JMP Group: A 6.875% Baby Bond IPO With Increased Credit Risk – JMP Group LLC (NYSE:JMP)

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Introduction

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 Baby Bond issued by JMP Group LLC (JMP). 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 424B4 Filing by JMP Group LLC the prospectus.

Source: SEC.gov

For a total of 1.44M notes issued, the total gross proceeds to the company are $36M. You can find some relevant information about the new baby bond in the table below:

Source: Author’s spreadsheet

JMP Group LLC 6.875% Senior Notes due 12/30/2029 (NYSE: JMPE) pay a fixed interest at a rate of 6.875%. The new issue has no Standard & Poor’s, is callable as of 09/30/2021 and is maturing on 12/30/2026. JMPE is currently trading below its par value at a price of $24.54, which means it has a 7.88% Yield-to-Call and 7.13% Yield-to-Maturity. The interest paid by this baby bond is not eligible for the preferential 15% to 20% tax rate. This results in the “qualified equivalent” YTC and YTM sitting around 6.57% and 5.95%, respectively.

Here is the product’s Yield-to-Call curve:

Source: Author’s spreadsheet

The Company

JMP Group LLC, formerly JMP Group, Inc., is a full-service investment banking and asset management firm. The Company operates in five segments: Broker-Dealer, Asset Management, Corporate Credit, Investment Income and Corporate Costs. The Broker-Dealer segment includes a range of services, such as underwriting and acting as a placement agent for public and private capital markets raising transactions and financial advisory services in mergers and acquisitions, restructuring and other strategic transactions. The Asset Management segment includes the management of a range of pooled investment vehicles. The Corporate Credit segment includes the management of collateralized loan obligations and small business loans. The Investment Income segment includes income from the Company’s principal investments in public and private securities.

Source: Reuters.com | JMP Group LLC

Below you can see a price chart of the common stock, JMP:

Source: Tradingview.com

Unfortunately, as has been shown by the common stock’s constant downtrend that exists for 3 years now, JMP is not in its best shape. Yet, the company still pays a dividend, however small it is, as for 2018, JMP has paid $0.12 annual dividend on its common stock. With a market price of $3.55, the current yield of JMP is at 3.38%. As an absolute value, this means $2.53M yearly dividend expenses for the common.

In addition, the company’s market capitalization is around $68.64M, which makes JMP the smallest national investment brokerage in the US (according to Finviz.com).

Capital Structure

Below you can see a snapshot of JMP Group LLC’s capital structure as of its last quarterly report in June 2019. You also can see how the capital structure evolved historically.

Source: Marketwatch.com | Company’s Balance Sheet

With the newly issued 2029 notes, the total debt of the company becomes $162M, that are senior to the company’s equity. This makes the Debt-to-Equity ratio at 2.38, which cannot be defined as a good number after the market capitalization coverage reaches only 2/5 of the debt.

Furthermore, we also want to add one more ratio, the Earnings-to-Debt payments. 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. From the income statement, we can see the company had a net income of $5.68M for the TTM with $40.93M paid of interest expense. So here we have a ratio of 0.13, which is even worse than the previous ratio.

The JMP Family

JMP has two more outstanding baby bonds:

  • JMP Group LLC 8.00% Senior Notes due 1/15/2023 (JMPB)
  • JMP Group LLC 7.25% Senior Notes due 11/15/2027 (JMPD)

Source: Author’s database

Here is the moment to mention the company’s intentions to contribute the proceeds of the newly issued 2029 Senior Notes’ offering to redeem “up to all” of its existing 8.00% 2023 Senior Notes (JMPB) on October 28, saving itself a yearly rate of 1.125%. Some more info, about the baby bond that will continue trading (JMPD), can be found in the chart below:

Source: Author’s spreadsheet

JMPD also pays a fixed interest, at a rate of 7.25%, is callable as of 11/28/2023 and is maturing on 11/15/2027. With a market price of $25.86, JMPD has a Yield-to-Call of 5.25% and Yield-to-Maturity of 6.90% compared to 7.88% YTC and 7.13% YTM of the new issue, which means the second has much better Yield-to-Worst. It should be added that this comes at the price of two years later maturity and call date. One more thing to add, with the current spread of 0.375% between the two relatives’ nominal yield, a redemption of JMPD on its call date next year is less likely, making a possibility for a higher return than its current YTC (that is its YTW). As you can see, with respect to the Yield-to-Maturity of the two securities, the difference is insignificant and the yield spread of 0.23% in favor of JMPE seems insufficient judging by the higher credit risk for the bondholders.

In addition, in the following chart, you can see a comparison between JMP’s securities and the fixed-income securities benchmark, the iShares Preferred and Income Securities ETF (PFF). What we see is a devastating performance of JMPD during the mini-recession late last year when PFF had lost around 12%, as despite it has a maturity date in 2027, it has lost more than 20% of its market value. Unlike the 2027 Notes, JMPB’s behavior can be defined as a lot less volatile, which can be simply explained by the fact that it is term security that at this point was already callable, partial called, and maturing in 4 years. Source: Tradingview.com

Sector Comparison

The following section contains all baby bonds that pay a fixed interest rate, with a par value of $25, issued by an investment brokerage company.

  • By Years-to-Maturity and Yield-to-Maturity

Source: Author’s database

The higher the YTM is, the better the bond is, and in this case, as they all are trading close to and above their par value, it is actually their Yield-to-Best. The only exceptions are the new IPO, LTSL, and LTSF, which is their Yield-to-Worst. Yet, another clarification I want to do, unlike SFB that is investment-grade security, all other issues are not rated by S&P.

  • By Yield-to-Call and Yield-to-Maturity

Source: Author’s database

  • Years-to-Call and Yield-to-Call

Source: Author’s database

Source: Author’s database

Fixed-Rated Baby Bonds

This section shows a more global view of all baby bonds that trade on the national exchanges, pay a fixed distribution, with a positive YTC, and have stated maturity date of between 5 and 15 years. For a clearer view, the baby bonds, issued by Medley Management (MDLQ and MDLX) are excluded because of their high volatility.

  • By Years-to-Maturity and Yield-to-Maturity

Source: Author’s database

  • By Yield-to-Call and Yield-to-Maturity

Source: Author’s database

Special Considerations

None.

Addition To The iShares Preferred And Income Securities ETF

With the current market capitalization of only $36M, JMPE cannot be an addition to the iShares Preferred and Income Securities ETF (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.

Conclusion

As fixed-income traders, we follow every preferred stock or baby bond which is listed on the stock exchange. As such, JMPE 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 common stock is in dire straits. Its ratios are awful as there is almost no coverage of its debt. JMP’s other baby bond that will remain outstanding, JMPD, has coped extremely sorely with the type of stress test last year when, as a 9-year baby bond at that time, manages to lose more than 20% market capitalization. When we compare it to the newly issued baby bond, with 7.13% the new IPO has better Yield-to-Worst (equal to its Yield-to-Maturity) but the current spread between the 2 issues nominal yield, early redemption of JMPD is unlikely to occur, which is why the possible return of the 2027 notes, if the company does not run into greater difficulties by then, will be higher than the current YTW.

In regards to the sector, the newly issued baby bond also gives one the highest YTW and with the current returns, it is priced similar to LTSF and LTSL for near maturity. Likewise, when comparing JMPE with all baby bonds with 5 to 15 years to maturity, it is also located close to the top of the graphs, giving high yields. Generally, the returns of the 2029 Senior Notes seem good, but with the current condition of JMP, the too long term of 10 years, the credit risk is too high. There are issues, like RILY’s bonds, that give similar yields, having shorter maturity, and the company is in way better shape. Generalized, I don’t find the new issue tempting.

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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.

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