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

[Mulligan]

So Mul, seeing I just saw this and don't have much time to do the research on SPLP-A, what is the expected return here? Going back to the original offering price at call, Something else besides the dividend?

Its a split maturity issue...In February 2020 you will be allowed to tender 20% of your total shares (its a pro rata system) for $25 cash.. So you buy at say $21 for example, you get the going 7% plus current yield and then the $4 cap gain at that time...In 2026 the other 80% mature at $25... Now it is written in there they can tender common shares in lieu of dividends and at maturity...But the 20% put is cash in 2020. They have had 3 divis and they paid in cash. I suspect the share offering is in case they dont have funds/financing ability in 2026 and just as a protection mechanism. Not totally unique. several preferreds I have come across have this mentioned...
The market is closed so you got time...Go to Seeking Alpha and under SPLP there are a few good articles about it and the actual preferred. Read the comments sections as they flush out some incite...This isnt buying Connecticut Light and Power way below par type issue.. But people smarter than me say it has a strong balance sheet, but it is insider controlled and several hedge funds are in the commons besides the head huncho Lichtenstein.
Its not like I am betting the ranch on this...But risk/reward seem palatable to me for what I am in at. If long rates rise say 100 basis points in a year or two one will be glad to have an income issue that will actually return their capital to them at par. That is why I have bought a few of these types recently.

 

[bobandsherry]

I agree Bob, HNH is the rope yanking the curtain here. Smarter people than me can play the opposite side of trade temporarily or even arbitrage HNH also. I just simply am looking at it from Feb. 2020 and 2026 term dated points of view and accepting the long end result. SPLP raised the offer in preferreds already from first original offer just going from memory. As I never had any interest in playing HNH if trade didnt go through or whatever, because it is up bigly the past year also. I know ultimately what I am getting from SPLP-A or at leas the basic terms. I dont know what would happen to HNH if it didnt close. But since SPLP already owns 70% of the shares to begin with, I imagine its going to get through.

Totally get your approach with getting in on the stock. Much better return than what 10 year treasury pays, so using that as benchmark the expected return with partial redemption and maturity face value seems to be pretty good even factoring in the risk.

The original price ($29/share) is was SPLP valued HNH at, so I just used that as being a fair value and then applied the conversion rate to guesstimate where this would settle.

But, like you, not sure what happens if the offer doesn't get fully executed. Think that with SPLP owning majority of the shares they would do reverse stock split to drive other remaining shareholders to fractional shares and then just pay them out that way?

 

[aja8888]

Its a split maturity issue...In February 2020 you will be allowed to tender 20% of your total shares (its a pro rata system) for $25 cash.. So you buy at say $21 for example, you get the going 7% plus current yield and then the $4 cap gain at that time...In 2026 the other 80% mature at $25... Now it is written in there they can tender common shares in lieu of dividends and at maturity...But the 20% put is cash in 2020. They have had 3 divis and they paid in cash. I suspect the share offering is in case they dont have funds/financing ability in 2026 and just as a protection mechanism. Not totally unique. several preferreds I have come across have this mentioned...
The market is closed so you got time...Go to Seeking Alpha and under SPLP there are a few good articles about it and the actual preferred. Read the comments sections as they flush out some incite...This isnt buying Connecticut Light and Power way below par type issue.. But people smarter than me say it has a strong balance sheet, but it is insider controlled and several hedge funds are in the commons besides the head huncho Lichtenstein.
Its not like I am betting the ranch on this...But risk/reward seem palatable to me for what I am in at. If long rates rise say 100 basis points in a year or two one will be glad to have an income issue that will actually return their capital to them at par. That is why I have bought a few of these types recently.

Thanks. I'll have a look at the SA articles.

 

[Mulligan]

Thanks. I'll have a look at the SA articles.

Additionally as birds eye amateur analysis I will add this...SPLP-A was issued as a 6% preferred...It NEVER traded at $25. When this was issued 6% meant investment grade preferreds. I would suggest this really a 6.5%-7% payer if it was perpetual. But SPLP got off cheap issuing them originally at 6% as a Steel Exel buyout. That is all they are paying from par. But basically everyone after Steel Exel has gotten a decent deal in after market trading...HNH knew this wasnt a 6% par issue so they demanded and got more shares in buyout (assuming it goes through). The true hidden value is the put that Mario Gabelli made them insert to get the majority of Steel Exel on board. This put really gooses returns here and limits long term capital exposure. But market wont really reflect it in price yet. It will be interesting to see how this trades as it approaches 2/2020. I cant believe a total free lunch will be here with it staying at $21 with a huge cap gain for the taking on 20% of
Ones shares.

 

[Mulligan]

Totally get your approach with getting in on the stock. Much better return than what 10 year treasury pays, so using that as benchmark the expected return with partial redemption and maturity face value seems to be pretty good even factoring in the risk.



The original price ($29/share) is was SPLP valued HNH at, so I just used that as being a fair value and then applied the conversion rate to guesstimate where this would settle.



But, like you, not sure what happens if the offer doesn't get fully executed. Think that with SPLP owning majority of the shares they would do reverse stock split to drive other remaining shareholders to fractional shares and then just pay them out that way?

I only know enough to be dangerous, but SPLP, just couldnt ram rod an unfair proposal down the throats of the trading float holders. I thought the majority had to approve...Dont quote me on that but input and consent from them has to occur. They would get sued over that. But I dont know who holds the remaining 30%. The majority could be held by only a few people or entities and they may have been broached to reach a fair offer. This happened with Steel Exel I know. I just didnt follow the Handy buy out situation that closely other than I knew it would effect price of SPLP-A for awhile. It will be interesting. This will increase float, so volume will not probably return to its original level. And the issue will certainly be more liquid than the common.

 

[bobandsherry]

I only know enough to be dangerous, but SPLP, just couldnt ram rod an unfair proposal down the throats of the trading float holders. I thought the majority had to approve...Dont quote me on that but input and consent from them has to occur. They would get sued over that. But I dont know who holds the remaining 30%. The majority could be held by only a few people or entities and they may have been broached to reach a fair offer. This happened with Steel Exel I know. I just didnt follow the Handy buy out situation that closely other than I knew it would effect price of SPLP-A for awhile. It will be interesting. This will increase float, so volume will not probably return to its original level. And the issue will certainly be more liquid than the common.

Reverse stock split can be used to force out minority shareholders and does not require approval of shareholders. SPLP is clearly majority shareholder and with control of the HNH Board.

REVERSE STOCK SPLITS CAN BE USED TO FORCE OUT MINORITY SHAREHOLDERS, SAYS WASHINGTON SUPREME COURT

Unclear as to how many shares remain unexchanged, but I would expect that SPLP would negotiate with significant minority shareholders, but then easy way to take out the remainder.

For something that was obscene to investors in regards to reverse stock split (along with price dilution):Ocean Rig Nearly Wipes Out Retail Shareholders

 

[Mulligan]

Reverse stock split can be used to force out minority shareholders and does not require approval of shareholders. SPLP is clearly majority shareholder and with control of the HNH Board.



REVERSE STOCK SPLITS CAN BE USED TO FORCE OUT MINORITY SHAREHOLDERS, SAYS WASHINGTON SUPREME COURT



Unclear as to how many shares remain unexchanged, but I would expect that SPLP would negotiate with significant minority shareholders, but then easy way to take out the remainder.



For something that was obscene to investors in regards to reverse stock split (along with price dilution):Ocean Rig Nearly Wipes Out Retail Shareholders

Interesting read, but I dont see us in disagreement...As my focus was on “fair value” not the actual mechanism of a reverse split. The article stated this was a state ruling and others have went the opposite way and disallowed the process too. Fair value must still be given even in a reverse split (of course that term may be subject to debate amongst owners). Ownership is pretty smart. My betting money would be on them already knowing they got enough tenders in hand.

 

[bobandsherry]

Interesting read, but I dont see us in disagreement...As my focus was on “fair value” not the actual mechanism of a reverse split. The article stated this was a state ruling and others have went the opposite way and disallowed the process too. Fair value must still be given even in a reverse split (of course that term may be subject to debate amongst owners). Ownership is pretty smart. My betting money would be on them already knowing they got enough tenders in hand.

Um... I guess I wasn't clear in my comments. I didn't say or mean to insinuate that residual shareholders wouldn't be given fair market value. Also, it's clear by how Gabelli had forced the 20% required redemption in 2020 that SPLP had engaged with key stakeholders.

My original question was only how HNH/SPLP could ensure that the offer was executed. It seems that 100% exchange would be difficult with company that has retail investors so suggested that RSS could be way to clear the field if there were stragglers. Is there another option that could be pursued? Asking for my own knowledge.

 

[Mulligan]

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

We were just coming at the thought from different angles. You have a good question that I dont know the full answer...But I know they can do one thing...Do nothing and let the shares float in the wind. SPLP has already said if they get half the stock it will cease to trade which means it becomes delisted. But the stock could trade on other exchanges. DMRR is a good example...It hasnt been an operating company for over a 100 years. CSX owns the majority of the commons but not all for most of this time in its previous formation prior to becoming CSX. The 10,000 common shares or so have just been left floating in the wind and it still trades a couple times a year.
BSND had insiders acquire so much that they were able to “go private” and delisted the stock. I bought a few shares several months ago just to get access to their financials, as by law they dont have to report anything (and dont).
But it is not in ones best interest to not accept as generally they just become illiquid and hard to unload since no sponsorship is there. This is where your suggestion of a reverse split comes in handy to rid the company of the nuisance pest minority shareholders. I have noticed on some companies balance sheets they will show a smattering of common stock shares outstanding from a subsidiary they completely control.

 

[Mulligan]

Bob, I suspect based on the way SPLP worded this that they will wrestle control of all of them after the merger is complete...Based on this article from Zacks if its correct and applicable to this situation which it appears.. They state if you dont tender you will keep them until formal closing them you will get what was originally offered anyways.
http://finance.zacks.com/happens-dont-tender-shares-10043.html

 

[bobandsherry]

^^ Thanks Mulligan.

 

[Mulligan]

^^ Thanks Mulligan.

Bob, are you thinking of jumping in? I dont remember if you said you were buying or not.

 

[Mulligan]

Not to worry, Pigpile - I sold HE-U in an attempt to flip it. It ran up to 28, as it had in the past, and I figured "It's easy money, I'll just buy it back when it drops to $26.30 or so."



I'm still waiting for that GTC to be filled at $26.30. I even tried bumping it up a few shekels to $26.50, but no dice. At least you did it for good reasons. I did it out of greed. And a desire to be like Mulligan.

So Moorebonds, where are you finding a home at for your MHO-A money?

 

[MooreBonds]

So Moorebonds, where are you finding a home at for your MHO-A money?

I'll probably upgrade my membership in the SPLP-A party. Currently have 250 shares, but will probably roll the dice and pick up another 100. Going over $5k in preferreds for an LP parent, with a "possible PIK" provision on a preferred requires me to step back and really take a long hard look diversification-wise, and isn't giving me a warm and fuzzy - but the YTM#1/YTM#2 and the "must call 20% in cash at Call #1" are enough for the greedy side of my brain to quiet down the nervous nelly side.

For those looking for some other opportunities, I've owned PFX for a while. It was a Phoenix Insurance bond, and was bought out by Nassau Reinsurance Group. The bond was delisted. Final maturity in 2032. 7.45% coupon on $25 par. Last traded about $19, which gives it a current yield of 9.8%, and a YTM of approximately 11.9% (depending on how you calculate it). I bought mine before it was delisted/bought out, and have a cost of about 24. Have 200 shares, tempted to maybe buy 100 more at these levels. There have been a few articles on SA about it over the months.

I have been receiving interest payments as scheduled.

 

[Mulligan]

PFX... I have been tempted as I have read, too. But there is always more under the covers here. Things arent the way they are without reason. And it has nothing to do with delisted, as I am trying to buy a delisted baby bond also except it is always around $28 way over par.
And if the company was so strong the acquirer would be snatching these up, which I highly doubt. That line has been trotted out before on another baby bond by “SA writers” before and I found untrue through SEC filings annual reports.
This Darren guy on there has pushed these bonds, but I have concluded after a few interactions ultimately he isnt any smarter than me. And that is not a complement.
Still they interest me and I am intrigued. But I need real info..What those bonds are backed by and who along with the finances supporting this specific bond. This is not a free gift from illiquidity. No way..So there is another reason(s) and that is what I would have to know. Do you have any financial info access to it Moorebonds?

 

[bobandsherry]

Bob, are you thinking of jumping in? I dont remember if you said you were buying or not.

I've been on the fence trying to come to terms that buying (taxable accounts) will complicate my tax filing as it seems yearly I'll need to file extension as K1 won't be delivered for April 15 filing. A dip below $20 may give a return that makes risk and hassle of additional tax headache worthwhile.

 

[bobandsherry]

Bob, are you thinking of jumping in? I dont remember if you said you were buying or not.

I've been on the fence trying to come to terms that buying (taxable accounts) will complicate my tax filing as it seems yearly I'll need to file extension as K1 won't be delivered for April 15 filing. A dip below $20 would give a return that makes risk and hassle of additional tax headache worthwhile.

 

[Mulligan]

I've been on the fence trying to come to terms that buying (taxable accounts) will complicate my tax filing as it seems yearly I'll need to file extension as K1 won't be delivered for April 15 filing. A dip below $20 would give a return that makes risk and hassle of additional tax headache worthwhile.

I keep being told its just one line simple interest income on the form. What you get on form is what you earn in income for this type of MLP preferred security. The two people who I trust who invest in MLPs forever say this specific type is nothing...But, I am not dealing with it having in tax deferred. I just dont think I could deal paying 30% of dividend in taxes, so I will not buy in taxable.
Besides, it may go lower while you ponder.

 

[bobandsherry]

I keep being told its just one line simple interest income on the form. What you get on form is what you earn in income for this type of MLP preferred security. The two people who I trust who invest in MLPs forever say this specific type is nothing...But, I am not dealing with it having in tax deferred. I just dont think I could deal paying 30% of dividend in taxes, so I will not buy in taxable.
Besides, it may go lower while you ponder.

30% tax on dividends? You non-US citizen or why 30% rate?

My concern with tax filing isn't with entering the K1 info, it's this from the prospectus:

However, it may require longer than 90 days after the end of our calendar year to obtain the requisite information so that IRS Schedules K-1 may be prepared by us. Consequently, holders of SPLP preferred units who are U.S. taxpayers should anticipate the need to file annually with the IRS (and certain states) a request for an extension past April 15 or the otherwise applicable due date of their income tax return for the taxable year.

I wrap up taxes by April 15, so having to file the extension each year is something I need to weigh into my decision.

 

[Mulligan]

30% tax on dividends? You non-US citizen or why 30% rate?



My concern with tax filing isn't with entering the K1 info, it's this from the prospectus:



I wrap up taxes by April 15, so having to file the extension each year is something I need to weigh into my decision.

No, Im heartland USA. Im in 25% Fed, 5.25% state bracket. I understand a delay being annoying, and certainly if it isnt a big investment (which I would never do here, lol).
It appears they set it up to directly download into Turbo for you. This link has a phone number. If you were interested they may be able to tell you when they make them available.
https://www.taxpackagesupport.com/steelpartners

 

[bobandsherry]

No, Im heartland USA. Im in 25% Fed, 5.25% state bracket. I understand a delay being annoying, and certainly if it isnt a big investment (which I would never do here, lol).
It appears they set it up to directly download into Turbo for you. This link has a phone number. If you were interested they may be able to tell you when they make them available.
https://www.taxpackagesupport.com/steelpartners

Thanks for the link Mulligan. I was never able to set-up IRA's, so no option for me to leverage pre-tax accounts. Fortunately, no state tax here and using post-tax investment I can keep my taxable to 0% or no more than 15% marginal for Fed.

 

[Sunset]

Thanks for the link Mulligan. I was never able to set-up IRA's, so no option for me to leverage pre-tax accounts. Fortunately, no state tax here and using post-tax investment I can keep my taxable to 0% or no more than 15% marginal for Fed.

Could you transfer a portion of your employer retirement fund to an IRA. Then you would have this "fun" option of investing.

 

[bobandsherry]

Could you transfer a portion of your employer retirement fund to an IRA. Then you would have this "fun" option of investing.

Good suggestion.... Yep, my plan let's me take partial distribution and move into IRA. But my 401K has returned 15% YTD (20% annualized if holds same return through end of year), so it's perhaps a trade off. But maybe a good option for some of the funds that have lower returns. Heading out for vacation so will take a look where SPLP-A is then and consider setting up an IRA, moving some funds and joining the "party".

 

[Mulligan]

Good suggestion.... Yep, my plan let's me take partial distribution and move into IRA. But my 401K has returned 15% YTD (20% annualized if holds same return through end of year), so it's perhaps a trade off. But maybe a good option for some of the funds that have lower returns. Heading out for vacation so will take a look where SPLP-A is then and consider setting up an IRA, moving some funds and joining the "party".

Of course I am just guessing, but I suspect you will have some time to reflect on this. This pressure on SPLP-A may take some time to fully unwind. Moorebonds is sitting patiently with bated breath waiting for that $20 spot to hit and pounce!

 

[bobandsherry]

Of course I am just guessing, but I suspect you will have some time to reflect on this. This pressure on SPLP-A may take some time to fully unwind. Moorebonds is sitting patiently with bated breath waiting for that $20 spot to hit and pounce!

Yep, being patient has seen the price drop by almost 4.5% so far. If I miss this one it won't be the first opportunity missed, and I'm sure it won't be the last. I just then look forward to what to do next.