As the U.S. stock markets gyrate on speculation about a possible deal to avert a debt default, it is clear that failure to lift the U.S. government's debt ceiling would radically lower the market's risk floor.
The one sector that would be hit the most by a U.S. government default, no matter how short-lived or "technical" in nature, would be the financial sector.
Companies like Morgan Stanley (MS) , which was thrashed in Friday's market action, interact with the U.S. Treasury on so many levels. Morgan Stanley issues Treasury bonds, buys them for its clients and benefits greatly when the Fed's bond market interventions keep interest rates artificially low. This allows Morgan Stanley to do IPOs and follow-ons for many "fundamentally challenged" (I was looking for another way to say "crap" there) companies.
If the Treasury can't issue additional debt, that gravy train stops. Immediately. So, as I pitch preferred stocks to my clients as a safer alternative to common equities, my smart asset management clients (a cohort that includes each one of them) have been asking me: Do we have to own so many bank preferreds? In a word, no.
So, banks are, or were before Silicon Valley Bank (SVB) started the Crisis of '23, frequent issuers of preferred shares because those mezzanine issues are counted as Tier 1 capital by the FDIC and other bank regulators. But when that capital is less in demand by spooked investors, existing preferreds start sporting crazy yields and the window for issuing additional preferred shares is effectively closed to banks.
Of course, "crazy" is in the eye of the beholder. I have named two floating-rate bank preferreds, Valley National's (VLYPO) and Zions Bancorp's (ZIONP) , that I have bought in size recently. But the question from my clients -- do we have too much exposure to the U.S. banking system? -- is still a massively perceptive one.
So, as someone who believes in different modalities in investing, I created a new model portfolio that is entirely composed of preferred shares, yet has zero exposure to financials.
I called it "NOFIN." No exposure to the U.S. banking system. At all. No commercial banks, no investment banks, no BDCs, no insurance compares, nada.
I compose these model portfolios with tons of blood, sweat, toil and tears and I have to protect my firm's intellectual capital. But just as I don't have any intention to give away my hard work for free, I have no intention to tease.
So, as a compromise, let me give you one name that ALMOST made NOFIN, but fell just short of the cut line. GTLS-B , the 6.75% Mandatorily Convertible Preferreds issued by Chart Industries (GTLS) . GTLS-B is the 11th player on a 10-man team. If any of the NOFIN names are called -- five of the 10 NOFIN names are currently callable -- I will gladly take GTLS-B off the bench and insert her into NOFIN.
GTLS-B will mandatorily convert into shares of Chart Industries' common stock, GTLS, on 12/15/25. The mechanics are here, as described by my fixed-income bible, www.quantumonline.com.com. Between now and December 2025, GTLS-B features a 6.75% coupon and quarterly record dates on the first day of the 3/6/9/12 months of the year. So, if you want to buy some GTLS-B, do it fast to snag that next payment.
I don't have enough space remaining in this column to properly describe Chart Industries' businesses. Suffice it to say, the company supplies the plumbing for energy production systems, including equipment that drives my favorite energy subsector, LNG. Natural gas, as I noted in my previous Real Money column had a renaissance this past week in terms of futures contract pricing, but in terms of demand, especially in emerging markets like China and India, natgas should show a steadily upward-sloping curve for the foreseeable future.
So, GTLS-B allows you to make a call about the future prospects of the U.S. equity market (and Chart Industries itself) -- with a "drop-dead" date in December 2025 -- while getting paid in the interim.
Chart Industries preferreds, GTLS-B, are is a strong bench player, and I will have no hesitation to insert them into NOFIN if one of our starters is called away.
