This week’s Weekly addresses two compelling high income opportunities (one of our own, and one from a Blue Harbinger member, Michael F). First, an attractive high yield bond that offers a double digit yield. It’s from a company that has experienced significant challenges, but appears to finally be “turning the corner,” and it still trades an attractively discounted price (it also announces earnings on Tues). Second, member Michael F has brought a high-yield MLP idea to our attention. Specifically, it’s an attractive ethanol logistics company that pays nearly 9% in distributions. However this company faces some big risks worth considering…
First, the bonds…
Walter Investment Management 2019 Bonds (15.1% Yield)
Walter Investment Management Corp (WAC) services and originates residential loans (including reverse mortgages), and by many measures the company is currently in distress. For example, its stock price has fallen from nearly $50 in 2013 to below $3 now, and its 2021 high-yield bonds trade at a significantly discounted 76 cents on the dollar. Despite these dramatic declines, WAC’s business is turning the corner (impairments and goodwill write-offs are largely in the rearview mirror now), and the market is again believing in its desire and financial wherewithal to support its debts (the bond prices have rebounded dramatically, but they are still on sale). Specifically, we like 15.1% yield and big coupon payments on WAC’S 2021 bonds. You can read our full write-up on these bonds here…
Next, the MLP…
Green Plains Partners LP (Yield 8.6%)
This ideas comes from reader Michael F., and he offers some very well thought out information…
Came across a high yield 8.6% company Green Plains Partners LP (GPP). It is a MLP subsidiary of the Great Plains inc ethanol company, which has 10% of the ethanol business. The large distribution in 2015 was due to their startup status/IPO. Their parent is subject to the spread of oil and corn prices, which are coupled due to this ethanol business (35% of US corn is converted to ethanol, which affects the whole farm economy, which is a lot of political power). The parent GPRE has been profitable even at low oil prices and ethanol is produced cheaper than gasoline now. Looks like they are growing the dividend 2.5% per quarter and can keep doing so as long as the parent ethanol business is profitable. GPRE has a take-or-pay contract with GPP for 5 years I think. GPRE is vertically integrating their storage and transport in partnership with GPP. Looks pretty interesting as long as the EPA ethanol mandates stay in place. Thanks Mike
Thank you for that quality info Mike. Here is our two cents…
First, on the positive side, GPP operates under long-term fee-based commercial agreements which basically generate big stable cash flows to help support the big distribution payments. As the following table shows they have agreements with Green Plains that last from 3 to 8.5 years.
Other positives are that there are cost advantages to ethanol, major retailers are converting to higher ethanol blends (E15), export demand is growing, and the company is focused on growth (for example its Jefferson Terminal project and its Drop Down acquisition). More information on these points can be found in the company’s recent investor presentation here.
However, we also believe there are some very big risk factors worth considering before you invest in this MLP. For example, the ethanol industry is highly regulated, and laws can change quickly. For example, consider the views on regulations (especially environmental regulations) of the guy in the White House now, versus the previous guy in the White House. Wikipedia does an excellent job highlighting environmental laws (you can access that here), but keep in mind that with the swipe of a pen entire companies can essentially be put out of business.
Another big risk is that Green Plains Partner’s only big customer is its parent organization, Green Plains (GPRE). GPRE has been generating very little profit, and its debt load has been slowly creeping higher. Also, the parent (GPRE) is the general partner and owns 64.5% of GPP (the public owns the remaining 35.5%). This means if the parent gets in trouble financially there is a strong likelihood that they’ll start doing goofy things to access GPP profits (GPP is currently very profitable). This could hurt GPP price and distribution significantly. Keep an eye on the parent if you’re going to invest in GPP.
Another risk (or perhaps more of an inconvenience) is that GPP is organized as an MLP which means you’ll get a K-1 statement at the end of the year. Also you need to be cautious about owning MLPs in a retirement account (e.g. IRA) because if the MLP generates too much “other comprehensive income” then you could end up disqualifying the preferential tax treatment for your entire IRA.
Overall, GPP’s big distribution looks very attractive (and sustainable), but be sure you consider the risks before investing. We are not purchasing this one right away, but we are adding it to our watch list for further review. And thanks to Michael F. for bringing this one to our attention.