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Fifth Street Finance Corp. Message Board

  • messagejumper messagejumper Feb 2, 2011 6:35 PM Flag

    Junk Fund FSC

    What are you buying?


    I don't think that most of you investors understand what this company really is. You probably saw it had a 8.5% yield and said, "I'm sold." Over the past year I have noticed news letters and articles pounding the "buy BDCs" topic. This is probably because they bought and want others to bid up their shares.

    I have been reading through the 10-Qs of companies like these lately. This is also something that I bet most of you never did. These BDCs are essentially junk bond funds for small caps. But it is worse than that! They take 25% of the gains (5 mil out of 20 mil! Without this you'd be getting nearly 30% more) and run these firms like hedge funds with 2% management fee and 20% of the gains. Their average yield is 13%, which, minus a management fee, is close to what you should be getting. Furthermore, many of these companies issue shares nearly every 6 months, like FSC which dilutes your stake in the firm and the proceeds are sometimes used to pay off dividends.

    Furthermore, you are generally over paying because the share price exceeds the NAV.

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    • If it is so bad then why the share prices keep going up and the insiders are buying like crazy, on top of getting a juicy yield?

    • Feb 1 (Reuters) - Business development company Fifth Street Finance Corp (FSC.N) said it will raise $126.5 million in a discounted share sale, sending its shares down as much as 4 percent in morning trade.

      The private equity firm said it will offer 10 million shares at $12.65 apiece, a discount of 4 percent to their close of $13.18 on Monday on the New York Stock Exchange.

      Fifth Street plans to use the net proceeds to make investments in small and mid-sized companies.


      The money will be used as all equity issuance is in BDCs, to invest in income producing assets.

      Selected BDCs are great investment vehicles because they team with experienced private equity sponsors who are good at evaluating good risk/reward prospect companies in the middle market. It is a gross misnomer to call these junk credits. They invest in competent managements of smaller American businesses. There are, of course, mistakes or business plans that don't work out. But, the greatest worry, always, is an economic downturn which we are coming out of. This is the best time to invest in BDCs. When, we are in recovery from a downturn.

      As in all things, you have to know your sector.

    • last one:

      Yes, they can fund at low rates, but FSC just had an offering to pay down debt. Not the wisest choice for putting investor's money, is it? In fact, it appears that FSC has an offering near every six months to a year. Nobody finds this a little strange?

    • Sorry for the piece wise guys, it will not let me post my reply in one big block for some reason.

      "if the government .... can you not find a way to make money every year for the next TEN years? Therefore FSC will not have problem in meeting their dividends in the next two years"

      That's a pretty broad conclusion. Would you have made this same statement when they cut their dividend by 1/3 on April, 2010? And for the last several months, they have been paying out more than their Net Investment Income. What are your thoughts on that?

    • A fair assessment but.....

      One could compare this to junk bonds as the originating loans are typically to companies with below investment grade ratings. Although some are companies that can get more favorable terms from a BDC such as an equity mix.

      True an individual investor might be able to eek out a few more points buying junk bonds directly but two issues. First, most folks don't know where to acquire corporate bonds. Second, this is a very liquid way to hold junk bonds. Buy them directly and they are much harder to liquidate. Can be done in seconds here.

      One thing for sure is the pps is much too high at the moment for this BDC. Even after the offering which was priced above NAV the NAV will still be well under the current pps.

      Unlike a manufacturer or oil producer where an increase in production can push the EPS up the earnings here are quite fixed. (If loans are tied to LIBOR that could bump but unlikely in the near future). Once the hype subsides and the earnings set the true pps those that are buying in the 13's and 12's will have to wait a whole year of divi's just to be at capital break even and then the next year resets the cycle.

      10% over NAV would put this at $11.89 post offering. Right now it is in the stratosphere.

      • 2 Replies to briskit44
      • I would definitely recommend a fund over buying individual bonds just for the credit risk.

        These BDCs seem to be cropping up all the time, so perhaps it will lead to competition in the pricing structure. I think people are so itchy for yield that they will jump on just about anything right now. Even large-cap junk bond funds are only paying like 7-9% with a NAV above par.

        But I agree, the NAV on the 5 firms that I looked at was 10-25% above NAV. Any market correction or interest rate spike could send people to the exits.

      • Having public offerings well over NAV is a great thing. It means they're getting extra money to reinvest at the same rate of dilution.

        Company A sells a million shares at NAV.

        Company B sells a million shares at 25% above NAV.

        Thus, its as if company B is selling 1.25 million shares but at the same dilutive rate as company A.

        For a far more articulate explanation, go to:

        http://investorvillage.com/smbd.asp?mb=6441&mn=677&pt=msg&mid=9993970

        "All other things being equal, if you want to invest in BDCs with the potential to grow its dividend, then you need to invest in BDCs that are growing their NII/share. And if you want growing NII/share, then the odds tend to favor investing in companies that are selling at the highest price/NAV premiums AND raising new equity."

    • ...It would appear,without intricate knowledge of your investment strategy, that you shorted FSC in the $12.50 region and are now desperate to recoup losses. Further it does hurt to have to pay investors for the dividend on your shorted shares.

      ...More info is required to qualify FSC as a Junk Fund! Good luck in your short position!!!!!

 
FSC
5.72-0.04(-0.69%)Sep 23 4:00 PMEDT