RILYP - B. Riley Baby Bonds: High Yields With Strong Insider Buying

2023-06-20 02:56:16 ET

Summary

• B. Riley Financial, Inc. reported a 75% increase in total revenues to $432.1 million in Q1 2023.
• The RILYK baby bond provides a very attractive yield on a relative basis.
• There has been significant insider buying of the RILY common shares since a short seller report in February.

B. Riley Financial, Inc. ( RILY ) is a leading financial services company that provides investment banking, trading, and asset management services. They offer a diverse suite of businesses that go beyond the typical financial firm. The B. Riley brands and operating groups include:

• B. Riley Advisory Services: includes restructuring and turnaround management
• B. Riley Principal Investments
• B. Riley Real Estate
• B. Riley Retail Solutions: leading provider of asset disposition and retail liquidations
• B. Riley Securities
• B. Riley Venture Capital
• B. Riley Wealth
• B. Riley Wholesale & Industrial Solutions

Some of the businesses above are counter-cyclical and tend to do better when the economy is weak or in recession. Other businesses do better when the company is stronger.

Q1 2023 Financial Highlights

• Total revenues increased 75% to $432.1 million

• Net income of $15.1 million, or $0.51 diluted earnings per share.

• Operating revenues increased 43% to $380.5 million

• Operating Adjusted EBITDA of $80.1 million

• Total Adjusted EBITDA of $94.8 million

The company currently has seven baby bonds in its capital structure. They generally issue five-year baby bonds periodically and refinance with new bonds as the older ones come due. The current bonds have maturity dates ranging from 2024 through 2028.

The current coupons range between 5.00% and 6.75%, but based on current interest rate levels and market conditions, I expect the coupon levels on upcoming bonds may be somewhat higher. We will get a good idea of what the market will require when the RILYO bonds mature in May, 2024. The company will most likely refinance with another five-year bond maturing in 2029, and we will get to see what coupon rate the market requires.

Adjusted Price Change From 12/30/2022 to 06/16/2023

Current Yield and Yield to Maturity

RILY Common Stock Has recovered after the Wolfgang short-seller report on February 8, 2023

On February 8, 2023, Wolfgang Research published a short seller report with an attack on RILY- RILY: A Bottom-Feeder Investment Bank That Is Crumbling Before Our Eyes

There is a saying- "Actions speak louder than words". The RILY management has used this approach to respond to the Wolfgang report with a large amount of insider stock buys since February 8. The CEO, Bryant Riley has been the biggest buyer, even though he already had over $200 million invested in RILY stock.

When the Wolfgang report came out on February 8, the stock price dropped and traded below $30 on March 13, 2023. But it has recovered nicely since then. The common closed at $41.37 on June 16, after paying out two $1.00 distributions in March and May. The multiple insider purchases suggest that Bryant Riley and the rest of his management team are quite positive about the company's future prospects.

RILY: Insider Buys Since February 8, 2023

Share Repurchases

RILY repurchased $53.7 million of its common shares during the first quarter. About $30 million is remaining under the Company's current share repurchase program authorized in March 2023.

Summary

The 14+% yield to maturity for RILYK, RILYG, and RILYZ is significantly higher than the yield on other high-yield bonds with a similar rating. For example, the yield on the iShares iBoxx High Yield Corporate Bond ETF ( HYG ) is currently 5.6%. The recently issued RILYZ 2028 baby bond received an Egan-Jones rating of BBB+, although there is no rating available from S&P or Moody's. This suggests that the B. Riley baby bonds are far more attractive than HYG for someone looking for a higher yield.

Here are some factors to consider before investing in the B. Riley baby bonds:

• B. Riley's financial performance has been volatile in recent years. In 2022, the company reported a net loss of $100 million, although they have recovered well so far in 2023.
• The management has been quite aggressive and has continued paying a $1.00 quarterly dividend on the common stock. As a bondholder, you might be better off if management reduced the common dividend somewhat and used the freed-up funds to retire some debt.
• The company has made some controversial loans and investments in crypto-based companies. While these investments tend to be fairly small, they can sometimes lead to bad press.

I currently own positions in all seven RILY baby bonds but do not own any of the common or preferred shares. I like the idea of setting up a "ladder" of the baby bonds which mature periodically.

The RILY preferred stocks have fairly attractive current yields compared to preferred stock peers, but there is no maturity date guaranteed. If interest rates fall, the preferred stock prices could return to par. But in a higher interest rate environment, the price could remain low indefinitely. With the baby bonds, you are guaranteed to get back $25 at maturity unless the company defaults. The bonds are also higher up in the capital structure in a worst-case scenario.

Right now, my favorite baby bonds are RILYK and RILYG which both have yield to maturity above 14%. I think some investors may be a bit confused and are treating these two issues as preferred stock. They most likely look at the current yield, which is below 7% for both of these two issues.

The RILYK issue is probably a little bit safer than RILYG because it matures earlier. After the RILYK issue matures in March 2026, the RILYN and RILYG issues mature several months later in 2026 only three months apart.

RILYK has an average trading volume of about 17,000 shares a day, so limit orders should definitely be used when purchasing shares.

For further details see: