Capital structure – Piazza Carlo Giuliani Tue, 10 May 2022 14:50:00 +0000 en-US hourly 1 Capital structure – Piazza Carlo Giuliani 32 32 CEF Preferred Stock for Income, Diversification and Quality Tue, 10 May 2022 14:50:00 +0000

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This article was first published to Systematic Income subscribers and free trials on May 3.

The CEF Preferred sector (i.e. the preferred shares issued by CEFs) is often overlooked by income investors due to its below-average size and liquidity. However, the sector has historically provided diversification, resilience, quality and decent returns. In this article, we provide an update for the sector along with our picks.

The CEF Preferred sector is comprised of three sub-sectors: CEF Preferred CLOs, CEF Fixed Income Securities and CEF Equity Securities. CLO CEF prefers is a riskier and more complex sub-sector and we will discuss this in another article. Here, we focus on low-risk fixed income and CEF preferred stocks.

These three subsectors have significantly different risk profiles, with CEF preferred stocks being the most resilient due, typically, to very high average asset coverage and low CEF leverage. CEF preferred shares are also attractive because most have investment grade ratings and have no debt (i.e., pensions, credit facilities or baby bonds) ahead of preferred shares in the capital structure. CEF fixed income preferred stocks tend to have lower asset coverage and often higher debt than preferred stocks. However, they also tend to trade at higher yields.

Sector themes

A number of key themes are worth highlighting.

First, the sector has has held up relatively well so far this year.

Systematic income

Systematic income

This is partly due to the sector’s relatively high coupon and yield levels, especially compared to other stocks of similar quality. Higher starting yields have the effect of shortening duration, making equities less sensitive to rising interest rates.

Another reason is that these stocks tend not to be held by passive ETFs due to their relatively low issue amounts, which prevents them from being included in relevant indices. This makes them less vulnerable to passive outflows such as the nearly $2.5 billion in year-to-date passive ETF outflows in the sector.

Finally, CEF’s favorite stocks remain a relatively niche sector, and investors with allocations to the sector are likely to be those with the highest conviction and “strongest hands”, making them less likely to sell and more likely to buy during draws.

Another theme was the ongoing issue of common stock on certain funds. All other things being equal, the issuance of additional common shares increases the fund’s net assets which, in turn, increases equity/preferred coverage.

For example, Gabelli Utility Trust (GUT) recently increased its outstanding common shares from 54 million to 64 million, adding approximately $40 million in net assets. A number of other Gabelli funds have done the same. This improves the position of the privileged, making them less vulnerable to losses, all other things being equal.

It’s important to point out that while issuing additional common stock is nice to see, it doesn’t always lead to higher preferred stock coverage. Indeed, the fund can also increase its borrowing, either through debt or through preferred shares. This is an especially common theme for CLO preferred shares where funds like to keep their leverage profile fairly stable while issuing additional common stock. This means that it is usually only CEFs with outstanding inherited preferences, such as Gabelli preferences, that benefit from this dynamic.

A third theme is the deleveraging before favorites in the capital structure. For example, the Highland Income Fund (HFRO) had a $200 million facility before the preferred shares, which has now disappeared. RiverNorth/DoubleLine Strategic Opportunity Fund (OPP) had a $21 million facility in front of the Preferred which also disappeared, being replaced by another Preferred. This dynamic improves the position of the privileged since all the assets are now directed towards the protection of the privileged rather than going first to repay the debt.

Some ideas

In this section, we highlight a few titles that look attractive at the moment.

the Gabelli Dividend & Income Trust 4.25% Series K (GDV) is trading at a yield of 5.73%. The stock has a relatively low coupon, which has caused it to underperform this year. Investors worried about higher interest rates should opt for the 5.51% yielding Series H (GDV.PH) instead.

These two favorite stocks have a comically high asset coverage figure of 755%. An intuitive way to think about this is that fund assets must fall more than 87% before the preferred stock asset coverage drops below 100%, i.e. before fund assets fall below the preferred stock liquidation preference.

GDV is an equity CEF with the largest sector holdings in the financials, healthcare and food & beverage sectors. The leverage of the fund is around 15%. GDV.PK is rated A3 by Moody’s and has no debt before it in the capital structure.

the Highland Income Fund 5.375% Series A (HFRO.PA) is trading at a yield of 6.02% and is rated A1 by Moody’s. The stock has a whopping 839% asset coverage (meaning the fund’s assets need to drop 88% before it hurts the liquidation preference). HFRO ​​has large, unusual and questionable holdings, such as its two REIT subsidiaries and a whole lumber pile in East Texas, as well as more traditional assets such as bank loans. Even if we reduce all non-loan assets to zero and stress test loan holdings by the historic recovery of around 70%, preferred stocks are still full.

the RiverNorth Opportunities Fund, Inc. 6.00% Series A (RIV.PA) is an A1-rated preferred trading at a yield of 6.42%. When the stock was recently issued, we had a fairly negative view of it, citing the built-in leverage of its CEF holdings, its low level of income generation (which would lead to a drop in NAV at over time, reducing asset coverage) and the fact that there was debt before the preference.

Nothing changes our mind like improved performance. Since its issuance just a few weeks ago, the stock has fallen to a stripped price of $23.35, pushing its yield up 0.4%. At this level, the stock has the highest yield of CEF’s preferred equity and fixed income universe, although it does not have the strongest risk profile. It currently has an asset coverage level of 296%.

About two-thirds of the RIV is allocated to other CEFs and another third to SPACs. Although CEF holdings result in additional leverage, the SPAC position is relatively low in volatility as they typically trade not far from their $10 price level.

Take away food

CEF’s preferred equity sector remains attractive as part of a broader income portfolio. It can offer resilience, diversification, quality and decent yields – an attractive combination in a challenging market environment for income assets, especially with the added uncertainty of rising recession estimates over the coming quarters.

Abercrombie & Fitch Stock: Undervalued and Resilient (NYSE: ANF) Sun, 08 May 2022 14:20:00 +0000

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Abercrombie & Fitch has strong financial fundamentals and underlying brands, but negative consumer perception and low margins may prevent the stock from reaching its full potential; I forecast the stock price of $45 over an 18 month period. Abercrombie & Fitch Co. (NYSE: ANF), founded in 1892 and headquartered near Columbus, Ohio, is a global omnichannel specialty apparel retailer for women, men and children that offers five distinct brands to consumers. The company operates approximately 730 stores in North America, Europe, Asia and the Middle East and distributes its products in more than 110 countries. The company is supported by multiple brands, but two key brand segments make up the bulk of sales; Hollister, a young adult lifestyle brand, and Abercrombie, a casual luxury brand. ANF reported $3.7 billion sales in 2021 and plan to continue growing in 2022, fueled by Hollister, which was recently named Top 5 brands for teens; this report presents a bull case for the company, while also acknowledging their past discriminatory practices, given that they have come to light again in a new Netflix documentary.

Abercrombie & Fitch Brands

Board ANF Q4 – Brands


As COVID delayed ANF’s momentum plans as governments closed malls and retail stores, one key positive emerged and has continued to this day: a strong online presence. . The company increased its online revenue to $1.7 billion last year, or 47% of the sales mix, from 28% in fiscal 2018. ANF also strengthened its in-store pickup model to support its online growth: 90% of its global store base has digital shopping/in-store pickup capabilities. The company has two key brands that make up its sales mix; Hollister (58%) and Abercrombie (42%). The company achieved strong growth in 2021, fueled by a 25% increase in U.S. revenue to $2.7 billion. ANF ​​has a geographical distribution of sales that focuses on the United States, with 71% of last year’s sales there. The company has always had a stable capital structure, with only 50 million shares outstanding. However, to stay afloat during COVID-19, ANF has taken on long-term debt at a rate of 8.75%, which will reduce its cash position until maturity in July 2025.


ANF ​​is part of the fast fashion industry in apparel and counts among its main competitors American Eagle (AEO), Guess (GES), Urban Outfitters (URBN) and The Gap (GPS). The global fast fashion market is expected to grow at a CAGR of 7%, representing $40 billion in sales by 2025. Comparing their competitors, ANF holds two key advantages. The first is their high gross margin; the company cultivated a unique American brand, while reducing the cost of materials, which helped its margin to remain high. Even throughout consumer preference cycles, their gross margin has historically exceeded that of their peers, going back several years. Given volatile cycles and global supply chain challenges, their gross margins of over 60% should support their profit targets.

Abercrombie & Fitch Profitability Comp

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The second benefit is their digital sales business. ANF ​​has increased its online share to almost half of its sales mix and sells the majority of its inventory through its online store. The company reduced its store base, coinciding with the return to revenue growth in 2017. This agility enabled a strong rebound in fiscal 2021 – the company generated EPS of $4.41 after losing $1.82 the previous year.

Fleet of Abercrombie & Fitch stores

ANF ​​Store Fleet Optimization Q4


When analyzing a fast fashion apparel brand, there are a few key risks that are inherent and cannot be fully mitigated. At the macro level, there is a risk related to ANF’s inability to anticipate and adapt to changing consumer preferences. Additionally, there is a risk associated with pricing pressure given high inflation and global supply chain issues. Another global risk is the potential impact regarding future store closures due to COVID-19. Although the company has a balanced sales mix, store presence is still important for customer service and retention. Regarding the company itself, in the recent past there have been allegations of improper hiring practices, including hiring based on appearance. Netflix released a documentary on April 19 called “White Hot: THE RISE & FALL OF ABERCROMBIE & FITCH.” This reminded consumers of discriminatory employment and marketing practices. Several employees detailed instances of firing models based on perceived ugliness and campaigns supporting perceived sexual harassment and a line from 2009 proclaimed ‘Show the twins’ above a photo of a young woman with her blouse open to two men. This risk is significant because many new viewers, especially teenagers who purchase their product, are unaware of ANF’s past and may turn away from the brand in the future. Although the company changed management several years ago, it is not known if its internal culture has changed. Additionally, Netflix’s document may encourage other employees to speak out about other previously unknown inappropriate behavior. I await feedback from the management team on this recent publication on the upcoming earnings call. The company also only has two key brands, so the risk of concentration of a brand going down can be a concern.

Watch White Hot: The Rise and Fall of Abercrombie & Fitch |  Netflix official site

Netflix ANF Documentary

The model shows the material upside down

If ANF achieves growth even close to its expected growth, its share price is likely to rebound. In hindsight, locking in an 8.75% senior rating stings, but the company’s net cash position of over $600 million provides ample opportunity to pay it off early or even refinance quickly if it does. wishes. Given their strong performance in 2021, I don’t expect the cost of debt to rise dramatically above 7.5% if they try to adjust their leverage in this environment.

ANF ​​Stock WACC


I’m forecasting a continued value of around $2 billion, given a mixed revenue increase of 3.25% for five years with weaker growth next year before accelerating in 2023 as issues of the supply chain are diminishing. The company expects revenue growth of 2-4% next year, and I expect growth at the lower end of the range. I see SG&A spend slowly dropping from 53% to 52% as a percentage of revenue over a 5-year period as digital sales synergies continue to pay off. I see raw materials jumping this year given supply constraints, before returning to historical averages in 2023. there aren’t too many material differences in the 2018 and 2019 numbers. I expect the company to hold the debt to maturity without refinancing, which explains the low cash flow in 2025. As the margin remains stable while as growth ensues over the 5-year term, a stock price of $48 (see below) can be sustained with strong fundamentals.

Forecast NOPLAT

Author NOPLAT Forecasts

Abercrombie & Fitch Enterprise Value

Author’s EV calculation

ANF ​​share price forecast

Author’s stock price forecast


ANF ​​continues to operate effectively and has shown resilience during the pandemic. The stock discount today, closing near ~$35, offers investors an opportunity over the next 18 months. I expect the stock price to reach $45 as the company invests and prospers through its digital offerings. The company saw strong growth from 2017 to 2019 and rebounded with strong earnings in 2021. While the company is undervalued and the model supports $48, I’m taking a cautious cut given the weak apparel industry profit margins, brand perception risk, and historically weak institutional investor sentiment.

ANF ​​EV Stock Valuation Metrics

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Report: Premier League ‘advanced’ in owners and directors test for Todd Boehly consortium ahead of Chelsea takeover Sun, 01 May 2022 18:30:00 +0000

The Premier League are said to be ‘advanced’ in their scrutiny of the Todd Boehly consortium, who have been named Chelsea’s next favorite owners.

The consortium, which involves Clearlake Capital, beat competition from Sir Martin Broughton’s group and Stephen Pagliuca’s party to be named the preferred bidder and given the chance to enter into exclusive talks before taking over at Chelsea.

According to Sky News, the Premier League is “advanced” in its scrutiny of the consortium as part of its test of owners and directors.