SAT - Preferred Stock/ETD IPO Market Nearly Frozen

2023-04-28 04:49:11 ET

Summary

• Tightening financial conditions have drastically reduced preferred stock / ETD offering activity, with not a single new preferred stock offered during the month of April, and just one ETD.
• Externally managed Business Development Company Saratoga Investment Corporation offered $50 million worth of 8.5% notes due 2028, rated BBB+ by Egan-Jones Ratings Company.
• Here is a comparison against the highest quality preferred stocks in our coverage universe, as ranked by our internal “CDx3 Compliance Score” metric:
• CDx3 preferreds ranked 10 out of 10 are meanwhile selling for an average discount to par of about 4.1% and offer an average current yield of 6.15%.
• Past preferred stock IPOs now trading below par: a look at recent par crosses.

New offering summary:

SEC filing for further information: SAZ

Just one short year ago, Saratoga Investment Corp ( SAR ) issued 6% notes due 2027, which trade under symbol SAT on the New York Stock Exchange. Their latest exchange traded notes offering, due 2028, priced on April 11th, 2023, at 8.5%. These new notes trade under symbol SAZ. They also join other series of exchange traded notes outstanding: SAJ which issued in October of 2022 at 8%, and SAY which was issued in December at 8.125%. While their Egan-Jones credit rating of BBB+ has remained the same across each of these four offerings, Saratoga's cost of capital has increased markedly all thanks to tightening financial conditions.

This chart shows the timing of each of the four Saratoga ETD offerings completed during this current Federal Reserve hiking cycle:

As regulated investment companies ("RICs"), Business Development Companies ("BDCs") like Saratoga have built-in investor protections including a limit on leverage, and investors in debt instruments issued by BDCs have pointed to favorable outcomes making it through the financial crisis (as far as BDCs meeting their debt obligations) as evidence for measuring the level of risk involved in investing in ETDs (and preferred stocks) issued by BDCs.

With a requirement to invest primarily in private companies in the United States, BDCs were created in 1980 by Congress to encourage the flow of public equity capital to private U.S. businesses. BDCs also have a structural requirement to distribute 90% of taxable income to shareholders, much like Real Estate Investment Trusts (REITs). Because of this earnings distribution requirement, BDCs generally cannot reinvest their regular earnings into portfolio growth and instead must rely on the equity and debt markets in order to raise new capital to fund growth in their portfolios.

As a result, many BDCs routinely issue preferred stocks and exchange traded debt ((ETD)) securities (which are also known as "baby bonds"). According to BDCinvestor , the highest yielding BDC preferred stock at present is PSEC-A, with current yield in excess of 8.5% at the time of this writing. PSEC-A was issued in July of 2021 as a cumulative perpetual fixed-rate preferred stock, with dividend rate of 5.35% against the $25 offering price (the shares now trade with a $15 handle, hence the much-higher current yield).

Past preferred stock IPOs below par

In addition to covering new preferred stock and ETD offerings, here at CDx3 Notification Service we also track past offerings, with alerts when securities fall below their par values. Here are some of the recent dips/crosses below par we observed:

Note: Any yellow highlighted entries indicate eligibility for the "CDx3 Bargain Table."

Until Next Time…

Here at CDx3, our typical articles will provide month-end preferred stock (and ETD) IPO summaries, plus a look at selected past preferred stock IPOs that are now trading below par. Whether you are the kind of investor who sticks with preferred stocks with a CDx3 Compliance Score rated 10 out of 10, or whether your portfolio has room for 9-score-and-lower securities, stay tuned for future articles recapping new IPOs and interesting preferred stock activity that we notice here at the CDx3 Notification Service . Thanks for reading!

For further details see: