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Posts Tagged ‘BDC’

This Monthly Dividend Stock May be Worth a Look

Fifth Street Finance Corp.(FSC) may be an ideal name for aggressive income investors. This is one of the top business development companies. The consensus price target is $11.50. Investors receive a 10.47% dividend with monthly distributions.  First Call consensus has a buy recommendation with a 2.5 rating.

Fifth Street reported net investment income of $0.27 (excluding gains on convert repurchase, diluted), in line with prior quarter and our estimate. This was a result of lower interest income earned on a larger average portfolio. Book value increased by $0.02 following a net $2.5 million unrealized appreciation on investments.

Liquidity: As of this week, FSC increased its available liquidity to $738 million following the post quarter end note issuance, capital raise, and credit facility expansion. FSC is well positioned for the acquisition of Healthcare Financial Group as management works toward its target leverage.

Valuation: Fifth Street is trading 12% premium, 1% above the peer group average, and yielding 10.47%, above the peer group average of 9.1%.

Estimates: Analyst lowered the 2013 estimate to $1.08 (from $1.10) to reflect a larger liquidity drag than previously expected. The 2014 and 2015 estimates remain unchanged at $1.15 and $1.20.

Maintain Buy: FSC is well positioned from a liquidity and capital standpoint to continue to take advantage of a strong pipeline of growth. The next step for the stock is to translate that into higher ROEs by achieving and maintaining higher levels of leverage.

In May, FSC announced that it has entered into an agreement to purchase a specialty lender, Healthcare Finance Group, that provides lending to healthcare companies. FSC will be investing $100 million, financed by cash and liquidity mentioned above.

OnMay 6, 2013, upon expiration of our existing stock repurchase program, the Board of Directors authorized a stock repurchase program to acquire up to$50 millionof outstanding common stock. Stock repurchases under this program would be made through the open market at times and in such amounts as management deems appropriate, provided they are below the most recently published net asset value per share.

New BDC ETF is a Pure Play on High Yield Income

Market Vectors ETF Trust just launched the Market Vectors BDC Income ETF (NYSE: BIZD), the first exchange-traded fund (ETF) designed to provide pure-play exposure to business development companies (BDCs).

BIZD is currently trading at $20.29 and will pay quarterly dividends and annual capital gains.  The initial dividend amount has not been announced yet but the index has a dividend yield of 7.6%.

Business development companies have traditionally been high-yielding, making them an attractive choice in today’s ongoing search for income.  Investing in BDCs provides exposure to private companies that many investors could not otherwise access, allowing for potential growth and yield generation.

The new ETF will try to reflect the performance of the Market Vectors U.S. Business Development Companies Index, which tracks U.S. publicly traded BDCs. The Index’s market capitalization break down includes mid-caps 49.4% and small-caps 50.6%. The underlying index also has an average weighted dividend yield of 7.60%.

To be eligible for the index, a BDC must also have a market capitalization in excess of $150 million, a three-month average daily trading volume of at least $1 million, and a minimum trading volume of 250,000 shares each month in the previous six months.

BIZD has 25 holdings and its top holdings include Ares Capital (ARCC) 16.0%, American Capital (ACAS) 14.8%, Prospect Capital (PSEC) 7.5%, Apollo Investment (AINV) 6.1% and Triangle Capital (TCAP) 4.9%.

BDCs’ principal business is to lend capital or provide services to privately-held companies or thinly-traded U.S. public companies. To qualify as a BDC, a company must be organized under the laws of, and have its principal place of business in the U.S.; be registered with the Securities and Exchange Commission; and have elected to be regulated as a BDC under the Investment Company Act of 1940 (“the 40 Act”).

New Listing of Business Development Companies (BDC) for Monthly Income

Business Development Companies (BDCs) allow public shareholders access to portfolios that resemble private-equity funds.  However, BDCs are not for the faint of heart.  Most offer liquidity, income, upside potential, professional management and the opportunity to invest in some attractive areas.  But there are significant risks includinghigh fees, leverage, conflictsof interest and risky underlying investments, to name a few.

Most BDCs have Web sites where you can find information on types of investments,advisors, leverage employed, expense and payout ratios, distributions, and other important data.  All filedocuments with the SEC.  Needless to say, you should read very carefully all of the filing materials, including theprospectuses, proxy statements, annual and semi-annual reports as well as their 10-Ks, 10-Qs and 8-Ks (detailing material events).

Take the time to analyze and identify those you want to own at the right price. Then when the time is right and the shares are trading near net asset value, make your move. While it’s ego gratifying to invest with the big guys, don’t pay up for mediocre performance or greedy managers.

Here is a listing of BDCs with company information.  In my opinion, a high yield should indicate a stable stock so I like BDCs with a low volatility to confirm it is trading well.  I prefer BDCs with average volatility below 30% and find those below 20% as a great indicator.  Of course, it’s the yield and monthly income we are looking for in a BDC and maybe a little capital gain.

Listing of BDCs with high yields

Click to enlarge

2 BDCs Offering Monthly Income at Yields Above 1o%

In yesterdays post, Fitch comfirmed that the business development company’s would remain stable throughout 2011 as recent capital raises and leverage reductions have provided ample investment capital to deploy and improved overall operating flexibility. BDCs lend to and invest in companies in connection with investments by private equity sponsors. Basically, they makes loans at a higher interest rate than money cost to them with the difference being their profit. With the market pullback over the last 6 weeks, FSC and PSEC are better priced for entry points and both pay monthly dividends. PSEC, which had been focused on the energy and industrial sectors, has expanded its range to include industries such as health care and specialty minerals.

Prospect Capital Corporation (PSEC) has fallen from a price above $12 in eaarly 2011 to around $10 today. This is a 16.7% decline during the recent market pullback. PSEC pay a monthly dividend of $0.10128 for a yield of 12%. It has a trailing PE of 7.6 which is cheap for this type of yield. PSEC just underwrote a public offering of 10,000,000 shares of its common stock at a price to the public of $10.15 per share. Barclays Capital Inc. acted as sole book-running manager in this offering and Prospect has granted the underwriter a 30-day option to purchase up to 1,500,000 additional shares. This is a good for PSEC as it just raised additional capital for more investments while lower the stock price to $10.00.

Fifth Street Finance Corp. (FSC) has fallen from around $13.50 to $11.50 during the the last few months. FSC has a monthly dividend of $0.1066 for a yield of 10.96%. It is trading at a PE of 18 which is more expensive than PSEC shown above. Fifth Street Finance Corp. announced that it has closed its public offering of 5,558,469 shares of common stock at a price of $11.72 per share, raising approximately $58.6 million in gross proceeds. Again, this raises capital for more investment opportunities.

Bottomline: Both PSEC and FSC offer a more attractive price entry point due to the new shares offering. You should continue to monitor these stocks as potential additions to your monthly income portfolio.

Company Profiles:

Prospect Capital Corporation (Prospect Capital) is a financial services company that lends to and invests in middle market privately-held companies. The Company is a closed-end investment company. The Company invests primarily in senior and subordinated debt and equity of companies in need of capital for acquisitions, divestitures, growth, development, project financing and recapitalization. The Company’s investment objective is to generate both current income and long-term capital appreciation through debt and equity investments. It focuses on making investments in private companies, and many of its investments are in energy companies. The Company’s investment adviser is Prospect Capital Management LLC. On December 2, 2009, the Company completed the acquisition of Patriot Capital Funding, Inc. (Patriot), whereby Patriot merged with and into the Company.

Fifth Street Finance Corp. is a finance company that lends to and invests in small and mid-sized companies in connection with investments by private equity sponsors. The Company is externally managed and advised by Fifth Street Management LLC, which it also refers to as investment adviser. As of September 30, 2010, its debt investments were secured by first or second priority liens on the assets of its portfolio companies. As of September 30, 2010, it held equity investments consisting of common stock, preferred stock, or other equity interests in 19 out of 38 portfolio companies. Its deal originating efforts are focused on building relationships with private equity sponsors that are focused on investing in the small and mid-sized companies. It divides the country geographically into Eastern, Central and Western regions.

Outlook for Business Development Companies (BDCs) is Stable for 2011

Fitch Ratings’ outlook for U.S. business development companies (BDCs) is Stable for 2011, as recent capital raises and leverage reductions have provided ample investment capital to deploy and improved overall operating flexibility. Fitch expects portfolio originations to outpace repayments for the full year, should risk-adjusted returns remain attractive in the market, which should support growth in net investment income and enhanced dividend coverage.

Public debt issuance in the BDC space has increased with the rising popularity of unsecured convertible notes. Prospect Capital Corporation was the first to access the convertible note market in the BDC space, pricing $150 million of five-year notes in December 2010. Ares Capital Corporation, Apollo Investment Corporation, Fifth Street Finance Corporation, and Hercules Technology Growth Capital have all since followed suit. Fitch believes opportunistic issuance in the space will continue, with the goal of improving funding flexibility and better matching liability structures with the average duration of portfolio company investments.

The improved availability of the debt and equity markets is likely to convert the usage of bank revolvers into temporary warehouse facilities, rather than longer-term funding sources. Leverage levels are expected to remain below longer-term historical targets in 2011, as valuation trends remain somewhat choppy in the middle market space.

Get Monthly Income from Prospect Capital (PSEC)

Prospect Capital Corporation (PSEC) is a financial services company that lends to and invests in middle market privately-held companies. The Company is a closed-end investment company. The Company invests primarily in senior and subordinated debt and equity of companies in need of capital for acquisitions, divestitures, growth, development, project financing and recapitalization. The Company’s investment objective is to generate both current income and long-term capital appreciation through debt and equity investments. It focuses on making investments in private companies, and many of its investments are in energy companies. The Company’s investment adviser is Prospect Capital Management LLC. On December 2, 2009, the Company completed the acquisition of Patriot Capital Funding, Inc. (Patriot), whereby Patriot merged with and into the Company.

Prospect Capital Corporation (NYSE: PSEC) is a business development company (BDC). BDCs have to pay out 90% of their distributable cash flow in dividends. In exchange for paying out most of their earnings in dividends, they pay no corporate income taxes.

Other companies that have a similar deal with the government – real estate investment trusts, for example – have large amounts of debt. But as a BDC, Prospect isn’t allowed to borrow too much money. The Investment Company Act of 1940 requires BDCs to have assets totaling at least 200% of their debt at all times.

Most of Prospect’s loans earn interest of between 10% and 15%. Some are as high as 18%. Others are in the range of 7%-9%. Overall, Prospect’s investment portfolio yields about 13% as of company reports.

On May 10, 2011 Prospect Capital (NASDAQ:PSEC) reported earnings and analysts, on average, expected earnings of $0.26 on sales of $40.9 million. Prospect Capital actually reported earnings of $0.27 per share on sales of $54.4 million, beating EPS estimates by $0.02 and beating revenue estimates by $13.5 million.

Prospect continues to grow as it makes new loans to other companies.  Prospect has invested $32 million of senior debt, subordinated debt, and equity in an advertising media buying business.  Of Prospect’s $32 million total investment, $24 million is structured as senior secured debt, $3 million as subordinated debt, and $4 million as controlling equity.   All of the media Company’s managers will remain with the business.  Separately, Prospect provided $15 million in secured second lien acquisition financing for a top company in the in-store media industry.  Prospect also provided $15 million in secured second lien financing for the recapitalization of a leading company in the engineered glass materials industry.  Prospect has closed more than $410 million of new originations since December 31, 2010.

Prospect pays its common stock dividend monthly. Right now, it’s paying $1.22 per share in dividends per year, $0.103 per share per month. With the stock around $11.30 a share, that’s a current yield of just under 11%. The 5-year dividend growth rate is 28.47% as the dividend grows when PSEC makes more income from loans.  Current book value per share is $10.33 so PSEC is trading at a 9% premium to book value.

Let Business Development Companies Pay You Monthly Dividends

This is the third in the investing for monthly income series: get paid by business development companies.

A business development company (BDC) is a publicly traded company that lends money to private companies.  BDCs must pay out 90% of their income to avoid paying taxes.  Therefore, BDCs pay out nearly all of their income to investors.

BDCs invest in companies that are private and do not have access to capital from the public stock exchanges.  Generally, BDCs make a loan to a private company that carries a significant interest rates i.e., 10-15% and an option to own shares of the company.  The BDCs are borrowing money at a fixed-rate of 3-4%.  This is a great business model to borrow at 3-4% and loan at 10-15%.  The difference minus expenses being income paid to the BDCs investors.

BDCs operate like a bank making loans to private companies.  To protect themselves, many BDC loans have a floating rate that will adjust if interest rates rise.  BDCs also are very adapt at managing the risk of each company they loan money to by judging the financial health of each prospective partner.  This decreases the risk of loan default by the private company.  Many BDCs make first lien loans that are similar to a mortgage.  If something goes wrong with the loan, the BDC gets the house.

The BDC model is so stable that many private equity firms will loan money to the BDCs to make returns for their high net worth clients.  Let’s look at a  small-cap BDC.

Main Street Capital (MAIN) is a small BDC with a market cap of $370 million. Main Street’s lower middle market investments are made to support management buyouts, recapitalizations, growth financings and acquisitions of companies that operate in diverse industry sectors and generally have annual revenues ranging from $10 million to $100 million.  Main Street seeks to partner with entrepreneurs, business owners and management teams and generally provides “one stop” financing alternatives within its lower middle market portfolio. Main Street also maintains a portfolio of privately placed secured, interest-bearing debt investments in middle market businesses that are generally larger in size than its lower middle market portfolio companies.

MAIN had a net profit margin of 91% and income of $30 million in 2010.  MAIN continues to grow new investments in new private companies.  The share price has increased from $14 in January 2010 to above $19 today. The yield was 11.14% in January 2010 but has decreased to 7.7% due to the share price increase.  Main pays a monthly dividend of $0.13 per share.  MAIN will continue to grow investment income as more private equity firms invest their capital in MAIN.

The next part of this series will discuss royalty trusts.

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