading at $9.70 with a current yield of 4.51%.
TYG-B can be redeemed at $10.10/share as early as 12/31/2015 (there is a extra 10 cent premium for this early redemption), but has a mandatory redemption in 2027. Given the direction rates are moving there is certainly a chance that the shares could be redeemed in a year–but since it is trading below par no financial pain would be inflicted.
But in the end the reason we have chosen TYG-B to be our favorite issue is that we know that we can move money there and it is SAFE. The issue is rated AA and there is no other preferred issue rated higher. Yes it can move up and down, but in the end we will get our $10/share back–maybe not until 2027, but it will be there. Now lest one think that these type of ratio violations do not occur–they would be wrong. At the height of the financial crisis in 2008/2009 one or more of the Gabelli funds violated (or came very close to violating) the ratio law. On Seeking Alpha way back in 2011 we wrote on the Gabelli response to the shortfall is assets—the bottom line is they started issuing CEF shares like crazy and ended up going from a near law violation to a coverage ratio of over 1000%!!! Now that is safety if you are a senior security holder.
Now you won’t get rich drawing a current yield of 4.51%, nor is it guaranteed that the NAV won’t go down (for now), but from everything we know today it is as close as can be to being a super safe investment with a fair return.
We use TYG-B for our ‘chicken’ position–given the wild markets of late we moved our personal accounts to a very overweight position last week and will likely leave it that way for the balance of the year.
Additionally we have a heavy weight in the models of this issue and we are going to use some of our cash and go even heavier tomorrow–better 4.51% than sitting in cash.