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CSWC Announces $2.75 Special Dividend – Stock Trades at 49% Discount to NAV

The Capital Southwest Corporation (CSWC) board of directors has declared a cash dividend in the amount of $2.75 per share of common stock. This special dividend is a yield of 2.5% based on the current stock price. The dividend is payable on March 28, 2013 to shareholders of record on March 15, 2013.

Capital Southwest Corporation is a public investment firm specializing in venture capital and private equity investments in small and medium sized businesses.  CSWC has a market cap of $421 million and is cheaply valued with a trailing PE of only 6 compared to an industry average PE of 20.

Capital Southwest Corporation reported total net assets at December 31, 2012 of $628,089,815 equivalent to $165.36 per share.  CSWC shares are currently trading at $111 which is a 49% discount to the NAV at year end. 

The market clearly misunderstands this stock as it should not be trading at such a discount to NAV.  In addition, CSWC has NO long-term debt on its books.  CSWC has an equity summary score of 7.2 out of 10 for a Bullish outlook.

Assuming reinvestment of all dividends and tax credits on retained long-term capital gains, the December 31, 2012net asset value was 18.4% greater than the March 31, 2012net asset value of $167.45per share and 34.9% above the December 31, 2011net asset value of $146.95per share. It is important to note that during the nine months ended December 31, 2012, CSWC distributed $66,825,782 or $17.59 per share of capital gains dividends and $3,025,032 or $0.80 per share in ordinary dividends to our shareholders.

On January 30, 2013 Capital Southwest Corporation announced that Capital Southwest Venture Corporation, a wholly-owned subsidiary of CSWC sold its 9,317,310 shares of common stock of Heelys, Inc. to Sequential Brands Group, Inc. pursuant to the merger of Heelys into a wholly-owned subsidiary of Sequential.  The Merger closed on January 24, 2013.

The sale of CSVC’s 9,317,310 shares of Heelys’ common stock generated cash proceeds of $20,963,948 and a capital gain of $20,861,458 or $5.49 per share, based on the 3,800,393 shares of issued and outstanding shares of CSWC. The CSWC Board has approved a partial distribution of the capital gain proceeds, in the amount of $2.75 per share or approximately $10,451,000.

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”).

Get an 11% Dividend Yield from this Private Equity Company

Kohlberg Capital Corporation (NASDAQ: KCAP) is a private equity and venture capital firm specializing in mid market, buyouts, and mezzanine investments. It focuses on mature and middle market companies.

For the three months ended June 30, 2012, Kohlberg Capital reported total investment income of approximately $9.5 million, as compared to approximately $6.1 million for the three months ended June 30, 2011. Investment income from debt securities increased 30% to $2.7 millionas a result of the continued growth in their debt securities portfolio.  Their debt securities portfolio was $143.3 million at June 30, 2012, as compared to $114.7 million at December 31, 2011.   At June 30, 2012, the fair value of KCAP Financial’s investments totaled approximately $299 million.

KCAP Financial is projected to increase EPS by 20% in FY 12 and 18% in FY 13.  KCAP Financial is up 35% in price over the past 52 weeks.

For the second quarter of 2012, KCAP Financial increased its dividend 33% to$0.24 per share from the 2012 first quarter dividend of $0.18 per share. KCAP Financial has a current dividend yield of 11.06%.

Dayl Pearson, chairman and chief executive officer, noted, “As expected, our strong second quarter results are indicative of the full and successful integration of Trimaran Advisors and to the continued performance of our investment portfolio, as we migrate to higher yielding middle market loans.”

On August 25, 2012 Columbine Capital Services, Inc. upgraded KCAP FINANCIAL INC from NEUTRAL to FAVORABLE.

On August 21, Zacks Investment Research, Inc. upgraded KCAP FINANCIAL INC from HOLD to BUY.

On August 17, KCAP Financial is upgraded to Buy from Hold at Stifel Nicolaus.

Kohlberg Capital has an equity summary score of 7.5 out of 10 for a Bullish Outlook.  Analysts at First Call have a 2.0 rating for a Buy recommendation.  Kohlberg Capital has a 12-month price target of $9.50, a 10% increase from current stock price.

Buy this BDC for Rising Earnings and a 11% Dividend Yield

Rising earnings estimates on the back of strong second quarter results – including a 48.2% earnings surprise – have helped TICC Capital Corp (NASDAQ: TICC) achieve a Zacks #1 Rank (Strong Buy) on August 30.  Moreover, this non-diversified management investment company has delivered an average surprise of 28.2% over the past four quarters.

With a solid year-to-date return of 20% and a history of beating quarterly earnings estimates, this stock offers an attractive investment opportunity.

Better-than-expected second-quarter earnings and steady improvement in investment portfolio are the primary rank drivers for this stock.  Moreover, continued improvement in investment income will help improve its profitability in the upcoming quarters.

On August 20, TICC CAPITAL completed an underwritten public offering of 3,450,000 shares of its common stock at a public offering price of $9.65 per share for total estimated gross proceeds of $33.3 million.  This capital will serve as growth for investments in the coming quarters.

On July 30, TICC Capital reported second-quarter 2012 net investment income of 40 cents per share, outpacing the Zacks Consensus Estimate of 27 cents by 48.2% and the year-ago earnings of 29 cents by 37.9%.

Total investment income of $20.5 million surged 83.8% from the year-ago quarter. Significantly higher (almost 87%) total investment income from non-affiliated/non-control investments was primarily responsible for the surge.

The fair value of TICC Capital’s total investment portfolio was $439.2 million as of June 30, 2012, up 12.2% from $391.5 million as of December 31, 2011. During the second quarter, the company provided approximately $62.1 million debt funding to new and existing portfolio companies.

TICC Capital’s Board of Directors has increased its dividend by 7.4% to $0.29 per share distribution for the third quarter this year, payable on September 28, 2012, to shareholders of record as of September 14, 2012.  TICC Capital had a very strong second quarter, as reflected by their having deployed approximately $62.1 million of capital, consistent with their investment strategy, as well as by their taxable income continuing to equal or exceed dividend distributions.

TICC Capital has a current dividend yield of 11.15%.  TICC Capital has increased its dividend 16% in the last year.

TICC Capital has a 12-month target price of $11.30.

TICC Capital Corp. is a business development company primarily engaged in providing capital to technology-related companies.  TICC concentrates its investments in companies having annual revenues of less than two hundred million dollar and/or a market capitalization or enterprise value of less than three hundred million dollar, with a focus on businesses.

Main Street increases Monthly Dividends Again in Q3

Main Street Capital Corporation (MAIN) announced today that its Board of Directors declared monthly dividends of $0.145 per share for each of July, August and September 2012. These monthly dividends equal a total of $0.435 per share for the third quarter of 2012. The third quarter 2012 dividends represent an 11.5% increase from the dividends declared for the third quarter of 2011 and a 3.6% increase compared to the second quarter of 2012. Including the dividends declared for the third quarter of 2012, Main Street will have paid $7.58 per share in cumulative dividends since its October 2007 initial public offering.

MAIN is trading at $25.68 with a market cap of $695 million.  MAIN has a current annual dividend yield of 6.5% that is paid monthly.  MAIN will report Q1 earnings on May 3.  MAIN has had a positive EPS surprise in 7 straight quarters so this is one stock to watch this week.

Last post for MAIN Dividend Increase.

Main Street Capital Corporation (MSCC) is a principal investment firm primarily focused on providing customized debt and equity financing to lower middle market (LMM) companies with annual revenues between $10 million and $100 million that operate in diverse industries. The Company invests primarily in secured debt instruments, equity investments, warrants and other securities of LMM companies based in the United States. Its principal investment objective is to maximize its portfolio’s total return by generating current income from its debt investments and capital appreciation from its equity and equity-related investments, including warrants, convertible securities and other rights to acquire equity securities in a portfolio company.

 

2 Aggressive Investments in Business Development Companies

The BDC business model is to lend to small and midsized companies at high yield equivalent rates while also at times taking equity stakes in such companies.  BDCs can also take an active part in assessing the borrower’s prospects and modifying business practices if necessary with the goal of ensuring a favorable
return for shareholders and principals in the company.  The combination of making loans and taking equity stakes has the potential for relatively high, stable cash distributions with the additional benefit of capitalizing on the equity performance of the borrower.

Now, BDCs are offered as bundles in ETNs that come as a normal ETN (BDCS) and a 2X leveraged ETN (BDCL) for aggressive investors.

The ETRACS Linked to the Wells Fargo Business Development Company Index due April 26, 2041 (BDCS) is designed to track an investment in the Wells Fargo Business Development Company Index, and may pay a variable quarterly coupon linked to the cash distributions associated with the underlying BDC constituents, less investor fees.  BDCS is trading at $22.34 with a quarterly dividend yield of 9.78%.  Year to date, BDCS has a market return of 12.5% compared to 9.5% for the S&P 500.  Here are the top holdings:

ACAS     American Capital Ltd

ARCC     Ares Capital Corp

SUNS     Solar Senior Capital Ltd

AINV     Apollo Investment Corp

FSC         Fifth Street Finance Corp

TAXI       Medallion Financial Corp

BKCC     Blackrock Kelso Capital Corp

SLRC      Solar Capital Ltd

HTGC     Hercules Technology Growth Capital Inc

MCC      Medley Capital Corp

For the most aggressive investors, the ETRACS 2xLeveraged Long Wells Fargo Business Development Company Index (BDCL) is designed to track a leveraged investment in the Wells Fargo Business Development Company Index and pay a variable quarterly coupon linked to the leveraged cash distributions associated with the underlying Business Development Company (“BDC”) constituents, less financing costs and investor fees.  BDCL is trading at $20.65 with a dividend yield of 16%% based on its most recent quarterly distribution of $0.8197 in January 2012.  Year to date, BDCL has a market return of 24.81% compared to 9.5% for the S&P 500.  The portfolio is like BDCS except the ETF is leveraged 2 times.

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.

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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