CLO Closed-End Funds: Baby Bonds And Preferred Offering Steady Income

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CLO Closed-End Funds: Baby Bonds And Preferred Offering Steady Income

seekingalpha06-28

Suchat longthara Written by Nick Ackerman, co-produced by Stanford Chemist. Last fall, risk-free rates were climbing, and fixed-income instruments such as preferreds and baby bonds were also getting ...

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Last fall, risk-free rates were climbing, and fixed-income instruments such as preferreds and baby bonds were also getting ...</p>\n\n<a href=\"https://seekingalpha.com/article/4701499-clo-closed-end-funds-baby-bonds-and-preferred-offering-steady-income\">Source Link</a>\n\n</div>\n","source":"seekingalpha_fund","html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>CLO Closed-End Funds: Baby Bonds And Preferred Offering Steady Income</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nCLO Closed-End Funds: Baby Bonds And Preferred Offering Steady Income\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-06-28 22:20 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4701499-clo-closed-end-funds-baby-bonds-and-preferred-offering-steady-income><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Suchat longthara Written by Nick Ackerman, co-produced by Stanford Chemist. Last fall, risk-free rates were climbing, and fixed-income instruments such as preferreds and baby bonds were also getting ...</p>\n\n<a href=\"https://seekingalpha.com/article/4701499-clo-closed-end-funds-baby-bonds-and-preferred-offering-steady-income\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"EICC","symbol_name":"Eagle Point Income Company Inc","start_time":0,"source_url":"https://seekingalpha.com/article/4701499-clo-closed-end-funds-baby-bonds-and-preferred-offering-steady-income","article_id":"2446819936","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1485319523/image_1485319523.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2446819936","pubTimestamp":1719584449,"sourceInfo":{"source_id":"seekingalpha_fund","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"Suchat longthara Written by Nick Ackerman, co-produced by Stanford Chemist. Last fall, risk-free rates were climbing, and fixed-income instruments such as preferreds and baby bonds were also getting pressured lower. At that time, we had taken a look at some closed-end fund  preferreds and baby bonds that trade publicly for the collateralized loan obligation  CEFs. When risk-free rates move, it moves all other yields with it. Generally, the Fed has control of short-term rates by adjusting their target Federal Funds Rate. However, the longer-term risk-free rates move more on market demand and only loosely follow the Federal Funds Rate.   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Last fall, risk-free rates were climbing, and fixed-income instruments such as preferreds and baby bonds were also getting pressured lower. At that time, we had taken a look at some closed-end fund (\"CEF\") preferreds and baby bonds that trade publicly for the collateralized loan obligation (\"CLO\") CEFs. When risk-free rates move, it moves all other yields with it. Generally, the Fed has control of short-term rates by adjusting their target Federal Funds Rate. However, the longer-term risk-free rates move more on market demand and only loosely follow the Federal Funds Rate.   Ycharts Are These Still Worth Looking At For Income Investors? While the risk-free Treasury Rates have fallen from where they were last fall, that helped to ease pressure on these preferred and baby bonds that are offered by CLO funds. So, while they may not be just as appealing as they were then, they are still generally safer areas to invest in when one is looking for yield. They can deliver more predictable income because they are fixed-rate payers. They are safer because the underlying funds that issued them would have to see massive failures or blow-ups for preferred and baby bonds to start seeing losses. Historically, there has never been a closed-end fund that has gone bankrupt. Yes, it is quite true that during the Covid crash, the energy CEFs that were leveraged were hit particularly hard. Some liquidated at around the lows, but none went to $0. In hindsight, had those funds just stuck around, energy was set to rebound significantly, and some of those losses could have been recovered. That's a different subject, though, completely. The main point is that during that crash, several of these funds needed to deleverage, and that meant redeeming sizeable portions of the preferred and senior notes. In the case of Tortoise—one of the main energy CEF sponsors—not only were they redeemed at par, but they also had to pay a prepayment premium. That brings up the other point of why these offerings are generally safer because of the 1940 Act placing greater regulations on these funds. They come with leverage limits terms of 50% for preferred and 33.3% for issued debt (that's public debt offerings, not credit facilities, which are privately negotiated between funds and the banks offering the credit.) A further consideration for preferred and baby bonds, is if the Fed is cutting rates in the next year or two, that would once again make these even more tempting yields. That, in turn, could push these to trade back closer to their face value. Even in some cases, if the Fed cuts enough, it is quite possible to see these trade above par value. Of course, these instruments don't come with risks or downsides, and they are subject to investment losses. Another factor to consider is that these are all rather small issuances, and that means liquidity with these selections is rather poor. That can make it difficult to get into a large position or get out if you are more of a trader looking to get in and out quickly. A downside could be that the upside can be limited, unlike the common shares of Oxford Lane Capital Corp (OXLC), Eagle Point Credit Co (ECC), Eagle Point Income Co (EIC), XAI Octagon Floating Rate & Alternative Income Trust (XFLT), OFS Credit Company (OCCI) and Carlyle Credit Income Fund (CCIF). Investors holding those could, in theory, see unlimited and unrestrained upside over the long term. Baby bonds and preferred are going to generally be more anchored to their face value, particularly those that come with maturities. In reality, this hasn't been too much of a problem historically, as most of the CLO CEF share prices have declined over the long term.   CLO CEF Price Returns (Seeking Alpha) But that doesn't mean they haven't provided some decent returns. That then brings up the other point that the yields offered by the common are meaningfully higher as well. That results in total returns generally being positive despite share price deterioration.   CLO CEF Total Returns (Seeking Alpha) The trade-off for those higher yields is that those will be the first to be cut during an economic downturn when defaults are rising—as we saw during Covid. Still, given all these considerations, I believe that baby bonds and preferred from the CLO funds could still be worth pursuing. Though, they may be more appropriate for long-term income investors looking for more secure income. Updated Look At The Offerings Here is the breakdown of the baby bond and preferreds in the CLO space with data as of June 27, 2024.   CLO CEF Preferred/Baby Bond Data (Author)   Preferred/Baby Bond YTM Chart (Author) Since our prior update, we have two new offerings. That includes the Eagle Point Income Company 8% Series C Term Preferred Stock Due 2029 (EICC). These were issued on March 28, 2024, and the first call date is April 3, 2026, with maturity of April 30, 2029. This one pays monthly, and as is naturally the case with a higher yield environment now upon us, the annual coupon rate came out at 8% here. The fund's other preferred enjoys a 5% (EICA) and 7.75% (EICB) fixed rate. Those were issued on October 19, 2021, and July 21, 2023, respectively. It also includes an offering from the newer CLO CEF to the market, Carlyle Credit Income Fund (CCIF) and its Carlyle Credit Income Fund 8.75% Series A Term Preferred Shares Due 2028 (CCIA). This was formerly the Vertical Capital Income Fund but was taken over by Carlyle. Damon Judd has a more in-depth overview of that transition written up previously. The CCIA offering was actually issued on October 19, 2023, and they issued some more to Eagle Point Credit on November 11, 2023. So, they should have been included in our prior coverage, but I had missed this one. It becomes callable on October 31, 2025, and matures on October 31, 2028. Interestingly, CCIA does come with the highest coupon rate of the entire group at 8.75%. That can also come to its benefit, as it is also the only one trading above its face value, currently at 103.20%.   CCIA Trading Price (Seeking Alpha) EICC is also essentially at face value—off by a penny as of the latest close—thanks to its 8% issued yield being quite enticing relative to the other CLO CEF preferred offers.   EICC Trading Price (Seeking Alpha) The other offering that trades right at close to face value is Oxford Lane Capital Corp 6.75% Series 2024 Term Preferred Stock (OXLCM) as it matures at the end of this month. These will be redeemed on July 1, 2024.   OXLCM Trading Price (Seeking Alpha) When looking at Eagle Point Credit Company 6.75% Series D Preferred (ECC.PR.D), this is a perpetual preferred that does not come with a maturity. It becomes callable on November 29, 2026. However, it was issued late in 2021 when rates were at zero, and unless we go back to a zero-rate environment, it is likely that they won't be able to issue another cheaper form of preferred. Therefore, there is no likely a scenario where this issue would get called; this is at least given the current circumstances of the rate environment and the expected rate environment not going back to zero. That's why this one trades so far below face value relative to the rest of these offerings. The benefit of that is investors looking to take the plunge currently and put some capital to work, they are going to get a current yield of 8.64%. That's higher than what CCIA offers at this time, with its current yield sitting at 8.48%.   ECC.PR.D Trading Price (Seeking Alpha) Of course, for CCIA, investors have to factor in that they will also be losing $0.80 come maturity due to trading at $25.80. That then shifts the yield to maturity down to 7.88%. The highest yield to maturity currently comes from Oxford Lane Capital Corp 6.25% Series 2027 Term Preferred (OXLCP) with its 8.94% YTM. The current yield might not be the most exciting at 6.68%, but it matures in 2.7 years. Investors who have a bit of patience to collect a relatively lower current yield in favor of some upside would be rewarded. Of course, that means betting OXLC would have to survive another 2.7 years as well.   OXLCP Trading Price (Seeking Alpha) Conclusion Baby bonds and preferreds can offer some safer sources of cash flow for income-focused investors. They might not be the most exciting, but all one is doing is betting that these funds survive—they don't have to thrive. Yields have come down some since last fall when risk-free rates were ripping higher. Still, they can be a generally more reliable source of steady yield for investors as part of a diversified portfolio.  Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"hasMoreComments":false,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false}}