Preferreds Weekly Review: New Issuance In An Attractive Bond Sector

Market Performance - Preferred stocks had a positive performance for the week and the month of May, with most sectors finishing in the green, marking the sixth up month in the last seven for the asset class [2] - Yields for preferred stocks have mostly range-traded this year at a bit under 7% [3] - Spreads continue to trade at very tight levels, a common theme across the broader income space [4] BDC Bond Issuance and Features - BDC Main Street (MAIN) issued $300 million of 6.5% bonds due 2027, with a shorter maturity of 3 years, which is at the shorter end of the typical 3-5 year BDC bond range [5] - The shorter maturity profile of the relatively high-quality BDC bonds provides investors with higher yields in the current environment, as shorter-dated bonds tend to have higher yields due to the inverted yield curve [5] - The bond includes a make-whole provision, which is favorable to bondholders in case of redemption, as the company would have to pay back the future coupons, appropriately discounted, if the bond is called early [6] - The yield on the bond is less than it would be in a more traditional call structure, but there is a small chance of an unexpected windfall for holders if the company decides to redeem the bond [6] BDC Sector Analysis - The BDC baby bond sector is favored due to the strong performance of book values in the sector, particularly relative to other investment company sectors such as mortgage REITs or many CEFs [7] - BDCs are subject to the asset coverage requirements of the Investment Company Act, unlike mortgage REITs, and most BDCs have on average half of their liability profile in secured financing, which sits ahead of unsecured bonds [7] - Bonds like HTFC, OXSQZ, and TRINZ are trading at yields around 8% or higher, making them attractive in the sector [7]