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.
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.