Preferreds Weekly Review: Agency mREITs Deliver Earnings

The preferreds market demonstrated stability in the fourth week of July, characterized by tight credit spreads. Notably, agency mortgage REITs like DX, AGNC, and NLY enhanced their preferred coverage through recent common equity raises, making their preferreds particularly attractive with yields around 9.5%. However, BDC OFS's newly issued baby bond is highlighted as an unappealing investment for bondholders.

Analysis

The preferred stock and baby bond market remained stable through the fourth week of July, characterized by relatively tight credit spreads. A key theme is the improving credit profile of agency mortgage REITs, specifically Dynex Capital (DX), AGNC Investment Corp. (AGNC), and Annaly Capital Management (NLY). These firms have recently raised common equity, which significantly bolsters their equity-to-preferred coverage ratios, providing a stronger capital buffer for preferred investors. This fundamental improvement, coupled with yields of approximately 9.5%, makes their preferred issues particularly appealing from a risk-reward perspective. In contrast, the report issues a direct negative assessment of a new baby bond from Business Development Company (BDC) OFS Capital (OFS), explicitly labeling it as an unappealing proposition for bondholders, suggesting perceived underlying credit weakness.

Key Decisions for Investors

• Investors seeking high-yield income should consider the preferred shares of agency mREITs like DX, AGNC, and NLY, given their attractive ~9.5% yields are now supported by enhanced credit coverage from recent equity raises.
• It is prudent to exercise caution and likely avoid the new baby bond issuance from OFS Capital, as it has been explicitly identified as an unappealing investment with a negative credit outlook.
• With overall credit spreads in the preferred market being tight, focus should be on security-specific fundamentals and catalysts, such as the balance sheet improvements noted, rather than broad market-wide allocations.