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Steel Partners Preferred (SPLP.PRT)

November 21, 2017

In my last post I alluded to a new position that I was building in a preferred issue. At the time I was writing that post I hadn’t yet accumulated a full position so I left the issue unnamed. An anonymous reader, as if reading my mind, suggested I look at the Steel Partners preferred units.

So now I’ll confirm I purchased these preferred units, but the T class not the A class. The original class A preferred units were issued last February for the buyout of Steel Excel shareholders. Then last month additional preferred units were issued to fund the buyout of the balance of the outstanding Handy & Harman shares not owned by Steel Partners. However, these latter units were designated class T units, but ONLY to distinguish them from the original class A units issued in February for ease in calculating the December 2017 dividend payment. After the December dividend payment the T class units will revert to A class units.

So why are either class of preferred units interesting? For one thing the balance sheet of SPLP is solid and cash flows from operations appear to cover LT debt several times (although this is not particularly clear as Steel Partners has interests in a number of businesses in different industries including manufacturing and banking – DO YOUR OWN DUE DILIGENCE). The preferred units, like preferred stock, have a call on cash flows superior to the common units, AND THE MANAGEMENT TEAM IN CHARGE OF SPLP CURRENTLY OWNS 50% OF THE OUTSTANDING COMMON UNITS OF STEEL PARTNERS. This means Lichtenstein’s management group would have to lose ALL their equity in the venture in order for the preferred units to become worthless. Thus, it seems to me that management incentives are at least to some degree aligned with those of preferred unit investors.

My interest in the T class units was tweaked when I noticed that they were selling at about a 5% discount to the A class units. That didn’t seem to make sense. The only difference in the cash flow streams between the two preferred classes is 10.4 cents at the December dividend payment, 37.5 cents payable to each class A preferred unit vs. 27.1 cents for each class T unit, but the T units were selling for $1 less. To explain this I can only suggest that there was additional selling pressure on the T class due to the fact that certain holders of the preferred units who had received them in the Handy & Harman exchange offer either 1) HAD to sell as they were constrained to holding only certain types of instruments or  2) considered the limited upside of the preferred units inconsistent with their investing goals. In either case I LOVE IT WHEN THERE ARE ‘FORCED’ SELLERS. Furthermore, just to make these units more attractive, they have a defined life; The issue must be fully retired at par, $25, in 2026, with 20% of the issued to be retired in 2020.

This is a period where I have been looking for investments that fit into one of two categories: either they are 10/1 (possibility of 10x up vs. 1x down) or relatively shielded from the current nosebleed equity markets with a reasonable return. These preferred units, of course, fall into the latter camp.  OK, so once I identified the preferred units as attractive why didn’t I ‘back up the truck’ and buy as much as I could, or at least buy a full position? Well, here we get into an ‘implementation’ issue. MY implementation issue. Scene: two weeks ago…price of both the A units and T units were trending down each and every day. I calculated that at $20 and change the units were yielding an IRR of 10%+. So I purchased a first tranche of class T units at about $20.12, thinking I would add a second and possibly a third tranche below $20 a unit as the price continued to trend down. BUT, and here’s the problem, rather than continuing their downward trend, the price suddenly reversed direction and began increasing! At first I thought, maybe this was just a blip upwards before the downward trend resumes. After a couple of days of gains, when I finally realized that this was not the case, I finally began putting in limit orders to get another tranche at a $.30 higher, then $.40 higher, then $.50 higher, etc. Yes, each time missing the purchase because I was nickel and diming my limit price. SO JUST HOW STUPID CAN I BE?? It’s a curse for me to make my first purchase at the low because I then anchor to that price and have a hard time pulling the trigger subsequently when the price goes up.

Anyway, that’s the saga of why I’m holding a half position in these preferred units.


As always, the above is not investment advice; always do your own due diligence!


  1. sam permalink

    I would imagine that they issue K1’s for their pfd’s. That unto itself keeps investor away, hence the discount to par. I appreciate any ideas. Thanks!

    • Yes, this is a limited partnership so K-1s are the order of the day. You’re right that this little fact probably keeps much of the small investing public away and thus gives us the discount. But is a 20% discount really appropriate? The discount’s already narrowed somewhat (both between par and between the A class units) and I expect it to narrow further over the next couple of months. If it does, maybe we’ll relook at the IRR and decide that there are better opportunities out there.

      Thanks for the comment.

  2. the LPs in Lichtenstein’s old PE fund thought their interests were protected as well. Last I checked, some of them still have lawsuits against him for his shenanigans. At best, you stand to make a small gain here. And preferreds have rightly been called the redheaded step-child of the capital structure.

    Do yourself a favor and take a close look at how this guy has treated his passive investors.

    • Yes indeed, Lichtenstein is out for himself and treated his hedge fund investors rather shabbily in 2008! I’m under no illusion that he treats his co-investors well. In this case, however, I think our respective interests are somewhat aligned. He levers up the equity he holds and we investors get a fixed income stream; he can’t have good returns on the first if we don’t get out due in the second. Plus we have the Gabelli funds that were invested in Handy & Harmon and now hold the preferreds; I believe they negotiated with Lichtenstein to extend the 20% retirement provision to the T class units. In any case, I don’t know if this is a long-term holding for me but I think it has more downside protection than most of the market at this point.

      Thanks for the comment.

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