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Underpriced High-Yield Baby Bonds And Preferreds - Investor Misunderstanding Creates Bargains: ECC And OXLC

Jun. 02, 2020 11:00 AM ETECC, ECCB, ECCX, ECCY, OXLC, OXLCM, OXLCO-OLD, OXLCP83 Comments


  • We discuss some term preferred stocks and baby bonds that offer high yields but are actually quite safe due to the market’s misunderstanding of these securities.
  • These securities are issued by closed end funds, which have legal leverage limits, making default hard to imagine, yet they offer oversized yields.
  • In the baby bond category, we discuss the very safe Eagle Point Credit baby bonds and why they are so safe despite the nice yield-to-maturity.
  • In the term preferred stock category, we discuss Eagle Point Credits term preferred ECCB and Oxford Lane’s term preferreds OXLCM, OXLCO and OXLCP.
  • Looking for a portfolio of ideas like this one? Members of High Dividend Opportunities get exclusive access to our model portfolio. Get started today »

Co-author Preferred Stock Trader


Very recently we published part one of our two-part series on baby bonds and term preferred stocks from companies with legal leverage limits. While the market has still not fully recovered, we think this is a great space to invest due to the safety and the high yields that still exist, but these opportunities are quickly disappearing.

In part 1, we discussed baby bonds from business development companies (BDCs) which have legal leverage limits of 67%. In this article, part 2, we focus on baby bonds and term preferred stocks that have been issued by closed-end funds which have even tighter leverage limits. CEFs cannot exceed 50% leverage.

Closed-End-Funds (CEFs)

CEFs are mutual funds that trade on the stock exchange. They have very strict liability limits. That is why you see preferred stocks from CEFs, like those preferred issues by Gabelli (GUT.PC) for example, and Highland Income Fund (HFRO.PA), given A1 ratings by Moody's, the highest rating of any preferred stocks you will find. But we have identified two CEFs that have preferred stocks and/or baby bonds that are not rated and therefore offer investors generous yields due to investors not understanding the safety of these securities. When we say this, we don’t mean to imply that our recommended CEF baby bonds and term preferred stocks would deserve a rating close to an A1 rating, but simply that preferreds/bonds from a CEF have inherent safety due to the rules they must follow. Due to these leverage limits, we are not aware of any CEFs that have defaulted on their debt or term preferred shares.


Oxford Lane Term Preferred Stocks


Oxford Lane Capital (OXLC) is a closed-end-fund that invests in Collateralized Loan Obligations (CLOs). As a CEF it has

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This article was written by

Rida Morwa profile picture

Rida Morwa is a former investment and commercial Banker, with over 35 years of experience. He has been advising individual and institutional clients on high-yield investment strategies since 1991.

Rida Morwa leads the investing group High Dividend Opportunities where he teams up with some of Seeking Alpha's top income investing analysts. The service focuses on sustainable income through a variety of high yield investments with a targeted safe +9% yield. Features include: model portfolio with buy/sell alerts, preferred and baby bond portfolios for more conservative investors, vibrant and active chat with access to the service’s leaders, dividend and portfolio trackers, and regular market updates. The service philosophy focuses on community, education, and the belief that nobody should invest alone. Lean More.

Analyst’s Disclosure: I am/we are long OXLC, ECC, OXLCM, OXLCP, ECCX, ECCY. 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (83)

I am interested in ECCX and ECCY, the two baby bonds.
These are due in 2027 and 2028. Will these be booked out on the day and the proceeds credited to my account? How much is the redemption amount? What does yield to call and call date mean?
Preferred Stock Trader profile picture
Proceeds will be credited to your account automatically on the redemption date and you will get $25 per share - so it will be a long term gain. A "call" means that the company can buy back the preferred stock at $25 after the "call date" has passed, so the company does not have to wait until the maturity date to redeem these preferred stocks. But since ECCX and ECCY trade below $25, that is not something to worry about. If they do call ECCX/ECCY at $25 sooner than the redemption date, your yield to redemption will be even higher that what the article says.
The higher the rate...the higher the risk!
PendragonY profile picture

No, not necessarily. For instance, REITs tend to have higher rates but that doesn't mean they are higher risk.
thebellsareringing profile picture
i will continue to own $OXLC with a very large number of shares. I anticipate a dividend reduction that will remain attractive to HY investors. Overtime, I believe the CLO market will be a positive ROI.
PendragonY profile picture

That is my thinking as well.
Oops.. The NAV is less than $3, so its trading at 30% premium After today's 17% drop... But downside from here is only $4 (cant go below zero rt?) but upside could be as high as the sky..
100% of your investment is still 100% of your investment no matter how low the share price is
63C-Vette profile picture
REPOSTING......I currently own about 4,000 shares of OXLC common, at a sizable loss on paper. My question is whether I should continue to hold this. The stock has appreciated close to 50% in the last week and has a yield of 52%, which will is likely to get cut. Can I please get your opinion on this? Does the recent jump bode well for hanging onto OXLC and what do you foresee about the dividend being reduced? Many thanks.
PendragonY profile picture
I continue to hold OXLC.
This might be a good opportunity to educate readers, like me, on the virtues and pitfalls of Baby bonds vs target date preferreds, and provide a list of both available now, highlighting those below par, along with a safety rating.
ijeff profile picture
How is it possible preferreds like OXLCP traded around $11 in March? I might be irrational but that pretty much scared me off them. It implies a risk much greater than I imagined. Many of the current preferreds I own are still well below their coupon price. Thankfully I didn't sell them and all of them have improved their price since then but most are still well below coupon. Will they ever trade at even or premium again? With the nice yields it sure seems like they should at least trade near even unless the market is still factoring in a lot of risk.
Tack profile picture
@ijeff The massive momentary decline in prices of every quality of baby bond and preferred implied fear and irrationality, not risk. The risk levels hardly changed at all for most of them, but the market went through temporary insanity, as it usually does in a crisis. The volatility of these issues is through the roof in such times because they are very liquid, not because their risk profiles suddenly collapsed.
ijeff profile picture
Tack, That makes sense. Rather than be fearful in March, I wish I had found some of these issues like OXLCP and bought them back then. This year has been a good learning experience for me regarding Preferred stock volatility. Never even owned a Preferred stock until last year.
tizod profile picture
I disagree as no one refers to the underlying fundamentals of what makes this up. They are inherently at risk right now, no matter the leverage. You just can't sell stock and gain leverage when the assets get valued to zero. Its like hearing from REIT guys saying the value of the land is $XXXX. That was then, but now with a rash of availability the value drops by 50-60-70%. What then? If these were so "safe" and "easy" they would not have this return.
Good stuff as usual. I’m long ECC and the baby bonds as well. I like how management is using the "at-the-market" offering program to issue shares at a premium to NAV in order to buy their own debt at a discount plus make investments in a period of extreme dislocation in the CLO market.

Per their quarterly report ”the weighted average effective yield of new CLO equity investments made by the Company during the quarter, which includes a provision for credit losses, was 47.42% as measured at the time of investment.”

Go ahead and sign me up for more of those purchases. Rarely do you get a chance to buy ECC close to NAV. Eagle Point has exceptional track records in their LP funds as well.
@Rida Morwa can you comment on the asset quality of these CEFs. discounts and NAv is on thing, but given their small size, one bad default in their loan books/asset side can have a big effect
Preferred Stock Trader profile picture
They own a significant number of CLOs. One default will have no impact on the preferreds or baby bonds.
Actually I dont mind preferred that don't have a required term limit if their interest stays the same and isn't adjusted to LIBOR+ an amount after callable.....I'll sit on a preferred paying 14% all day long if it doesn't get called at par if the rate doesn't readjust after mature date
Rida Morwa profile picture
@myfunmoney Agreed, we have been loading up on preferred during this dip!
I've been avoiding these loan cos for years. (and the tiny rate spread/flat yield curve also stunk)
And who knows how this will shake out.
The defaults have just started.
No thanks.
Rida Morwa profile picture
@CEFspert Thank you for reading and commenting, it is going to be an interesting few months.
NV_GARY profile picture
While the OXLC term shares have the 200% coverage requirement, ECCB goes a step further:
"The Company is required to redeem the preferred at $25 per share plus accrued and unpaid dividends if they fail to maintain an asset coverage ratio of 200% (see page S-12 of the prospectus for further details). If the Company fails to redeem the preferred pursuant to the mandatory redemption required on 10/30/2026, or in any other circumstance in which the issuer is required to redeem the shares, then the Fixed Dividend Rate will increase by two percent (2.00%) for so long as such failure continues "

(not noted in article- nor that Notes pay interest, so it is better to hold them in a tax-advantaged account)
NV_GARY profile picture
Oh- almost forgot- looks like ECCB is issuing up to another 1 million shares:

Gotta buy baby shoes... or buy back preferreds.
Preferred Stock Trader profile picture
@NV_GARY Good info. Thanks for sharing. Do you really mean ECCB is issuing more shares or ECC common stock is being issued?
NV_GARY profile picture
I guess you did not look at the prospectus :
$125,000,000 of Common Stock
Up to 1,000,000 Shares of 7.75% Series B Term Preferred Stock due 2026 Liquidation Preference $25 per share
We are offering up to $125,000,000 aggregate offering price of our common stock and up to 1,000,000 shares of our 7.75% Series B Term Preferred Stock due 2026, or the “Series B Term Preferred Stock,” with an aggregate liquidation preference of  $25,000,000 pursuant to this prospectus supplement and the accompanying prospectus. We have entered into an at market issuance sales agreement, dated November 22, 2019, and amended June 1, 2020, or the “Sales Agreement,” with B. Riley FBR, Inc. (“BRFBR”) and National Securities Corporation (“National”), which we refer to as the placement agents or each a placement agent, relating to the sale of shares of common stock and Series B Term Preferred Stock offered by this prospectus supplement and the accompanying prospectus.
Hey hope this isn't a stupid question but they don't issue a k-1 do they?
Preferred Stock Trader profile picture
No K-1s. By the way, bonds never have K-1s.
Thanks Rida, always enjoy your articles. Just bought some OXLCM at $23.47. One question...how are you calculating the stripped YTR?
Preferred Stock Trader profile picture
We subtract the accrued dividend from the current price and then calculate YTM.
Thanks. Do you include capital appreciation up to par as well in that calc?
Thanks for the article. I am currently keeping all my dividends and not reinvesting, since I depend on most of that cash flow for living expenses, and I anticipate some more dividend reductions (I hold ECC and OXLC, among others). However, once I have enough squirreled away to get through anticipated meltdowns, I think these term preferreds and baby bonds look very inviting. Thanks again.
Preferred Stock Trader profile picture
You're welcome. Thanks for reading. The term preferreds and baby bonds are worlds safer than OXCL and ECC - really a totally different investment althogether.
Rida Morwa profile picture
@posane3 Thank you for reading and commenting, good idea to hold a reserve.
waldipup profile picture
On March 12 $30Mil. of the 2023 OXLCO's were redeemed .

On May 21 , they announced an additional $40Mil. market Pref buyback :
Oxford Lane Capital's (NASDAQ:OXLC) board authorizes a program to repurchase up to $40M of preferred stock.
Under the program, OXLC may buy 7.50% series 2023 term preferred stock, 6.75% series 2024 term preferred stock, and 6.25% series 2027 term preferred stock.
NV_GARY profile picture
At least it's not a tender offer. Authorization doesn't really promise anything- but it might happen.
This article finally settles it: I'm way too dumb to understand bonds and preferreds. Back to DKNG!
Preferred Stock Trader profile picture
I doubt that you are too dumb. Just read up a bit.
bbob68 profile picture
Hey DDOG, It can be complicated. That's why we have Rida.
This notion that the "market" is mis-pricing these investments IMHO is absurd. The high yield is the market saying, hey this is more risky than other investments - invest carefully. These investments are priced where they should be given the uncertainty of the economy and the underlying holdings. It's no more complicated than that. This mentality that HDO knows better than the market's pricing mechanisms is why HDO failures like MLPQ crashed to zero before HDO could tell its subscribers to bail.
Preferred Stock Trader profile picture
Personally, I don't believe in the efficient market and that everything is priced correctly. Preferred stocks and baby bonds are an area dominated by retail investors who often don't know a lot and panic when they should be buying. I have been trading preferreds for more than 20 years and have beaten the benchmarks handily, so I know that these securities are often mispriced.
I always find people are not telling the truth when they brag about what they did...I let the numbers talk, so prove it
I think there is a fundamental difference between identifying value in the preferreds market in undercovered, under publicized, or misunderstood companies and seeing a preferred trading at 94% of par that is issued by a fund that invests in hugely complicated and risky securities and overlays another level of liabilities on top of it. CLO equity is dangerous. There's no reason these prefs shouldn't yield 8%, or even more at all.
Will have to take a look at these - getting tough to find a decent yield without taking on too much risk.

Well - been tough for a long time - there was just a brief blip in recent couple months. Now back to tough again.
Rida Morwa profile picture
@bondsmoker We did take advantage of the dips and pick up preferreds at scream deal prices. However, trying to determine who will succeed in a post-COVID-19 lockdown world is a key aspect of any actively managed portfolio.
Very daring to recommend buying into a CLO invested entity without a detailed discussion of underlying holdings, deteriorating liquidity, cashflow, and market access of those same holdings
waldipup profile picture
Yeah but it's not the equity .
Preferred Stock Trader profile picture
As long as they obey the law and keep leverage at legal levels, it really doesn't much matter.
@Preferred Stock Trader,

Perhaps I misunderstand your "it doesn't really matter" comment, but it sounds as though you're saying the underlying holdings (the CLOs) don't matter.

If that is what you meant, it seems to me it matters a great deal if enough loans within the CLOs they own default, since the equity tranche of a CLO is the last to be paid. With all the financial turmoil from COVID, it seems very likely that default rates will increase. The AAA tranches will be safe, but the equity tranches will suffer in that scenario. If the equity tranche payments to OXLC and ECC dry up, just how would OXLC and ECC pay the bond interest or the preferred dividends?
annel1 profile picture
Hey, I cannot get to chat room says I have to install Rocket.chat?
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