Preferred Stock Investing-The Good , The Bad and The In Between 2015 - 2020

[Slow But Steady]

I'm trying to figure out OSBCP.

Quantum Online says it was 2.75 million shares at $10. Coupon is $0.195 per quarter, implying a quarterly interest payment of $536,250. OSBC's quarterly report says they paid $1,084,000 interest on junior subordinated debentures.

I don't see any other junior subordinated issues on Quantum.

Someone please enlighten me.

 

[Mulligan]

I'm trying to figure out OSBCP.



Quantum Online says it was 2.75 million shares at $10. Coupon is $0.195 per quarter, implying a quarterly interest payment of $536,250. OSBC's quarterly report says they paid $1,084,000 interest on junior subordinated debentures.



I don't see any other junior subordinated issues on Quantum.



Someone please enlighten me.

They have a separate "private issue" that is not tradable...Unbeknownst to most people, only 25% of all preferreds issued are available to retail investors like us..The others go directly to institutions or people like Warren Buffet who always gets great deals on preferreds with higher rates than we get.
Another perfect example. I found last week two BEAUTIFUL 7 5/8% investment grade utility preferreds on the books of Hawaiian Electric.
Could find no trades of them and they were issued in 1993... Big $50 million dollar issues...Coolius went and dig legwork for me and called brokers to find them...Nothing anywhere...Private placements...


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[Mulligan]

For a floating rate issue, how about C-N?



It's not rated like PFK, but isn't C "too big to fail?"



The divi is quite a bit fatter than PFK.

Slow I forgot other reason...This is the only INFLATION indexed issue out there I can find. Not Libor. I doubt this one to be a real interest to anyone...Just a safety play that will yield me some money...Now if Prudential would issue an exact same issue with a 10 year call date, I would gladly dump some serious money into an issue like that.. I doubt a company would do that though. Since I own no bonds or commons, I tend to spread risk among various types, various risks of call and that coincides with the yield it currently carries. But I do not have much diversity in industry...My utility preferreds range from 4.88% (HAWEL) to 7.15% (AILNP). Banks I tend to stretch a bit in yield and go through the debt of the companies with the TRUPs.


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[Texas Proud]

They have a separate "private issue" that is not tradable...Unbeknownst to most people, only 25% of all preferreds issued are available to retail investors like us..The others go directly to institutions or people like Warren Buffet who always gets great deals on preferreds with higher rates than we get.
Another perfect example. I found last week two BEAUTIFUL 7 5/8% investment grade utility preferreds on the books of Hawaiian Electric.
Could find no trades of them and they were issued in 1993... Big $50 million dollar issues...Coolius went and dig legwork for me and called brokers to find them...Nothing anywhere...Private placements...


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Well, to be fair, there are a lot of private placements of all kind of securities and bonds... they are cheaper to issue and are a quick way for a company to get funding...

To buy these securities, you need to be a sophisticated investor... this is not Warren Buffet rich, but from the link you need $2.5 mill... (it used to be $1 mill 16 years ago)....

Sophisticated Investor Definition | Investopedia

 

[Mulligan]

Well, to be fair, there are a lot of private placements of all kind of securities and bonds... they are cheaper to issue and are a quick way for a company to get funding...

To buy these securities, you need to be a sophisticated investor... this is not Warren Buffet rich, but from the link you need $2.5 mill... (it used to be $1 mill 16 years ago)....

Sophisticated Investor Definition | Investopedia

Well I am excluded from all angles then... But Buffet gets to arrange terms on his doing because he has the accessible capital they need (and we are talking hundreds of millions, not 2.5 million) He has frequently bragged in the past (and rightfully so) on like a 10% Bank America preferred and an 8% Dupont issue... He also gets certain exclusive terms such as payment before the regular preferreds and dictate call ability terms, or convertible to common shares if he desires.


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[Texas Proud]

Well I am excluded from all angles then... But Buffet gets to arrange terms on his doing because he has the accessible capital they need (and we are talking hundreds of millions, not 2.5 million) He has frequently bragged in the past (and rightfully so) on like a 10% Bank America preferred and an 8% Dupont issue... He also gets certain exclusive terms such as payment before the regular preferreds and dictate call ability terms, or convertible to common shares if he desires.


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Oh yea, don't get me wrong.... Buffet can dictate terms to some companies that need financing but cannot get it any other way... and very favorable to him... these are not ever traded.... but this is not the norm....

I was trustee on a number of bond issues that were private placements... they did trade, but not as often as the ones that are available to the general public... sometimes an investment bank would buy the whole issue and then sell it to their best clients.... they would make a market in that issue if they were the only investment bank...

 

[Mulligan]

Now this is only what I have read and going through financial reports, such as OSBCP where Slow wanted to know where the extra money was going to on Trust preferreds. I certainly am no expert. Now, I have read a few institutional prospectus's that have said "no market will be available", but did imply one could be created later (presumably not by them).
There is a Southern Company preferred with a slightly higher yield I have tried to snag, before. Never a bid or ask, but shares trade. I have put 1000 share bids on the issues at selling price, but they have been ignored. I look at trades and they usually are 20,000-50,000 blocks. This is an example of what you referenced..Ticker symbol is GLFQP.
Goto Parent Company's Record (SO)
Notes: This Preference Stock will not be listed on any securities exchange or on any automated dealer quotation system.
IPO - 10/17/2007 - 450,000 Shares @ $100.00/share. Link to IPO Prospectus
Market Value $ 45 Million

Click for current GLFQP price quote from the PINK SHEETS


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[Texas Proud]

Now this is only what I have read and going through financial reports, such as OSBCP where Slow wanted to know where the extra money was going to on Trust preferreds. I certainly am no expert. Now, I have read a few institutional prospectus's that have said "no market will be available", but did imply one could be created later (presumably not by them).
There is a Southern Company preferred with a slightly higher yield I have tried to snag, before. Never a bid or ask, but shares trade. I have put 1000 share bids on the issues at selling price, but they have been ignored. I look at trades and they usually are 20,000-50,000 blocks. This is an example of what you referenced..Ticker symbol is GLFQP.
Goto Parent Company's Record (SO)
Notes: This Preference Stock will not be listed on any securities exchange or on any automated dealer quotation system.
IPO - 10/17/2007 - 450,000 Shares @ $100.00/share. Link to IPO Prospectus
Market Value $ 45 Million

Click for current GLFQP price quote from the PINK SHEETS


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I would have to check some other issues, but I think this is not limited... I cannot see any text limiting who can buy the securities.... and the first sentence in the IPO is... not sure if this means anything, but I will go with yes until I see some evidence that I am wrong...

This is a public offering by Gulf Power Company
​

I would contact these people and see what you can do if you want to buy... they can tell you where to go to buy....

Transfer Agent and Registrar

Unless otherwise indicated in the applicable Prospectus Supplement, the transfer agent for the Class A Preferred Stock will be Southern Company Services, Inc., 30 Ivan Allen Jr. Blvd., N.W., Atlanta, Georgia 30308, which will also serve as the registrar.
​

 

[Mulligan]

Preferred Stock Investing-The Good , The Bad and The In Between

Last trade was 20,000 share in April...I highly suspect this has moved to the "Grey Market". A notch below the Pink Sheets. There is never a bid or ask on issue. Grey Market issues do not have them. There are no "market makers" on Grey Market issues... I learned a lot from a recent Gray Market purchase when I secured the last of my 1000 shares of CTWSO... You really have to get a broker eager to work for you to find where any outstanding issues are located. If you just put a bid in online you may never get a hit as they just send it to their market. Grey Market issues do not get "passed around" to find best price or availability. So you could put a bid in a week prior to me and I could still actually get them at a lower price without you getting a sniff if my bid is by chance routed to an area that actually has an inventory or sell from an individual.


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[Mulligan]

Well I assume if you are into the the safe illiquid preferreds you had another boring snoozefest day if not a profitable one like me... I made money on both of these past two "crash days". Not particularly worried about that...Just the fact I am in mostly high quality and that with the bonus yield provides continues to side step any market downdrafts the past few years... Bought a few hundred more of PFK at market low... A safe hedge play... Bought 100 of a Cincinnati Bell preferred at $48.91 today... More of a yield chase, though company financials are improving and focus on debt reduction to clean up balance sheet. Feel good on this riskier below par play that was issued in the late 1990's. And what the heck...My thousands of AILLL shares wanted to adopt a couple hundred more to join the huge family, so I gave in and bought... Who knows...Maybe by when I am 100 years old I will own the entire issue myself.


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[Sunset]

Well I assume if you are into the the safe illiquid preferreds you had another boring snoozefest day if not a profitable one like me... I made money on both of these past two "crash days". Not particularly worried about that...Just the fact I am in mostly high quality and that with the bonus yield provides continues to side step any market downdrafts the past few years... Bought a few hundred more of PFK at market low... A safe hedge play... Bought 100 of a Cincinnati Bell preferred at $48.91 today... More of a yield chase, though company financials are improving and focus on debt reduction to clean up balance sheet. Feel good on this riskier below par play that was issued in the late 1990's. And what the heck...My thousands of AILLL shares wanted to adopt a couple hundred more to join the huge family, so I gave in and bought... Who knows...Maybe by when I am 100 years old I will own the entire issue myself.
..

Does that mean you paid $26.55 for the AILLL shares ?

 

[Mulligan]

Preferred Stock Investing-The Good , The Bad and The In Between

Does that mean you paid $26.55 for the AILLL shares ?

Nope, I paid $26.60! A little over a month ago before the BGLEN frenzy, I decided the prudent thing to do would be to prune a small portion of my AILLL and sell a 1000 shares. I reached 500 shares sold between $26.75 and $26.85 and couldnt stomach selling any more of my original gold issues that started me down this very successful path a few years ago.... So I reversed course and over past couple weeks bought the 500 back at between $26.60 and $26.62.
So in essence I juiced the divi slightly this quarter.
The bottom line is this, I am quite comfortable as it as my lead dog. If a call happens, so be it, I have made very good money collecting juicy divis and flipping over and over early on before settling in with a huge amount of them. Despite my logical concerns, nothing has changed in the original thesis in owning... 1) Float issue to small to call and reissue. 2) Collective yield of all the companies issues are still UNDER par thanks to the old 4%, 1940s issued ones. This is important as they are used for rate hikes and are considered "cheap capital" to regulatory agency 3) Company due to huge cap ex expenditures is running cash flow negative, despite high profitability. No money laying around to call 6% issues when it can be used to generate 10% ROE.
4) 6.20% is almost 500 Bps above 10 year. It was less than 200 bps when issued in early 90s. Tremendous risk reward value for my specific needs.
But then again, I love PFK also... I would be quite satisfied to have all my money in BAA1 issues with a 2.5% base plus monthly CPI kicker that is paid monthly. Keep legging out them infield hits, with a few ground rule doubles (AILLL, BGLEN), and a rare swing for the fences for fun opportunities (examples PVTBP, CBB-B)


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[Coolius]

I was lost trying to find out how you bought at $25.60 when the past few weeks of trading was all around the $26.50 area.

Then it dawned on my slow & aging brain - $25.60 was your original price; you sold at $26.80 ( average ) and bought back at $26.60 ( average ). So the round trip made you a few dollars, and your original price is intact. Is this reasoning correct?

Since you did all this in your retirement accounts, you have no worries about the IRS reporting. In a taxable account, you would have had to report the first sale as a CG, then cost basis for your latest buy is $26.60.

Hope I'm thinking straight.....

 

[Mulligan]

For those interested in a bit more understanding of the thought process into calling a preferred, I thought I would give an example... On many occasions it isn't just "the yield is too high" or "it can be financed cheaper". With REIT preferreds the above is pretty much the reason, as interest reduction goes straight to the bottom line. But in utilities and banks it isnt so clear and thus where higher yield opportunities arise.
Take PVTBP, a trust preferred from Private Bank...Why would they have a 10% TRUP on the books? Only highly stressed companies have 10% debt right? Well not always...So they just love giving money away then? Well not really either..
See banks must have a certain amount of Tier 1 capital on hand. They used to accomplish by issuing debt (trust preferreds). Dobb/Frank Act eliminated that, but grandfathered smaller banks to where they could keep existing preferreds on the books. To keep their required Tier 1 capital intact but yet lower that cost of capital, they would normally have 3 options...1) refinance with lower debt yield 2) issue non cumulative preferred 3) Issue more stock... Well #1 is not possible as only grandfathered debt is allowed, any new issued debt would not be allowed to count by law...#2 option would be call and reissue non cumulative preferred stock as a substitute... Yet this is not interest, therefore they cant write expense off of income. 10% Trup for them is an effective 6.3% non cum. But recent bank issues of their ilk suggest this may not be quit possible, and that is before the underwriters clip them for around 4% in fees off the top...No savings there... Option #3... Issue more common stock well this results in earnings dilution and also makes "return on equity" look poor..Presently there "return on equity" is higher than the 10% rate of the TRUP. So this would not be efficient use of the capital. Plus management said in last conference call that "return on equity" is a high priority for them...So here is an effective example of why things are not so black and white on high issues not being called. Or at least presently have not been called. Sometimes you get caught in a box with no easy way out.


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[Mulligan]

Preferred Stock Investing-The Good , The Bad and The In Between

I was lost trying to find out how you bought at $25.60 when the past few weeks of trading was all around the $26.50 area.

Then it dawned on my slow & aging brain - $25.60 was your original price; you sold at $26.80 ( average ) and bought back at $26.60 ( average ). So the round trip made you a few dollars, and your original price is intact. Is this reasoning correct?

Since you did all this in your retirement accounts, you have no worries about the IRS reporting. In a taxable account, you would have had to report the first sale as a CG, then cost basis for your latest buy is $26.60.

Hope I'm thinking straight.....

No, IM THE DUMMY! I meant $26.60! It has been a long time since I could buy it at $25.60, unfortunately... Geez, I am so dense I had to read your post twice...My brain automatically transposed your $25.60 to $26.60 so I was trying to figure out what was going on...And I finally did...I typed it in wrong!!!!
PS.... I went up and edited it to correct price...If I could get it at $25.60 there would be some of my preferreds being jettisoned for more of that!


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[Coolius]

No, IM THE DUMMY! I meant $26.60! It has been a long time since I could buy it at $25.60, unfortunately... Geez, I am so dense I had to read your post twice...My brain automatically transposed your $25.60 to $26.60 so I was trying to figure out what was going on...And I finally did...I typed it in wrong!!!!
PS.... I went up and edited it to correct price...If I could get it at $25.60 there would be some of my preferreds being jettisoned for more of that!


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Ah, OK - so it WAS a typo after all.

I did think initially it was a typo, but when you responded to Sunset that your buy price was $25.60 ( in essence confirming it ) , I had to try and figure out how you came to that number.

Even a year ago, the prices were above that; most of my shares bought a year ago were at about $25.85 or higher.

At least you didn't have that "fat finger" when you chose to sell your AILLL - I would have scooped them up in a microsecond at $25.60!!

 

[Mulligan]

Ah, OK - so it WAS a typo after all.

I did think initially it was a typo, but when you responded to Sunset that your buy price was $25.60 ( in essence confirming it ) , I had to try and figure out how you came to that number.

Even a year ago, the prices were above that; most of my shares bought a year ago were at about $25.85 or higher.

At least you didn't have that "fat finger" when you chose to sell your AILLL - I would have scooped them up in a microsecond at $25.60!!

I must confess I got sloppy and in a hurry once and put a sell order $1 under what I meant. Fortunately it was only a 100 share order and bid was like a quarter less than what I meant to ask. And half were sold even closer to ask... I have had a couple times the opposite has happen the past month or so... Had an ask with no action, so change to sell at bid price and it sells immediately at a few cents higher than the original ask price I wanted that was getting no action...Very odd, but cant complain.


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[Golden sunsets]

Nope, I paid $26.60! A little over a month ago before the BGLEN frenzy, I decided the prudent thing to do would be to prune a small portion of my AILLL and sell a 1000 shares. I reached 500 shares sold between $26.75 and $26.85 and couldnt stomach selling any more of my original gold issues that started me down this very successful path a few years ago.... So I reversed course and over past couple weeks bought the 500 back at between $26.60 and $26.62.
So in essence I juiced the divi slightly this quarter.
The bottom line is this, I am quite comfortable as it as my lead dog. If a call happens, so be it, I have made very good money collecting juicy divis and flipping over and over early on before settling in with a huge amount of them. Despite my logical concerns, nothing has changed in the original thesis in owning... 1) Float issue to small to call and reissue. 2) Collective yield of all the companies issues are still UNDER par thanks to the old 4%, 1940s issued ones. This is important as they are used for rate hikes and are considered "cheap capital" to regulatory agency 3) Company due to huge cap ex expenditures is running cash flow negative, despite high profitability. No money laying around to call 6% issues when it can be used to generate 10% ROE.
4) 6.20% is almost 500 Bps above 10 year. It was less than 200 bps when issued in early 90s. Tremendous risk reward value for my specific needs.
But then again, I love PFK also... I would be quite satisfied to have all my money in BAA1 issues with a 2.5% base plus monthly CPI kicker that is paid monthly. Keep legging out them infield hits, with a few ground rule doubles (AILLL, BGLEN), and a rare swing for the fences for fun opportunities (examples PVTBP, CBB-B)


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Mulligan; I finally bought some of this yesterday. Can you tell me why the dividends are paid on the 30th of 3/6/9&12, but the ex-dividend date is 7/7. Does that mean the ex dividend date for the 9/30 dividend is July 7th, the ex div for the 6/30 having already passed? So in order to break even I have to hold my breath for 4 dividends starting 9/30 hoping that the issue won't be called? Is my thinking correct?

 

[Coolius]

Mulligan; I finally bought some of this yesterday. Can you tell me why the dividends are paid on the 30th of 3/6/9&12, but the ex-dividend date is 7/7. Does that mean the ex dividend date for the 9/30 dividend is July 7th, the ex div for the 6/30 having already passed? So in order to break even I have to hold my breath for 4 dividends starting 9/30 hoping that the issue won't be called? Is my thinking correct?

Golden Sunsets, are you referring to AILLL ?
Information on my broker site shows AILLL Ex-Div as July 7, and pay date as August 1st.

QOL gives different dates: 3/6/9/12 - so one of them's gotta be incorrect.

 

[Slow But Steady]

This morning somebody bit on the $27 sell order I had open for EYMXP. I bought it for $25.33 on 2/16, collected one $0.39 dividend, and sold for $27 on 6/28. Not bad, I guess, but I hate those short term capital gains.


And now I need to put the money back to work.

 

[Golden sunsets]

Golden Sunsets, are you referring to AILLL ?
Information on my broker site shows AILLL Ex-Div as July 7, and pay date as August 1st.

QOL gives different dates: 3/6/9/12 - so one of them's gotta be incorrect.

Right - I also noticed my broker now shows future receipts from AILLL starting in August, so Quantum must be incorrect. So I am only exposed by three dividends and only have to hold my breath until 4-7-17.

 

[Coolius]

Right - I also noticed my broker now shows future receipts from AILLL starting in August, so Quantum must be incorrect. So I am only exposed by three dividends and only have to hold my breath until 4-7-17.

I don't think you need to hold your breath that long; based on Mulligan's DD, and my own digging ( of much less value than Mulligan's ) , it does seem Ameren Illinois preferreds will be around for quite a long time.

I sleep well with AILLL, CNLPL, CNTHP and CNTHO in my portfolio.

 

[Mulligan]

This morning somebody bit on the $27 sell order I had open for EYMXP. I bought it for $25.33 on 2/16, collected one $0.39 dividend, and sold for $27 on 6/28. Not bad, I guess, but I hate those short term capital gains.


And now I need to put the money back to work.

Slow, I do this all the time with the "yield exposed issues". I think what you did was very prudent. Just keep it on your watch list and and some point it may drift back into your "call risk/reward" price point again. I think I mentioned before, but I think it prudent with preferreds to think of the cap gains as "prepaid dividends". So in 4 months you snagged (including at least one captured divi) way over a years worth of divis, plus the money can be used to capture additional dividends with a new purchase. As you drift higher with purchases further above par, you have to look to get in and out to capture profits without getting potentially hit with a call.


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[makd]

First, thanks to all in this thread, especially Mulligan. It's very cool to have this discussion and explain the thinking... I've been learning and have a question:

I know that getting a good price is important when buying (duh!) but looking at a security like CNTHO which is priced at $51.40 and callable at $51.43, what is the downside to buying at current levels if one wanted to hold it and collect the dividend?

It would seem to me that, if it doesn't get called, you get the dividend. If it does get called, you're getting out at your entry point, so you have no loss. Heads - make 5%, Tails - lose 0.

There's probably more to it than that that I'm not seeing. I'd appreciate any thoughts...

 

[Mulligan]

Good question, Makd... And it all boils down to how much you worry about capital preservation or just want the dividend and do not worry about net value... With CNTHO, the risk here is really never payment, and since bought at par, call risk is of no concern. Price risk is your real worry if that matters... If our rates slog along at these low levels, you may not be exposed much at this time..But...At beginning of 2008 when 10 year treasury was 3.24%, CNTHO appeared to be trading a bit under $45... In 1998 when 10 year was 5.54%, CNTHO traded around $30. Obviously nobody wants to pay 5% for a utility preferred if absolute safety of 10 year yields more... So a 5% CNTHO issue is more exposed to rate risk than sister issue CNTHP 6% . However CNTHP being above par is for now more exposed to loss of a call risk. So its a push pull choice.. Less call risk go CNTHO, higher yield, increase call risk with CNTHP.
That is why Coolius and I try to walk a fine line of maximum yield while trying to attempt to skirt a call. BUT....It has now got to the point with issues bidded up where we are balancing a bit with lower issues and below par purchases such as CNTHO for Coolius, and CTWSO for me. We both own HAWEL for same reason...
Two years ago it was a no brainer.. Buy CNLPL and AILLL about a divi above par and collect 6.4% or so..Now its buy 3/4 divi above par and get 6% ish... So a little spreading of the bets has started to occur for us.


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