KCAP has all their capital invested in secured bond like instruments, of which most are senior secured.
At normal market, these bonds are worth $11-12. Most recent NAV is at $9.65 because the bonds on avarage have been marked down by 15%.
The stock sells for $5.14. Thats is a huge discount for these bond holdings. 98% of the bonds are performing. I have all my money in KCAP, this is like buying money at 50% discount. KCAP's bonds are short term and have to be repaid relatively shortly. I dont see any risk at all of loosing my money when the quality assets already been discounted by 65%. And while we wait, we get a nice 12% dividend. It may go to $4 if the market takes a severe down turn, but I can live with that votality.
What you said could very well be true but the matter is it would become more and more difficult for KCAP to remain paying even the current quarterly dividend payout of 17 cents per share. Without any cash, they would have troubles in financing their debts.
Today, KCAP dropped to $ 4.91 and I believe it would continue to drop in the next few months and I strongly believe they would further reduce their dividend. If there would be any LARGE correction of the market, I believe KCAP would get hit very hard.
If you want a HIGH return, I believe PSEC is actually a much better buy than KCAP. Its yield is much higher and it is sold below book. Of course, you can argue their dividend is only a return of their capital.
The debt and cash income follow hand by hand. If KCAP will earn less cash due to loan repays, they will use the cash from loan repays to paydown debt and they also said in CC that debt will be reduced further during the next few months.
So yes, less divident most probably, but also less debt.