Staying In GBLIZ Doesn't Make Sense, Switch To GBLIL

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About: Global Indemnity plc (GBLI)
by: Colorado Wealth Management Fund
Summary

Global Indemnity is an insurance company with a respectable credit rating.

GBLIL and GBLIZ, baby bonds from GBLI, are a solid choice for the buy-and-hold investor.

At recent prices, investing or staying in GBLIZ doesn’t make sense.

GBLIL is the better choice.

This research report was produced by The REIT Forum with assistance from Big Dog Investments.

Global Indemnity (GBLI) is an insurance company with a respectable credit rating. It's my view that GBLI is not likely to be a huge credit risk in the near future. GBLI has two securities, GBLIL and GBLIZ, which are baby bonds. I normally cover preferred shares. However, baby bonds have more protection than preferred shares. Further, if GBLI were to release preferred shares, they would be subordinate to both baby bonds. I have no current evidence that GBLI intends to issue preferred shares.

GBLI baby bonds

For investors interested in The REIT Forum's preferred share ratings, see my guide to preferred shares. I also have a guide for preferred share dividend captures.

Since many of my readers are familiar with preferred shares, let's identify some of the differences between preferred shares and baby bonds.

A share of preferred stock is a share of a company that is a cross between a bond (GBLI has two baby bonds we will be looking at) and a common stock.

  • Preferred shares are called "preferred" because these shares have dividend preference over common shares.

  • Because preferred shares have a dividend preference over the common and because the price of the shares tends to be stable, many people think of preferred shares as having minimal risk.

  • Preferred shares of stock are issued with a prospectus, like common shares. A prospectus is a contract between the company and the investors. In the prospectus, you will find the issue price, the call price, the date the shares are eligible to be called, and, of course, the dividend amount. These elements form the basic contract between you and the issuing company.

Compared to a stock

  • Like a common stock, a preferred share moves up and down in price with the market forces.

  • Unlike a common stock, a preferred share can be called back by the issuing company at a fixed price (after call protection ends) - normally $25.

  • Like many common stocks, a preferred stock pays a dividend, fixed by a contract known as a prospectus. Most preferred stocks pay a fixed dividend. This causes many people to compare them to bonds, which also pay a fixed dividend.

  • Unlike a common stock, the dividend usually remains constant throughout the life of the preferred share. Because the dividend is fixed, they are compared to bonds, which also are fixed.

  • Note: Some preferred shares have an FTF (fixed-to-floating) feature. This means after call protection ends, they cease having a fixed dividend rate and go to a floating rate.

Compared to a bond

  • Like some bonds, a preferred share has a "call date". The issuing company may or may not call the preferred shares on the call date. If the share is called, the company gives the agreed amount (usually $25) to the investors and then retires the shares.

  • After the call date, the company can call the preferred shares at any point with a 30-day notice.

  • Unlike a bond, the preferred shares do not have a maturity date.

Here are the two baby bonds from GBLI:

Source: CWMF's subscriber spreadsheet (subscription required for 50+ preferred shares and baby bonds with comparing prices)

Investors in GBLIZ should sell their position and buy GBLIL instead. GBLIL has a higher stripped yield by 10 basis points. These baby bonds carry a risk rating of "2" on a scale of 1-5 where "1" is the least amount of risk. I consider GBLIL a solid choice for the buy-and-hold investor.

GBLIL tends to be a very steady baby bond. You don't see a great deal of price volatility. The stability of GBLIL is an added benefit for the buy-and-hold investor.

The maturity is far away, and there's also a material amount of call protection left on the calendar:

GBLIL has more call protection on the calendar until 4/15/2022 compared to 8/15/2020 from GBLIZ. The extra call protection comes with additional yield.

Staying in GBLIZ doesn't make sense. Investors in GBLIZ should be looking to switch into GBLIL if they want to continue to be invested in these baby bonds.

After call protection ends, the company is able to call shares at their call value of $25. If they do not call them, then the baby bonds have a maturity date in 2045 and 2047, respectively.

One of the reasons these baby bonds don't have a risk rating of "1" is the market capitalization over preferred share liquidation:

We would like to see this ratio be at least 5x, but it's at 2.46x. This means that a large portion of the company's capital structure comes from baby bonds. While baby bonds are relatively safer than preferred shares (all else equal), this number is still a risk factor investors need to take into account.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.