Preferreds Weekly Evaluate: New Issuance Is Low-cost To Current

Welcome to a different installment of our Preferreds Market Weekly Evaluate, the place we talk about most well-liked inventory and child bond market exercise from each the bottom-up, highlighting particular person information and occasions, in addition to top-down, offering an summary of the broader market. We additionally attempt to add some historic context in addition to related themes that look to be driving markets or that buyers should be aware of. This replace covers the interval by way of the final week of March.

Remember to take a look at our different weekly updates protecting the enterprise growth firm (“BDC”) in addition to the closed-end fund (“CEF”) markets for views throughout the broader earnings area.

Market Motion

Preferreds underperformed this week, primarily as a consequence of REITs, however the broader area nonetheless managed to eke out a optimistic whole return over March. Over the month, all however one sector (the single-issuer BDC sector) have been up.

The preferreds sector has loved the longest rally since 2021 however stays effectively off its 2021 excessive in worth phrases. This highlights that yields are nonetheless considerably above their 2021 ranges.

From a complete return perspective, preferreds have almost reclaimed their 2021 highs, owing to substantial dividends earned within the final 2-3 years.

Market Themes

Two latest points have illustrated the widespread sample of latest issuance coming in cheaper, i.e., at higher-yields than current securities of the identical issuer. The rationale for that is pretty intuitive – if new issuance have been costlier it would not appeal to a lot demand. And two, the next yield to current issuance provides the bookrunners a margin of security to position the safety.

There have been two examples this week of issuers pricing securities above the yields of their current ones. First was the CLO CEF Eagle Level Revenue Firm (EIC). It’s issuing an 8% 2029 most well-liked (EICC). The fund has two different preferreds excellent – EICA and EICB with 2026 and 2028 maturities respectively and yields of round 7.7%.

EIC is a lower-octane CLO CEF than one thing like OXLC, ECC and OCCI due to its sizable CLO Debt allocation. That is one cause why EIC preferreds (as XLFT.PR.A) are likely to commerce at a decrease yield than the preferreds of CLO Fairness CEFs.

The second instance was a bond issued by the BDC Trinity Capital (TRIN) which introduced a brand new 7.875% 2029 bond (TRINZ) with a primary name in 2026. The corporate’s different child bond – the 7% 2025 TRINL – has been buying and selling at a lot decrease yields, at the moment at 7.08%, not often dipping under par. This 0.8% yield pick-up over an current challenge is without doubt one of the largest we’ve got seen.

Using proceeds mentions redeeming the KeyBank credit score settlement and presumably the 2025 bond. Refinancing the credit score facility in all probability is sensible because it prices round 0.65% greater than the brand new bond and it has further covenants which the brand new unsecured bond doesn’t. Refinancing the 2025 bond is a bit odd given its 7% coupon which has one other 10 months to run. Perhaps the corporate is wanting on the tight credit score spreads and thinks that is nearly as good as it may get for issuance even when Treasury yields usually are not all that low.

Between these two points, we’d contemplate including TRINZ not a lot above par because it’s prone to rally to a comparable yield as TRINL, notably if TRINL is partly or totally redeemed. So far as EICC, we proceed to favor OXLC bonds within the broader CLO CEF senior safety sector given their yields akin to EIC preferreds with a a lot stronger asset protection profile, regardless of the higher-beta nature of the OXLC CEF.

The important thing takeaway right here is that buyers should control new points each as tactical alternatives in addition to a method to improve their current holdings.

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