Agree with your ARCC comments. Long ARCC myself. PSEC's portfolio profile is similar to ARCC. PSEC management has no excuse for selling below NAV.
Based on 4Q2014
Strategic buyer assumptions: 0% growth rate, 15% unlevered req'd IRR, 7x terminal multiple, buyer assumes $27MM op lease obligation
Buyer would maintain R&D spend and reduce SG&A by 30%.
Price per share $12
Very weak earnings quarter for CRY. Operating Lease obligation increased by $3MM, Working Cap (incl restricted cash) $90.4MM
I hope new CEO knows what he is doing. Making 2015 a transition year is a bit worrisome. With a little luck, maybe some of his strategic plan will start showing in the numbers by 3Q2015. I hope the board keeps a tight leash on him.
Didn't expect this message today: Sit tight during 2015 in exchange for a 1% dividend and wait to see if management can execute on a plan that doesn't produce until 2016.
Not very compelling. I guess I'll take some comfort in knowing that I'm waiting with the likes of BlackRock, etc... I hope these institutions don't try to quietly exit this over the next 7 months. Given the lack of liquidity at the moment, they don't have much choice.
Given the hedges in place, the trust throws off a lot more in distributions with lower oil than it does with higher oil. I believe the hedges expire 9/30/15. The trust gets $88 for each bbl produced and $88- (current mkt price of oil) for each bbl not produced up to the maximum hedged volume.
So, it would be nice for oil to rebound in the 4th qtr and perhaps get some upward pressure on nat gas.
I agree with you. It was nice while it lasted. 10yr CD's are yielding 3% so it's tough to justify a 4% unsec'd senior note backed by middle market loans.
Thanks for the informed and objective discussion.
I own PSEC bonds and other BDC issued bonds. The BDC leverage restriction 1:1 Debt/Equity essentially keeps these bonds at a 50% advance rate against a collateral pool consisting of middle market loans.
I only dabbled a bit in the common units and, now, wish I hadn't.
Unfortunately, some of this high yielding BDC debt is going to get refinanced at lower rates as call dates come in. ARCC just issued 2020's at 3.8% and will probably payoff $300-$400MM of notes paying 7%.
Please give me your thoughts. I'm not a PSEC management basher but the last CC gave me a less than positive impression. I would love to be comfortable with a larger position in the common units.
Pretty amazing. In today's yield environment, you'd think institutional holders would be big holders of PSEC. After all, PSEC is one of the larger BDC's with an 85%+ senior sec'd risk exposure in the portfolio with a yield north of 10%. I hope this isn't a reflection of management's arrogance. I was an institutional investor in this asset class for 5 years. We expected management to have integrity and to be highly competent in the space. We also expected access. As investors we were highly competent in the asset class and exited at the first hint of management arrogance.
I have a small position in PSEC common units and a much larger position in the notes.
I encourage people to read this note regarding the details of the management base comp and capital gains comp. Would love to see an informed discussion on this post. Wanted to post the note here but it was too long.
There are pre-incentive NII hurdles that need to be met prior to paying the quarterly fee.
I'm not a big fan of management. The Manhattan arrogance level is pretty high. However, I've seen management groups do a lot worse than these guys and they seem to be coming around regarding common stock dilution and risk composition in the portfolio.
Their advisory fee is old school from the days people tried to issue public stock in advisory firms managing CLO's. Percentages of AUM is not a great structure but they are tied to NII.
I'd love to see this get behind PSEC so management stays focused on more important matters; such as, loan losses, gain opportunities and, oh yeah, stock price appreciation.
Typically this is out on YHOO finance but not for PSEC.
Using a 10% qrtrly decline in all production and $50/bbl oil and $2.36 nat gas, I show a $.51 distribution per non-subordinated common unit for the production qrtr ended 2/28/15.
Using a 10% qrtrly decline in all production and oil ranging from $50 to $75/bbl and nat gas staying flat at $2.36/mmbtu, I estimate total distributions to non-subordinated common units during the production period of 11/30/14 to 5/31/17 to be $3.88. That is when, I believe, the subordination period ends.
My personal forecast was for all production to be down 10% from the 8/30/14 numbers and it was slightly worse. Since oil didn't get into the $70's/bbl until November, the hedge gain from selling unproduced bbls up to the hedge volume limit was still muted. Dec, Jan, Feb should show strong hedge gains - perhaps 5x the hedge gains reported in the 11/30 production qrtr.
Unhedged nat gas prices hurt us. $2.36/mmbtu vs my forecast of $3/mmbtu. Nat gas cost us $.05/unit in distribution. Also disappointed that all production actually did drop off by 10% from 8/30 qrtr.
So, I had forecasted $.51 per non-sub common unit and we got $.45. CHKR has paid non-sub common units $.96 in distributions in the 6mos ended 11/30/14.
It's better for CHKR holders for oil to stay low until the hedges expire. We get $88 for every barrel produced and we can buy barrels, we don't produce, at $45 and sell them for $88 up to the limit of the hedges,
PSEC management needs to convince the market that the reported NAV is clean. The current discount to NAV simply says investors don't believe the accounting.
1.6% US10yr - if you have investments in middle market private companies, the present value of these companies isn't going to get any better than this. Leveraged loans are secured primarily by enterprise values. The valuations supporting these loans and equity interests will not benefit from rising rates.
There are only so many "good" middle market leveraged loan opportunities in the market each year. Because of their size and access to capital, BDC's like ARCC and PSEC are best positioned to win these transactions. Their portfolios are heavily weighted in senior secured loans so they are able to stay high in the stack of creditor claimants while they still meet their origination goals. Smaller BDC's are probably winning the less desirable secured loans or are investing much lower on the capital structure or creditor stack to meet their asset and income goals.
The key to any of the middle market loan businesses is risk discipline and management integrity. As a small individual shareholder in a BDC, you'll never see the loan loss impact until after the shares have reflected it. Everyone will tout the non-accrual ratios and the loan loss reserve ratios, etc... There is no comfort in these ratios unless management has integrity. There are no 3rd party regulators or CPA auditors that will ever detect understated loan loss reserves until well after the 'horses are out of the barn".
So, you stay in the larger BDC's with 85%+ senior secured loan composition in the portfolio and hope you have a management group with discipline and integrity. Oh, yeah, and you enhance your personal portfolio income using BDC's - you don't go all in.
Unfortunately, there are many historical examples of middle market, leveraged loan management groups that get caught up in the lifestyle and choose to set their integrity aside when it matters most.
As long as PSEC management is not manipulating the loan loss reserves, PSEC pps will head back to 10% yield level. Most of the other higher yielding BDC's have portfolios that are small and heavily weighted in non-first lien bank loan risk. ARCC and PSEC are large, diversified portfolios with 85%+ secured bank loan risk.
Yes, I'd rather be investing in an FDIC insured CD at half the yield of these BDC's. It doesn't exist so I move to the next best thing. And today's earnings releases showed you that Dow large caps were not good dividend plays at 2%-3% yields. If you prefer cash yield today, you will move into the best BDC's - and those are ARCC and PSEC.