Over the last two days, GMXR 9.25% Cum. Pfd. stock GMXR, or GMXR-P has dropped 7.7%. from $24.75 to $22.85. This presents a compelling opportunity to earn a 10% yield with the additional possibility of an almost 10% capital gain.
It appears that the decline over the past two days is driven by a lack of liquidity in the pfd stock rather than a fundamental change in the prospects of the company. The pfd normally trades around 20K shares per day. Tuesday, 900K shares traded, with another 150K changing hands Wednesday. The common stock GMXR is up over 4% in the same period, rising from $4.75 to $4.95. Additionally, the 11.375% notes due in 2019 are unchanged. The notes yield 11.9%, actually a better value than the preferred. But the notes are extremely thinly traded, so significantly less liquid.
Normally there would be an arbitrage opportunity, whereby sophisticated investors would go long notes and short pfd. However, there are so few pfd shares outstanding and obtaining the borrow to short shares in any meaningful size would be difficult. The price action in the other securities of the company indicate that there is no change to the fundamentals.
The preferred dividend appears relatively safe for the near term. The company is operating slightly below breakeven after adding back one time impairment charges. With respect to the capital structure of GMXR, there are 2.3 million shares of preferred stock outstanding with a total liquidation preference of $58.5 million. The current equity market cap of the company is $283 million with a book value of $174 million. The company also has $340 million of debt outstanding. That places the pfd. at a very good position around the middle of the capital structure.
In a liquidation scenario (not implying that would be the case, particularly since the company is cash flow positive on an operating basis), a preferred shareholder has $174 million of protective equity below. The total preferred dividends per quarter amount to $1.3 million, which is sustainable for a company that produced $16.5 million of operating cash flow in the latest quarter.
I expect that this company will use cash to pay down debt and eventually call the pfd. stock at $25. In the meantime, investors earn a 10% yield.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.