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 Preferred Stock 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.
For a total of 2M shares issued, the total gross proceeds to the company are $50M. You can find some relevant information about the new preferred stock in the table below:
B. Riley Financial, Inc. 6.875% Series A Cumulative Perpetual Preferred Stock (NASDAQ: RILYP) pays a qualified fixed dividend at a rate of 6.875%. The new preferred stock has no Standard & Poor’s rating and is callable as of 10/07/2024. Currently, the new issue is trading a little below its par value at a price of $24.80. This translates into a 6.93% Current Yield and a YTC of 7.34%.
Here is the product’s Yield-to-Call curve:
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:
For 2018, the company has paid a $0.74 annual dividend on its common stock. With a market price of $22.84, the current yield of RILY is 3.24%. As an absolute value, this means $19.62M yearly dividend expenses for the common.
In addition, the company’s market capitalization is around $598M, which makes RILY one of the smallest asset management companies.
Below, you can see a snapshot of B. Riley Financial’s capital structure as of its last quarterly report in June 2019. You also can see how the capital structure evolved historically.
Source: Morningstar.com | Company’s Balance Sheet
As of Q2 2019, RILY had a total debt of $1.52B ranking senior to the newly issued preferred stock. The new Series A preferred shares rank junior to all outstanding debt and equal to the other outstanding preferred stocks of the company. Currently, RILYP is the only issued preferred stock by B. Riley Financial.
The Ratios Which We Should Care About
Our purpose today is not to make an investment decision regarding the common stock of RILY but to find out if its new preferred stock has the needed quality to be part of our portfolio. Here is the moment where I want to remind you of two important aspects of the preferred stocks compared to the common stocks.
- Preferred shareholders have priority over a company’s income, meaning they are paid dividends before common shareholders.
- Common stockholders are last in line when it comes to company assets, which means they will be paid out after creditors, bondholders, and preferred shareholders.
Based on our research and experience, these are the most important metrics we use when comparing preferred stocks:
- Market Cap/(Long-term debt + Preferreds) – This is our main criteria when determining credit risk. The bigger the ratio, the safer the preferred. Based on the latest annual report and taking into consideration the latest preferred issue, we have a ratio of 598/(1520 + 50) = 0.38, which cannot be defined as a good number after the market capitalization coverage reaches only 40% of its liabilities.
- Earnings/(Debt and Preferred Payments) – This is also quite easy to understand approach. 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. The ratio with the TTM results is 24.05/(66.62 + 3.44) = 0.34 that also repeats the previous ratio.
The B. Riley Financial Family
RILY has seven 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)
- B. Riley Financial 6.75% Senior Notes Due 05/31/2024 (RILYO)
- B. Riley Financial 6.50% Senior Notes Due 9/30/2026 (RILYN)
We have to mention that the company has included some special optional redemption clauses on four of its “babies” (RILYH, RILYI, RILYO, and RILYP) depending on when the call occurs if such early call occurs before maturity. It is also the reason, they have higher Yield-to-Call on its earliest call date. I’ll try my best to simplify all options at what price any baby bond can be called with the following chart. Horizontally, at the top are all the call dates of all 7 securities. In the boxes below, you can see what is the call price of the issue if the company decides to redeem it on the relevant date.
If we compare the newly issued preferred stock with the rest of RILY’s issues, we can see that RILYP has the highest Yield-to-Worst of 6.93%, equal to its current yield. However, we have to notice that as preferred stock, it sits junior to the company’s baby bonds. It is especially important given the pretty high leverage of the company. When looking at the Yield-to-Worst of RILYH, RILYI, RILYO, RILYP (equal at their Yield-to-Maturity), a return of 6.40% and 6.70% seems quite better with a significant reduction in the credit risk. The yield spread of 0.23% in favor of the preferred stock versus RILYN, for example, seems utterly insufficient even if RILYP pays a qualified dividend. Overall, RILYN seems a lot better than the new IPO. If you want to be even more conservative, RILYH and RILYI give a slightly lower return for less than 4 years to their maturity date.
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). RILYN and RILYO are not included in the following picture, as they have too little trading history. What we see is the rest of 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.
The charts below contain all preferred stocks and units in the ‘Asset Management’ sector (according to Finviz.com):
- By Yield-to-Call and Current Yield
The upper right stock is the one with the highest YTC and the highest CY at the same time. In this case, it is the speculative one TECTP as there is very little information available about the company, that is private, and the risk in it is the uncertainty. Generally, it is very far from the quality of the rest of the group securities.
- By Years-to-Call and Yield-to-Call
To see the real Yield curve of these securities, we’ll have to exclude the negative YTC securities:
Here is the full list:
Special Optional Redemption
- Upon the occurrence of a Delisting Event (as defined below), we may, at our option, redeem the Series A preferred stock, in whole or in part, within 90 days after the first date on which such Delisting Event occurred, for cash, at a redemption price of $25,000.00 per share (equivalent to $25.00 per depositary share), plus any accrued and unpaid dividends to, but not including, the date of redemption, and the depositary will redeem a proportional number of depositary shares representing the shares redeemed.
- Upon the occurrence of a Change of Control (as defined below), we may, at our option, redeem the Series A Preferred Stock underlying the depositary shares, in whole or in part within 120 days after the first date on which such Change of Control occurred, for cash, at a redemption price of $25,000.00 per share (equivalent to $25.00 per depositary share), plus any accrued and unpaid dividends to, but not including, the date of redemption, and the depositary will redeem a proportional number of depositary shares representing the shares redeemed.
Use of Proceeds
We anticipate using the net proceeds from this offering for general corporate purposes, including funding future acquisitions and investments, repaying indebtedness, making capital expenditures and funding working capital. Pending such use, we may invest the net proceeds in short-term interest-bearing accounts, securities or similar investments.
Addition to the iShares Preferred and Income Securities ETF
With the current market capitalization of only $50M, RILYP cannot be an addition to the iShares U.S. Preferred Stock ETF (NASDAQ: PFF), which is important to us due to its influence on the behavior of all fixed-income securities. I’ll just remind you about last year’s rally in the fixed-income borne from the redemption of the two “giants” HSEA and HSEB and the released cash of over $600M used from PFF to buy more of the rest of its holdings.
As fixed-income traders, we follow every one preferred stock or baby bond, which is listed on the stock exchange. As such, RILYP 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. As for the newly issued preferred stock, it provides the highest Yield-to-Worst in the family, and also the second-best returns in the sector. However, due do the greater amount the debt, RILYP’s yields also come with an increased level of credit risk. This is why I recommend the company’s baby bonds instead. RILYH and RILYI give 6.40% Yield-to-Maturity for no more than 4 years holding to maturity. RILYN gives slightly better returns but at the cost of longer maturity. Historically, RILY’s issues had traded very close to the fixed-income benchmark, PFF, which later the more recent issues become superior to the ETF. We should not forget the fact that these are term securities, which predisposed them to less volatile behavior as long as there is no increase in the credit risk. Overall, RILYP seems quite overpriced against the background of the “family” and I prefer the senior notes, instead.
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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.