A Safe 11.1% Yield From A Well Capitalized Company

| About: Cowen Group, (COWN)

Summary

Debt accounts for only 22% of Cowen Group’s total capital.

COWNL debt issue now offers an 11.1% yield to maturity.

Profitable and diversified brokerage with a strong growth record.

COWNL is equal in seniority to the 2019 notes and trades at a large discount.

Negligible energy sector exposure.

Cowen Group (NASDAQ:COWN) is a diversified Investment Brokerage that is best known for their strength in the healthcare sector. Revenues are derived from a balanced mix of investment income, banking, brokerage operations, management fees and incentive fees. Cowen Group has been growing faster than their brokerage peers. Revenues have nearly doubled since 2011. The company has a very strong balance sheet with debt accounting for only 22% of total capital. Cowen was profitable for the first 9 months of 2015, despite a Q3 loss due to unusual market volatility (August flash crash).

COWNL is a par $25 debt issue maturing on 10/15/2021. COWNL has an 8.25% coupon and interest is paid quarterly. At a recent price of $22.25, COWNL is trading at a yield to maturity of 11.1% (calculated from my Excel model) and may not be called at par prior to 10/15/2020. Even though COWNL is a debt issue, it trades like a stock on the NYSE. See prospectus for additional details.

The 11.1% yield to maturity from COWNL compares very favorably to Cowen's 3% Convertible Senior Notes maturing on 3/15/2019 (CUSIP 223622AB7). The 2019 notes last traded at $83.43 with a 9.2% yield to maturity. Both COWNL and the $150 million 2019 note issue are senior unsecured obligations. The 2019 notes are convertible at $5.33 per share, but this conversion option is of little interest with COWN now trading at just $2.70. As per page 1 of the COWNL prospectus, it is equal in seniority to the 2019 notes:

"The Notes will be our senior unsecured obligations and will rank equal in right of payment with all of our existing and future senior unsecured obligations"

COWN has excellent liquidity. As of Q3 2015, cash and funds invested in liquid trading strategies totaled $527 (See page 25 of the 11/9/2015 Investor Presentation). Total debt of $213 million accounted for just 22% of the $976 million total capitalization (See page 20). An under-leveraged balance sheet with outstanding liquidity is very comforting to COWNL debt holders.

Given the continued weakness in commodity prices, many investors are scrutinizing financial issues for excessive energy exposure. Cowen provides research coverage for some energy sector equities and has done investment banking in this area. Energy sector investments are broken out as $0.7 million (less than 1% of their total capital) in the Merchant Banking Strategies area of their Q3 holdings (see page 25 of the Investor Presentation). While it is possible that there may be some energy exposure embedded in other trading strategies, direct energy holdings appear to be quite negligible.

Cowen currently has a very conservative balance sheet, but could leverage eventually increase? Fortunately, COWNL has some good protective covenants that limit leverage. These are summarized in the 3rd quarter report management discussion (see page 71):

"The Senior Indenture contains covenants that, among other things, limit (subject to certain exceptions) the Company's ability and the ability of the Company's Restricted Subsidiaries (as defined in the Senior Indenture) to: (1) incur debt (including certain preferred stock), if the incurrence of such indebtedness would cause the Company's consolidated fixed charge coverage ratio, as defined in the Senior Indenture, to fall below 2.0 to 1.0, (2) pay dividends or make distributions on its capital stock, or purchase, redeem or otherwise acquire its capital stock, and (3) grant liens securing indebtedness of the Company without securing the 2021 Notes equally and ratably."

Cowen's balanced business model reduces risk. The firm's trading capital is spread among different trading groups utilizing different strategies including credit trading, event driven, merchant banking, macro trading, activist and quadratic. Unusual market volatility hurt Q3 results for the firm's invested capital, but other areas performed well. As of Q3 2015, overall revenues are running 25% ahead of 2014. This includes gains of 44% for investment banking, 16% for brokerage, 15% for management fees and 14% for management fees.

My Panick Value Research Report premium service is focused on high yield preferred stocks and exchange traded debt issues. It's quite rare to discover such a lofty yield from a growing, profitable and well-managed company like Cowen. Exchange traded debt issues such as COWNL can be an excellent choice for retail investors. They offer the safety of a debt issue without the hassles of bond market trading.

Disclosure: I am/we are long COWNL.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.