B. Riley Financial: Another One Baby Bond IPO

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About: B. Riley Financial, Inc. (RILY), RILYO, Includes: RILYG, RILYI, RILYL, RILYZ
by: Arbitrage Trader
Summary

Overview of B. Riley Financial's new issue: RILYO.

A brief review of the company and the important ratios.

Comparison to the other securities in B. Riley Financial's capital structure.

Comparison with the sector.

Comparison with all other baby bonds that pay a fixed rate and have less than 10 years to maturity.

Introduction

Our goal is to present to you our IPO analysis for every new fixed-income security that enters the market and to find out if there is any trading potential. In this article, we want to shed light on the newest Baby Bond issued by B. Riley Financial (RILY). Even though the product may not be of interest to us and our financial objectives, it definitely is worth taking a look at.

The New Issue

Before we submerge into our brief analysis, here is a link to the 424B5 Filing by B. Riley Financial Inc - the prospectus.

Source: SEC.gov

For a total of 3.48M notes issued, the total gross proceeds to the company are $87M. You can find some relevant information about the new baby bond in the table below:

Source: Author's spreadsheet

B. Riley Financial 6.75% Senior Notes Due 2024 (NASDAQ:RILYO) pay a fixed interest at a rate of 6.75%. The new issue has no Standard & Poor's rating but is rated a "BBB+" by the less authoritative Egan-Jones Ratings Company. The newly issued baby bond is callable as of 05/31/2021 and is maturing on 05/31/2024. Currently, the new issue trades a little below its par value at a price of $24.80, which means it has an 8.37% Yield-to-Call and 6.78% Yield-to-Maturity. The interest paid by this baby bond is not eligible for the preferential 15% to 20% tax rate. This results in the "qualified equivalent" YTC and YTM sitting around 6.98% and 5.90%, respectively.

Here is the product's Yield-to-Call curve:

Source: Author's spreadsheet

The Company

As per the company's website:

B. Riley Financial is a publicly traded, diversified financial services company which takes a collaborative approach to the capital raising and financial advisory needs of public and private companies and high net worth individuals.

Headquartered in Los Angeles with offices in major U.S. financial markets, the firm consists of over 900 employees whose cross-platform expertise is mobilized to provide a myriad of financial solutions. Its wholly-owned subsidiaries include:

  • B. Riley FBR, Inc.: A FINRA-licensed broker-dealer.
  • Great American Group, LLC: Provider of advisory and valuation services, asset disposition and auction solutions, commercial lending, and real estate advisory services.
  • B. Riley Capital Management, LLC: A SEC-registered investment advisor includes B. Riley Asset Management, a provider of investment products to institutional and high net worth investors, and B. Riley Wealth Management, a multi-family office practice and wealth management firm focused on the needs of ultra-high net worth individuals and families; and Great American Capital Partners, a provider of senior secured loans and second lien secured loan facilities to middle market public and private U.S. companies.
  • Wunderlich Securities: A registered broker/dealer and Registered Investment Advisor, provides wealth management services to individuals and families, corporations and non-profit organizations, including qualified retirement plans, trusts, endowments and foundations.

  • B. Riley Principal Investments: Focuses on investing in or acquiring companies and corporate assets that present attractive cash-flow driven returns.

Below you can see a price chart of the common stock, RILY:

Source: Tradingview.com

For 2018, the company has paid $0.74 annual dividend on its common stock. With a market price of $20.13, the current yield of RILY is 3.68%. As an absolute value, this means $19.62M yearly dividend expenses for the common.

In addition, the company's market capitalization is around $503M, which makes RILY one of the smallest asset management companies.

Capital Structure

Below, you can see a snapshot of B. Riley Financial's capital structure as of its last quarterly report in March 2019. You also can see how the capital structure evolved historically.

Source: Morningstar.com|Company's Balance Sheet

With the newly issued 2024 notes, the total debt of the company becomes $1.47B, that are senior to the company's equity. This makes the Debt-to-Equity ratio at 2.94, which cannot be defined as a good number after the market capitalization coverage reaches only 1/3 of the debt.

Furthermore, we also want to add one more ratio, the Earnings-to-Debt payments. One can use EBITDA instead of earnings, but we prefer to have our buffer in what is left to the common stockholder. The higher this ratio, the better. From the income statement, we can see the company had a net income of $16M for 2018 with $56M paid of interest expense. So, here we have a ratio of 0.28, which also repeats the previous ratio.

The B. Riley Financial Family

Source: Author's database

RILY has four outstanding baby bonds:

  • B. Riley Financial 7.50% Senior Notes Due 5/31/2027 (RILYZ)
  • B. Riley Financial 7.50% Senior Notes Due 10/31/2021 (RILYL)
  • B. Riley Financial 7.25% Senior Notes Due 12/31/2027 (RILYG)
  • B. Riley Financial 7.375% Senior Notes Due 5/31/2023 (RILYH)
  • B. Riley Financial 6.875% Senior Notes due 09/30/2023 (RILYI)

Let's see what the bubble charts look like:

By Years-to-Maturity and Yield-to-Maturity

Source: Author's database

By Yield-to-Call and Yield-to-Maturity

Source: Author's database

If we compare the newly issued notes due 2024 with the rest of RILY's baby bonds, we can see that RILYO, in regards to Yield-to-Worst, is fairly priced to RILYH and RILYI, that matures after 4 years and slightly retreats to RILYZ and RILYG. However, the higher YTM of the Z and G is due to the longer maturity date, 3 years longer than O. AS for RILYL, it is trading post its call date at a negative YTC, which is why it does not attract interest for us at this price. With a nominal yield spread of 0.75% between L and the new IPO, it will not be a surprise to be called.

The security with the best Yield-to-Worst from the group I find to be RILYG. It has also the second highest YTC (if an early call occurs). RILYL also have the same YTM but, as I mentioned, this comes at the expense of taking a call risk. I must also mention that the advantage of RILYG comes with a 3 years longer term than the new IPO. If you are more conservative, RILYI is also a good choice, 6.80% YTW with a year shorter maturity.

In addition, in the following chart, you can see a comparison between the RILY's securities and the fixed-income securities benchmark, the iShares Preferred and Income Securities ETF (PFF). What we see is the bonds separate into two groups: the first with RILYG, RILYZ, and RILYL, trading close to PFF, and the second with RILYI and RILYH notably outperforming the first group.

Source: Tradingview.com

Sector Comparison

The image below contains all baby bonds that pay a fixed interest rate, with a par value of $25, in the "Asset Management" sector (according to Finviz.com). For a clearer view, the baby bonds, issued by MDLY (MDLQ and MDLX) are excluded because of their high volatility lately due to shareholders concern about the potential merger of MCC, MDLY, and Sierra Income Corp.

By Years-to-Maturity and Yield-to-Maturity

Source: Author's database

By Yield-to-Call and Yield-to-Maturity

Source: Author's database

Generally, the RILY baby bonds have the highest returns and are a lot better than its closest relatives. For 4 or 5 years, a YTW of around 7% cannot be seen in any other bond from the sector. And again, RILYH higher than any other issue.

Fixed-Rated Baby Bonds

The next charts show a more global view of all baby bonds and preferred stock that trade on the national exchanges, pay a fixed distribution, and have stated maturity date of less than 10 years, with a positive YTC. Here, we are adding the term preferred stocks, as they are very close to the baby bonds, also bear limited interest rate risk, with the main difference that the preferreds are one step behind the notes in the capital structure of the companies. Again, MDLY's baby bonds are excluded, along with AFHBL, where the situation is very severing.

By Years-to-Maturity and Yield-to-Maturity

Source: Author's database

By Yield-to-Call and Yield-to-Maturity

Source: Author's database

Special Considerations

We may redeem the Notes for cash in whole or in part at any time at our option (I) on or after May 31, 2021 and prior to May 31, 2022, at a price equal to $25.50 per note, plus accrued and unpaid interest to, but excluding, the date of redemption, (II) on or after May 31, 2022 and prior to May 31, 2023, at a price equal to $25.25 per note, plus accrued and unpaid interest to, but excluding, the date of redemption, and (III) on or after May 31, 2023 and prior to maturity, at a price equal to 100% of their principal amount, plus accrued and unpaid interest to, but excluding, the date of redemption.

Source: 424B5 Filing by B. Riley Financial Inc

Use of Proceeds

We expect to use the net proceeds of this offering for general corporate purposes.

Source: 424B5 Filing by B. Riley Financial Inc

iShares Preferred and Income Securities ETF

The main benchmark, PFF, which is the ETF that seeks to track the investment results of the S&P US Preferred Stock iShares Index, is in progress of changing its investment objective. The fund is expected to change the underlying index, passing through a Transition index ("ICE Exchange-Listed Preferred & Hybrid Securities Transition Index") during the period from February 1, 2019, to October 31, 2019, and after that will track the "ICE Exchange-Listed Preferred & Hybrid Securities Index". The requirements for an addition of the New Index are much likely the same as the old one, with the difference that the New Index will also include notes. However, the market capitalization of $87M is not enough at this point for RILYO to be included in the PFF holdings. However, if the company make an additional offering and the capitalization exceeds $100, it will be a potential addition.

Conclusion

As fixed-income traders, we follow every one preferred stock or baby bond, which is listed on the stock exchange. As such, RILYO is no exception, and the homework we always do we share it with the public. It is not necessary for the IPO to be an arbitrage and a bargain but in many cases, the new security happens to be better than the ones already trading on the market.

The company's debt-to-equity and interest coverage ratios are not the best, which one can hope for, as the company is quite leveraged. Furthermore, 6.70% Yield-to-Worst is not their best, but if you like more, you have to hold longer. My approach, in this case, is to be more careful, and personally, I'd like the shorter maturity with 6.80% YTM than the 3 or 4 years longer with 80bp higher return. This is why I prefer RILYI more, the newly issued RILYO also offers 6.80% but you have to hold it longer.

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.