November Overview in Income Investing
By: Tim McPartland,
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Recapping the important news in income securities in the last month. New issues, bankruptcies, major movers and dividend suspensions
New Issues in November of Preferred Stocks
There were two new preferred stock issues during November, as well as one new Baby Bond (exchange-traded debt issue).
Property and casualty insurer Endurance Specialty Holdings LTD (ticker: ENH) sold a Non Cumulative Redeemable preferred issue with a coupon of 6.35%. Standard and Poors has assigned a investment grade rating to the issue.
This issue traded on the OTC Grey Market prior to its listing on the big board. But with the modest coupon, the issue has continued to trade just under par in the $24.95 area.
While this issue is perpetual, we might have an interest in it if the Fed raises interest rates in December. A rate hike may cause the price of this issue to fall a bit (raising the current yield to new buyers). It would seem to us that a 6.5% or 6.6% yield on a investment grade issue would be reasonable.
This issue is non cumulative (dividends that are not declared will never be paid) which may deter some investors, but we are less concerned with this factor on a investment-grade issue.
Reinsurance company Maiden Holdings LTD (ticker:MHLD) sold a Non Cumulative Redeemable preferred issue with a coupon of 7.125%. Standard and Poor’s rated this issue two notches below investment grade.
The issue traded on the OTC Grey Market prior to its listing on the New York Stock Exchange. The issue is now trading on the NYSE at around $25/share.
Maiden Holdings currently has three Baby Bonds outstanding.
New Issues in November of Baby Bonds
United States Cellular Corporation (ticker:USM) sold a new issue $25 Baby Bond in November. The issue is one step below investment grade.
The coupon is a fairly attractive 7.25% for a relatively decent quality issue. The shares are now trading right around par ($25).
New REIT and MLP Issues for November
We don’t have any new REITs or MLPs to report on at this time
Distribution Suspensions
November was a calmer month than October for distribution suspensions in the Income Investing arena.
Advertisement. The following companies suspended distributions — none of them are particularly surprising.
Breitburn Energy Partners (ticker: BBEP) is a upstream oil and gas MLP. Distributions on the common units have been suspended.
Breitburn Energy Partners (ticker: BBEP) Perpetual Convertible Preferred distributions are now going to be paid in Common Units.
Yuma Energy (ticker: YUMA) is a tiny upstream oil and gas producer. They suspended their dividends on their 9.25% cumulative preferred stock (ticker: YUMA-A).
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MLP Merger
Midstream giant Markwest Energy Partners (ticker: MWE) has approved a merger with Marathon Petroleum-sponsored midstream player MPLX (ticker:MPLX).
This combination will create one of the largest Master Limited Partnerships in existence. The deal is expected to close in the next week.
Interest Rates
The 10-year treasury moved in a range of 2.18% to 2.34%, closing the month at 2.21%. We would consider this a tight range — Goldilocks like since it seemingly needed to be just right.
Recall from prior learnings that the level of rates is not likely as concerning as is the “rate of change.” Year-to-date the highest level we have seen on rates on the 10-year treasury is 2.49% back in June with the low at 1.67% way back in January. Only a very strong employment report is likely to move interest rates higher between now and the Federal Open Market Committee (FOMC) meeting on Dec. 16. A strong report moving the 10-year treasury by 20 basis points could knock stocks for a loop — more modest moves are not likely to cause stock reactions.
Advertisement. Additionally, if the FOMC meeting on Dec. 16 moves the Fed Funds rate higher, we could see a “knee-jerk” reaction that moves the 10-year treasury higher by 10-30 basis points. We would expect such a reaction to cause rates to once again drift down as the global economy shows little signs of life. Most likely this move would flatten the yield curve further (shorter term rates would move higher while longer-term rates would remain near current levels).
Economic News for the Coming Week
There really is just one item of huge importance this week in economic news and that is the employment report on Friday, Dec. 4.
The consensus is for 190,000 new jobs to be created in November, which is where it has been for the last 3-4 months. A strong number (consensus or higher) should cement the Fed Funds rate hike next week, while a weak number will bolster the argument for no hike.
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Tim McPartland
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Tim McPartland is a private investor with over 45 years of investing experience. His analysis, research and writing is devoted to the hunt for income producing securities of all types, but in particular specializing in preferred stocks, exchange traded debt and Master Limited Partnerships.
