March was another strong month for our portfolios. Market performance was initially concerning, as we saw the S&P 500 down more than 2.5 percent during the first week of March. We did see a rebound as the month progressed and the Federal Reserve completed its dovish turn. Federal Reserve Chairman Jerome Powell provided color on a new course of action where the Federal Open Market Committee will not plan to raise interest rates at all in 2019 and has only one increased planned in 2020. This is a remarkable reversal in policy from last fall, when the Federal Reserve hinted at three rate increases for 2019 alone. The other action by the Fed was the early termination of the “balance sheet normalization” program. For the past two years, the Federal Reserve had been slowly unwinding the Quantative Easing programs of the preceding ten years. Instead of accelerating that process, the Federal Reserve has made it apparent that asset markets will continue to provide capital with lower interest rates for the foreseeable future. While this may create asset bubbles in the intermediate future, the short-term implications are advantageous. All asset classes should benefit from the continuing availability of cheaper capital. Fixed income investments will be major beneficiaries, with some effects already palpable. For example, the ten-year United States Treasury bill has fallen from 2.63 percent to 2.40 percent in the two weeks since the March Federal Reserve board meeting. This is a huge move in such a short period of time. In response to this huge drop, you may have heard that the three-month US Treasury note yielded more than the ten-year note—which has not occurred since 2007. Many believe this yield curve inversion is a guarantee of a forthcoming recession. We are not forecasting a recession this year.
Please review the following updates from some of the existing positions that we manage.
BNCCorp Inc.- (BNCC): One of our longer-standing equity positions looks to be preparing to be acquired, as we forecasted previously. On March 15, BNCCorp’s largest shareholder (9.9 percent), PL Capital, announced that they would propose a proxy vote to capture a board seat and ask the shareholders to vote on selling the company. We have been waiting for PL Capital to join Rangeley Capital (the hedge fund sponsor who piqued our interest in BNCCorp) and M3 Funds (a fund manager in Utah specializing in regional banks) in asking the board to implement a sale process. While some in management, including CEO Tim Franz, have opposed a sale in the past, we believe strongly that PL Capital’s capture of a second board seat, in combination with the remaining activist shareholders, will ultimately result in completion of a sale. As a whole, GCWM controls approximately one percent of the shares outstanding. While this does not sound like a lot, for publicly traded companies, it is a material amount. On March 26 we drafted a letter to the Board of BNCC encouraging them to move forward to undertake a determination of its valuation. BNCC is well-positioned to sell and its three largest shareholders (totaling 29 percent of the shares outstanding) all agree that a sale should occur. The Federal Reserve’s recent decision to scale back interest rate increases has helped the BNCCorp’s underlying asset base of long-term US Treasuries notes. As the long end of the curve has moved lower, the value of the assets have improved (the inverse relationship between yield and bond prices). The bank also holds an extremely strong deposit base, both in size and consistency. We believe this will ensure interest in the North Dakota-based bank among prospective buyers. The current tangible book value of the bank is approximately $24 per share; however, in a take-out situation, one could expect around $35 per share. There is a bonus that the take-out premium could reach the upper-$30s to $40 per share if there are multiple parties looking to acquire BNCC’s attractive deposit base. We are very confident in the sellability of BNCCorp.
Exterran Partners Bond due April 2021 – (CUSIP: 30227CAB3): Exterran announced that it is calling our 2021 bonds early. The parent company raised $500 million in a private offering early in March and the proceeds of that sale were intended to retire our paper and some of the revolving credit facility. It was a solid investment for us one that earlier clients focused on income enjoyed. The bond price moved higher with the improving credit. It seems the recent growth of investment in natural gas compression service companies is not slowing anytime soon.