OPP: Most popular Shares Provide A Secure 6.25% Yield

Introduction

After I’m taking a look at fastened earnings securities like most popular shares, I need not have the very best yield, as that generally is a recipe for catastrophe as we, for example, noticed with Argo Blockchain (ARBKL) the place the worth of the child bond was crushed. For me, investing in most popular shares is at all times a danger/reward tradeoff.

OPP’s efficiency in FY 2022 was okay, and preferreds ought to be nice

RiverNorth/DoubleLine Strategic Alternative Fund (hereafter simply ‘OPP’ to maintain it easy) is a closed-end fund specializing in creating worth by specializing in a tactical earnings technique and (as much as 35% of the managed belongings) and the opportunistic earnings technique (as much as 90% of the managed belongings).

The portfolio primarily consists of bonds, closed-end funds and mortgage-backed securities. After I final mentioned the CEF, shares and most popular shares made up lower than 16% of the belongings, however the portfolio didn’t comprise any frequent fairness anymore whereas the popular shares now nonetheless signify lower than 5% of the portfolio.

Nonetheless, there’s greater than meets the attention right here: OPP merely changed the description from ‘common shares’ to ‘SPACs’ as that is what the frequent share portfolio consists of. The mix of SPACs and most popular shares now exceeds 20%.

I am primarily focused on how a lot curiosity and dividend earnings the OPP portfolio is producing. Trying on the earnings assertion for FY 2022 (which resulted in June), the portfolio generated about $20.8M in curiosity and dividend earnings, with virtually 90% of that income coming from the bond and CLO portfolio.

We additionally see the overall quantity of bills is simply $4.9M, leading to a web funding earnings of $15.9M. As I’m primarily focused on the popular shares, I’ll ignore the $52M in unrealized depreciation on investments. Whereas that has a damaging impression on the NAV of the frequent models, it’s an irrelevant issue to determine how protected the popular shares are: finally the debt will probably be repaid to OPP and mark-to-market variations will not make a distinction right here: both the borrower repays OPP, or it defaults. And, in fact, the decrease portfolio worth will probably be mentioned after I take a look at the asset protection ratio.

We nonetheless want to take a look at the popular dividend funds. We see there was a $2.6M cost on the Collection A most popular shares and $1.7M on the Collection B. Take note the Collection B have been solely issued in the course of the monetary yr and contemplating there are 2.4M most popular shares excellent, the normalized most popular dividends on the Collection B will probably be simply over $2.8M. On a mixed foundation, the popular dividends will price OPP about $5.5M per yr. With a web funding earnings of virtually $16M based mostly on the FY 2022 outcomes, the protection ratio of the popular dividends is nearly 300%. Not spectacularly excessive, however adequate for me.

A more in-depth take a look at the 2 problems with most popular shares

As defined in my previous article, OPP now has two sequence of most popular shares excellent.

The Collection A most popular shares are buying and selling with (OPP.PA) as ticker image and supply a cumulative dividend of $1.09375 per share per yr, which works out to a most popular dividend yield of 4.375% based mostly on the par worth of $25/share. These securities could be referred to as from November fifteenth, 2025 on. And to be clear, the popular dividend doesn’t have a reset perform: the $1.09375 stays unchanged till OPP decides to name the popular shares.

The Collection B most popular shares are buying and selling with (OPP.PB) as ticker image and are additionally cumulative in nature. This sequence was issued in Q2 FY2022 (This fall calendar yr 2021) and OPP needed to supply a better most popular dividend to get the deal accomplished, and these most popular shares are paying a most popular dividend of $1.1875 per share and could be referred to as from February 15, 2027 on.

What’s attention-grabbing is that because of the growing rates of interest, each most popular shares are actually buying and selling considerably under par. OPP.PA closed at $17.96 on Monday evening, whereas OPP.PB closed at $18.97, for a yield of respectively 6.09% and 6.26%. For sure that – as each sequence rank equally – I’m favoring the OPP.PB sequence now, given the upper yield and better chance the securities will probably be referred to as (word: these odds are nonetheless fairly slim at 4.75% is fairly low-cost for perpetual fairness so though they’re extra more likely to be referred to as, I do not assume a name is probably going).

What I like most about these kind of investments is the dearth of debt on the stability sheet. As you’ll be able to see under, the overall quantity of liabilities is lower than $1.4M, which is lower than half the overall quantity of belongings.

This implies the popular shares are just about first in line to be paid out ought to one thing go improper. This additionally makes the asset protection ratio attention-grabbing as the overall quantity of belongings versus the $120M in most popular fairness got here in at 283%. So even when the worth of the portfolio drops by 50%, the popular shareholders can nonetheless be made complete.

The popular shares have an extra attention-grabbing characteristic: if the asset protection degree drops under 200% (on this case, the overall quantity of belongings must drop under $240M), OPP will both should situation new frequent models to shore up the belongings place, or will probably be compelled to redeem the popular shares at par worth. And that is why I’m not too anxious in regards to the unrealized losses. It hits the frequent unitholders more durable, and the popular shareholders are protected by the 200% rule. And needless to say subsequent to the tip of the monetary yr, OPP raised about $34M in frequent fairness by a rights situation. This makes the popular shares safer.

Funding thesis

I at the moment nonetheless haven’t got a place in the popular shares of OPP, however I’m planning to go lengthy within the subsequent few weeks. On the present share costs, shopping for the B-series would make extra sense because the yield is larger.

Whereas the popular dividend yield of 6.1-6.25% is certainly not the very best yield on the road, it’s a ‘sleep effectively at evening’ kind of yield and the (commonplace) safety associated to the required 200% asset protection ratio provides an extra layer of security.