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

[Mulligan]

I might take a flyer on this after a bit...


I remember when I was young and working for a bank that went under... there was one guy who bought up a LOT of pref shares at 1 cent per share... when it came out of BK they went back up to $25... he made millions....

There is no way this will be the same as it will never get down that low... but XKE is based on a bond and not pref so it is higher in the chain...

I need to look and see where these bonds fall... probably unsecured and at the bottom of the $5 bill owed...

My bet its bottom of the barrel subordinated debt. Its went full circle now. The issuing agency of XKE went bankrupt and now the debt held in trust went bankrupt. Well at least the trustee didnt go bankrupt. I will leave this trade for you Texas. I havent had a bid to buy or sell anything this week let alone buy or sell. Highly unusual for me. I suspect this will continue. Nothing I want to sell and nothing I want to buy.

 

[Texas Proud]

My bet its bottom of the barrel subordinated debt. Its went full circle now. The issuing agency of XKE went bankrupt and now the debt held in trust went bankrupt. Well at least the trustee didnt go bankrupt. I will leave this trade for you Texas. I havent had a bid to buy or sell anything this week let alone buy or sell. Highly unusual for me. I suspect this will continue. Nothing I want to sell and nothing I want to buy.

In the end I probably will do nothing... just some speculation....

If they reduced debt, how much do they need to do so Will this be cut by 80%? Will this be converted to common?

The last big retailer that I knew who failed was Sport Authority and they went Ch 7... HMMM, I just remember Gander Mtn was closing shop... maybe look into what happened to them...

 

[Running_Man]

This bankruptcy is not a well planned bankruptcy, a month ago the “experts” were sure Toys R Us would gain an extension on it’s debt, mere word of a possible bankruptcy and credit got shut off for the company. With no credit they have no merchandise, so they had to file. From what I understand and this is a private company so data is not as easy as a public company, it is a very complicated corporate structure with finance companies real estate companies international companies, warehouse companies and inter-company transactions occurring all over the place. It is likely the unsecured debt is with companies with as few assets as possible to attach to, KKR would have been working on this from the start and they have had 12 years to do so.

This is merely one company that is blowing up, but it shows what happens when credit shuts down and you have debts, you are powerless to do anything. Everything Toys R Us can do is done by Target, Wal-mart and Amazon. It would seem this is a permanent death knell for Toys R Us last year cash flow from operations were ZERO before any financing costs and pricing is only getting tougher — who will buy Christmas gifts from there if you are not sure if you’ll be able to return them, when you can buy the same thing cheaper on Amazon. I expect Toys R Us will implode and go away.

 

[Texas Proud]

This bankruptcy is not a well planned bankruptcy, a month ago the “experts” were sure Toys R Us would gain an extension on it’s debt, mere word of a possible bankruptcy and credit got shut off for the company. With no credit they have no merchandise, so they had to file. From what I understand and this is a private company so data is not as easy as a public company, it is a very complicated corporate structure with finance companies real estate companies international companies, warehouse companies and inter-company transactions occurring all over the place. It is likely the unsecured debt is with companies with as few assets as possible to attach to, KKR would have been working on this from the start and they have had 12 years to do so.

This is merely one company that is blowing up, but it shows what happens when credit shuts down and you have debts, you are powerless to do anything. Everything Toys R Us can do is done by Target, Wal-mart and Amazon. It would seem this is a permanent death knell for Toys R Us last year cash flow from operations were ZERO before any financing costs and pricing is only getting tougher — who will buy Christmas gifts from there if you are not sure if you’ll be able to return them, when you can buy the same thing cheaper on Amazon. I expect Toys R Us will implode and go away.

A possibility, but that has been said of Sears for at least a decade... maybe longer...

The bond in question is a liability of the parent... I do not know which legal entities went into BK.. I have read that foreign companies did not... probably also the RE did not..

I will probably stay away from it as the potential gain is not worth the potential costs... if it were down to less than a penny per dollar I might think different... throw $1,000 for a potential $100,000...

 

[Running_Man]

A possibility, but that has been said of Sears for at least a decade... maybe longer...

The bond in question is a liability of the parent... I do not know which legal entities went into BK.. I have read that foreign companies did not... probably also the RE did not..

I will probably stay away from it as the potential gain is not worth the potential costs... if it were down to less than a penny per dollar I might think different... throw $1,000 for a potential $100,000...

Sears never filed for bankruptcy and Lampert has been using his control of the corporation to utilize time to pull assets away from a possible bankruptcy filing and keep the real estate assets for himself — this included giving Craftsman brand rights away to the PBGC in order to stop a forced bankruptcy.
Sears instead has been selling assets on an ongoing basis in order to continue to fund operations even in the face of huge negative cash flow. If Sears had declared bankruptcy Lampert would not have been able to transfer ownership of the assets and the bankruptcy would have crushed him, debtors would have been paid and Sears would now be gone instead when they go bankrupt soon losses can now all be held by debtors business will go away and Lampert will have kept a fortune.

By the end of this year both Sears and Toys will be in bancruptcy and there is going to be downward pressure on rents for retail space next year as a huge amount will be opening up as after this Christmas it will be apparent these locations can no longer be rented to the original tenants.

All that being said it is true that valuing what a bond may be worth is difficult and subject to large upward gains when more is received than expected and could be an outlier on potential returns, that is why there are vulture investing firms to extract maximum leverage from an investment in distressed debt. My take is more on the overall outlook on the REIT environment and retail rent costs in general. But I do not see a corporate upside similar to the Kinder Morgan upside when they cut dividends on their poor results.

 

[Texas Proud]

Yes I know Sears has not filed, but it has been on many lists of 'who will be gone this year'.... Lampert has done a great job of wringing money out of this stone and from what I read awhile back he has all the good RE locked up...

I did see a article that talked about 300 retailers that have already filed for BK this year!!! Looked it up to link...

Retail bloodbath: Bankruptcy filings pile up - Jun. 13, 2017


Yes, the mall is dying....

 

[Mulligan]

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

Texas that Toys 3rd party trust issue in prospectus lays out the bankruptcy procedure in the prospectus....Good luck figuring it out!

 

[Texas Proud]

Texas that Toys 3rd party trust issue in prospectus lays out the bankruptcy procedure in the prospectus....Good luck figuring it out!

It must be nice to be able to put these things together....

The underlying security is a Toys R Us bond that pays 8.75%.... but XKE pays 7.75%.... so Lehman was skimming 1% off the top...

It does make it easier to trade etc., but a 1% skim?

Might have to check some of the others that are ABS.... see if they are costing me a fee...

Then again, all I was doing with this issue was flipping... so no big deal...

 

[Mulligan]

I doubt that is so...The underlying bond was issued in 1991... Lehman issued this in 2001. They more than likely bought these in open market at under par prices. There will be a skimming as they turned the issue into a retail consumption issue from a bond. The prospectus has a lot going on here...Way more than the traditional 3rd party trust issues I have had in the past.

 

[Texas Proud]

I doubt that is so...The underlying bond was issued in 1991... Lehman issued this in 2001. They more than likely bought these in open market at under par prices. There will be a skimming as they turned the issue into a retail consumption issue from a bond. The prospectus has a lot going on here...Way more than the traditional 3rd party trust issues I have had in the past.

Yes, lots of info that you have to really look for to get...

First, the securities are designed to match the principal of the bonds... so I do not think they paid a premium...

Second, the A-2 certificates pay 1% and are interest only on the notional amount of the underlying bonds... so there is a 1% skim...



From the prospectus... my bold..


Certificates ........................ The Class A-1 Certificates are being offered hereby and will be issued pursuant to the Trust Agreement. The Trust will also issue Class A-2 Certificates, which are not being offered hereby. The Class A-2 Certificates will bear interest at an annual rate of 1.00% on a notional principal amount equal to the outstanding principal balance of the Underlying Securities. The Class A-2 Certificates will be interest-only certificates, and will not entitle holders thereof to distributions of principal.

 

[Mulligan]

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

I took that to mean the certificate owners were receiving that. BUT, I didnt research this one too thoroughly. But I have owned several 3rd party trust and none of them had any intentions of matching the yield of the underlaying bond. They paid more or less depending on yield when the brokerage bought the bonds and turned them into retail consumption. They did it differently besides the Class 2 stuff.. For example KTH pays an additional $2 at maturity so maturity date price is higher than issue par price was. Some were actually synthetic adjustables to where brokerage pocketed the spread of the synthetic adjustment off the fixed underlying yield of bond. If it ever got where the adjustment was higher than the fixed underlying bond, they would just simply call the trust certificate.

 

[Texas Proud]

I took that to mean the certificate owners were receiving that. BUT, I didnt research this one too thoroughly. But I have owned several 3rd party trust and none of them had any intentions of matching the yield of the underlaying bond. They paid more or less depending on yield when the brokerage bought the bonds and turned them into retail consumption. They did it differently besides the Class 2 stuff.. For example KTH pays an additional $2 at maturity so maturity date price is higher than issue par price was. Some were actually synthetic adjustables to where brokerage pocketed the spread of the synthetic adjustment off the fixed underlying yield of bond. If it ever got where the adjustment was higher than the fixed underlying bond, they would just simply call the trust certificate.

The A-2 certs were kept by Lehman as part of their compensation... there is a possibility that they could have been sold but I doubt it...

There is always a residual holder on all trust... when I was dealing with them they were usually a tranche called Z...


I would have to see what yields were at various times, but they could have paid less than par to buy the bonds...

 

[Mulligan]

The A-2 certs were kept by Lehman as part of their compensation... there is a possibility that they could have been sold but I doubt it...

There is always a residual holder on all trust... when I was dealing with them they were usually a tranche called Z...


I would have to see what yields were at various times, but they could have paid less than par to buy the bonds...

Yes they all are a little different....In the case of CVB and KCC brokerages kept the call warrants to pocket the spread on a call if one occurred and it did. Take KCC they called and then reissued the bonds to somebody who wanted them at 20% premium and pocket it. Some trusts dont have that provision...KTH is uncallable.
These things have kind of faded out of style. Most were issued turn of century. All but the scumbag bonds were called long ago.

 

[Mulligan]

Couldnt help myself. Flipped out RNR-C for a quick gain...Bought a more illiquid convertible preferred from plastics manufacturer A Schulman that has been around the block a long while. Preferred is SLMNP. 7% QDI allowing for accrued divi to date. Goes exD $15 divi next month

 

[Texas Proud]

Yea, I have been hit with a number of calls.... but if I were in charge of the companies and had the ability to refinance at a lower cost I would... so I cannot begrudge the companies that are doing so...



As for the flipping.... I decided to take some money and trade, buying before ex-div date and then selling soon after... at first I got hit with a big price drop on one but I persisted... I am very close to one year and I think the results are pretty good.... with one sell left before my final year number I have....

15 total trades
23 days avg holding period
2 sold before divi because price increased enough for me
Best annualized return was 172% on the Toys R us
Worst annualized was -126%

Avg amount invested was $11,726
Total net income was $1,445

Since I still have a couple of weeks left it calculates to annual return of 12.6%.... I figure I made an extra $700+ doing this... might not be worth it, but it is something to do...

OK.. an update... with 5 days to go to equal one year I think this will be it... I just sold out of two holdings because the price rose more than half a divi after I bought... so I made more money than I was expecting with fewer days...

Avg investment was $11,828
Net income was $1,879
Return was 15.9%...

NOT BAD!!! Probably an extra $1,000 than if I had not done it..

My last 3 trades have been the most profitable... last one being held 3 days with a 415% annualized return...

I think I am going to change my tactics and buy them much sooner than I started and sell when people come in to buy a divi....


BTW, if you would have thrown out my one bad trade when I started I am going at a 24% annual return...

 

[Running_Man]

As a comparison for you in 2016 my preferreds returned +8.17% and so far in 2017 +11.23% so you are crushing my longer term holding strategy

 

[Mulligan]

Congrats Texas! I am a bit opposite than RM. My 2016 was higher than 2017. But 2016 and 2015 were real high... I havent had the flip opportunities as last year. I havent checked recently so I am guessing. But I think I am more around a bit over 10% this year and higher the previous 2 years.

 

[Texas Proud]

As a comparison for you in 2016 my preferreds returned +8.17% and so far in 2017 +11.23% so you are crushing my longer term holding strategy

Well, I did some looking and low and behold....

The first 6 months I had two bad trades and lost money... the last 6 months I have made really good money...

So, last 196 days I have an annualized return of 33%!!!

Hope I can keep this up...

 

[Mulligan]

Your post made me think...My returns are going down, because I have been burrowing down into more illiquids that simply dont trade. The “action” has been on the higher yielding / risk issues lately and I shy away from those. Plus I have been getting into more term dated issues that dont move as much. I also mentally wiped off some fanthom profits. For example somebody bought 3 shares of MSEXP at $194.50 today which is over 1/3 higher than my basis cost. That 5k gain I am not even recognizing in my gains. Though its possible it may not trade for years again like in the past.

 

[1-31-18]

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

A couple questions for you preferred investors (pun intended):

In an equity / bond allocation, how do you personally account for preferred -- as equity, or as bonds? I treat PFF as 50 percent of each, in line with its beta, which I think is about .50.

In an about-to-retire-and-start-drawing port, and without reliance on a pension, SS or other fixed income, how much would you consider it safe to allocate to preferred?

Example: If I go to 35 percent (common) equity, 50 percent preferred, 15 percent bonds and cash, am I at about 60 / 40? Am I crazy? Asked because I like the yield and can live off of it, but don't want extraordinary volatility (beyond 60/40).

 

[Mulligan]

That is a tough question 1-31-18..... The experts say an aggressive portfolio would not exceed 20% allocation. But this assumes the normal risk that preferreds entail. Some are safer than most bonds. Some are term dated to ensure capital preservation. I would not treat PFF as my sole allocation to preferreds due to its excessive concentration risk in financials. That doesnt mean I dont think its bad, just clarifying that I dont think its a “preferred index fund”. I dont have an allocation because I live off my pension. Plus being a bit determined I can root into obscure illiquid high quality issues that I trust more than most bonds. I also have
sector and term diversity... specialized plastics, water ute, gas ute, electric ute, railroad, reits, Mreit, bank, MLP, and conglomerate preferreds. The term dates mitigate a bit of the perpetual yield curve they trade off. But ultimately safety of dividend trumps most, though a few are a yield reach on purpose.

 

[Sunset]

A couple questions for you preferred investors (pun intended):

In an equity / bond allocation, how do you personally account for preferred -- as equity, or as bonds? I treat PFF as 50 percent of each, in line with its beta, which I think is about .50.
....
Example: If I go to 35 percent (common) equity, 50 percent preferred, 15 percent bonds and cash, am I at about 60 / 40? Am I crazy? Asked because I like the yield and can live off of it, but don't want extraordinary volatility (beyond 60/40).

I consider preferred as bonds, because the base price really won't rise in the common situation very much at all. So I think of your allocation as 35 / 65

I'm also buying them for the payment, and not for the thought they will double in price in years, just like bonds.

I am in the same situation, no pension.
My allocation to normal stocks is about 80% (probably too high), but I would not like to go lower than 50%, so I find your allocation very low.

I think my allocation for preferreds is 5% or less.

Here is the trap with preferreds, I compared PFF with VTI over the past 10 years.
The blue line is PFF and VTI is the dark line.

 

[Mulligan]

I consider preferred as bonds, because the base price really won't rise in the common situation very much at all. So I think of your allocation as 35 / 65

I'm also buying them for the payment, and not for the thought they will double in price in years, just like bonds.

I am in the same situation, no pension.
My allocation to normal stocks is about 80% (probably too high), but I would not like to go lower than 50%, so I find your allocation very low.

I think my allocation for preferreds is 5% or less.

Here is the trap with preferreds, I compared PFF with VTI over the past 10 years.
The blue line is PFF and VTI is the dark line.

Unless one is dumpster diving ( another form of preferred investing which I dont partake in though) the coupon is the max one can realistically achieve and less if rates rise...However I reinvest all proceeds so yield will improve if price drops.

 

[1-31-18]

A couple responses:

I mentioned PFF as a proxy for the preferred market, not as an intended sole investment. I'm too busy now to hunt for individual stocks like you guys do, but I can construct a diversified preferred port when retired.

PFF got clobbered in the financial crisis because the big banks almost went lights out. If you are willing to bet, like I am, that Dodd-Frank will preclude a rerun of that, then PFF won't get hurt nearly that badly in the next (or any) recession or financial crisis.

Also, the PFF dividend yield skyrocketed when the price crashed. Good for a buy and hold preferred fund investor. And if the dividend yield declines when rates rise, that doesn't hurt a buy and hold preferred investor, either. Am I correct?

Maybe a 40 common / 40 preferred and bidco and REIT / 20 bond allocation is what I really need, as that is a proxy for 60 / 40, I'm thinking. I just can't stand the thought of putting 40 in bonds, because there is no yield there, such that I'll need to sell them to fund withdrawals at even a 3 percent withdrawal rate. Comments?

 

[Mulligan]

Just to clarify, I wasnt imply PFF was dangerous. Just stating the composition as some are not familiar with the internal issues held within. Some people do a pair trade of PFF and PXFX as it holds separate issues from financials. One cant control yield curve risks in perpetuals but they can control sector concentration risk if they so choose. The one way to control yield
Curve risk is buy purchasing term dated issues which I have several. But I am not aware of any such type fund that focuses in that.
Dividend yields will RISE when rates rise as prices of your preferred stocks will drop in relation to that...Yellen just came out today saying they have been wrong on job growth and inflation pressure and will be more accommodative going forward. This should near term put less pressure on preferred stock prices as yields wont be going anywhere soon...Lower for longer as always....But I still like having my term dated issues in the fold. Did buy some RILYL today as a bit of a yield goose for my stash.