Yeah, that price target got hit quickly because of the sell off in the entire sector.
I was expecting the price to hover around $12'ish until the next earnings report comes out. NAV was about $12.80 after the secondary, but they are likely to under-earn the dividend by a lot in Q3, and that will lower NAV some more.
Don't know how deep this sell off will go, but I always look to buy quality names in a sell off, because when sentiment changes, the quality names bounce back. The dogs like FSFR may bounce back a little, a rising tide usually lifts all boats, but the dogs will still have those company specific issues that will hold them back
I think I'll be glad when September is behind us.
I think I had seen a couple of your posts over at the PSEC board. You're trying to reason with a bunch of folks there that don't want to let facts get in the way of what they want to believe.
I wasn't surprised that FSFR did a secondary below NAV. They had been telegraphing this at least since their June newsletter. What did surprise me was the size of the offering. You and I both know their was no pressing need for this huge secondary. They threw their shareholders under the bus to increase AUM.
The title of your article says it all. There is no way I would invest in a Fifth Street product, asset manager included, because I don't trust management to operate in the best interests of their shareholders.
In addition to lack of trust in Fifth Street management, FSC's track record is mediocre at best. I describe it as big dividend yield, minus the destruction of share price. Prior to this recent dividend increase which they have not shown the ability to earn, they had cut the dividend 4 times in 4 years, and those 4 years were not tough years for lenders.
FSFR has a relatively short operating history, but already their track record is shaping up a lot like FSC's. Declining share price, declining NAV, and an unsustainable dividend which will probably lead to a dividend cut in about a year.
You can't pay me enough in dividends to override lack of trust and mediocre performance. The lack of trust alone is a deal breaker for me.
There's a lot of BDC's to choose from, if that's where you want to invest. A couple like Fifth Street & Prospect are obviously operating in the best interest of the external manager, not the BDC's shareholders, but not all operate in this fashion. There's much better choices out there than Fifth Street & Prospect.
Let's go through this.
All of the floating rate loans in FSFR's portfolio have floors of at least 1%. This means FSFR does not benefit in any way until rates rise at least 75 bps.
FSFR's credit facility has a floor of 2%. This means after rates have risen at least 75 bps FSFR will benefit the most until rates exceed that 2% floor. After that the benefit of the loans financed by the facility will be nullified as their borrowing costs will increase in tandem with those loans. Prior to the secondary FSFR was leveraged at .89:1, and it's reasonable to think they will have to get back to that leverage if they have any hope of covering their new dividend. This means only the roughly 55% of their portfolio financed by equity will continue to benefit from rising interest rates, assuming interest rates rise that far.
I get the strategy of a BDC being positioned for rising rates. I like it, but I don't think it's as potent as they would like us to believe.
What I don't like is a BDC that is counting on rising rates to get them from poor to full dividend coverage. BDC's like this lose in two of the three possible scenarios.
1.) Rates stay where they're at for an extended time. Eventual dividend cut.
2.) Rates move up just modestly 75-125 bps over an extended period. Eventual dividend cut.
3.) Rates do move up significantly. BDC finally attains good dividend coverage.
Counting on rising rates to bail out the BDC's poor dividend coverage is a poor strategy.
The BDC should have good dividend coverage now. Those that fit this criteria don't cut their dividends under scenarios 1 & 2 above, and under #3 they are a dividend increase candidate.
FSFR fits the former category, and that's one big reason why they are going to trade poorly going forward. Investors don't think their dividend is sustainable and unless rising rates bail them out, they are a dividend cut candidate in a year or so.
There's much better choices elsewhere IMO.
I don't think FSFR is such a steal at it's current price.
All the senior floating rate BDC's trade at a discount to NAV.
SUNS - (-10.81%) Poor dividend coverage
ACAS - (-7.61% ) The divvy is well covered.
FSFR - (-5.53%) Poor divvy coverage.
PFLT - (-1.45%) The divvy is well covered.
I'm not excited about any in this niche, but to me PFLT looks to be the best. Their yield is lower because it's the only one trading close to NAV, and they're not trying to boost NII via the use of CLO equity or other leveraged vehicles, which adds risk. Plus, even if they do a secondary at their current price, the damage to existing shareholders will be less than with the others. I don't believe any of the other BDC's here would pull a stunt like FSFR did with a huge highly dilutive secondary. These are all externally managed BDC's, but of this group only Fifth Street has proven to put the growth of the external manager ahead of shareholders interests.
Whatever FSFR's NAV is today, my math shows $12.80, it will be lower when they report Q3 earnings. There is no way they are going to earn their dividend in Q3. As stated in the CC they hope to have the secondary capital deployed by October, and leverage deployed by December. FSFR 's NII was $0.28 in Q2 and they needed to be leveraged to .89:1 to earn that $0.28.
in Q3 they've got 22.8mm new shares to pay that $0.30 divvy to, and they will be virtually unleveraged for most if not all of Q3. They said in the CC they haven't finalized their senior loan joint venture, which means there will be no help this Q from this higher yielding venture.
Whatever amount FSFR under-earns the dividend, will lower NAV by that amount, and I believe it's going to be
a big miss.
Considering NAV still has farther to fall and even when fully leveraged FSFR isn't going to earn that $0.30 dividend, I'd say $11.75 would be my price target. Plus, I believe they're a dividend cut candidate in a year or so, as their $0.03 divvy looks unsustainable.
The problem is they are not going to earn it.
This is part of the reason why the share price continues to be weak.
Whatever amount they under-earn the dividend will further reduce NAV by that amount.
Of the internally managed BDC's I hold MAIN, TCAP, & HTGC.
There's a few others, but they all have company specific problems that eliminate them from my consideration.
The internal management structure is a clear advantage, but it doesn't override poor management or other company specific problems that can occur.
If you aren't familiar with those three I mentioned,when you check them out you will be shocked by the large premiums to NAV they trade at. There are reasons they trade at such lofty premiums, but don't get the impression I think they are a buy at any price. I would just say they trade in a different range than externally managed BDC's.
Let me know what you think.
No question there is the inherent potential for conflict of interest with the external management structure, but not all externally managed BDC's succumb to the temptation.
PNNT & FSC is a good comparison of this. PNNT IPO'd in 2007, about a year before FSC, but FSC has grown AUM at about twice the rate as PNNT. Both are externally managed and charge the standard 2/20%.
Fifth Street is the big winner as far as the external managers income goes, but if you check the CAGR of these two BDC's, PNNT's shareholders have fared much better than FSC's.
PNNT outperforms FSC anywhere from about 40% to 100% through most time periods. Ironically, YTD in 2014 FSC has outperformed PNNT, but that's because FSC had just cut their dividend for the fourth time in four years and the share price was justifiably getting punished back in January.
My preference is a well run internally managed BDC, but there's only a couple of them out there.
I do hold a couple of externally managed BDC's, but will never hold one that I feel isn't run in the best interest of their shareholders.
The best person/group to answer that question is FSFR management. Unfortunately, they decided to play hide & seek rather than hold their CC last week.
Forced to offer a version of their point of view, I'd refer to the FSFR's June newsletter where they state:
"We anticipate that this partnership will be structured similar to Senior Loan Fund JV 1..... FSFR will need additional capital to fully ramp the strategic partnership, which we consider important to our long-term growth and success. Once fully ramped, we believe this partnership could generate an estimated 13% to 16% return on FSFR's invested equity, which would be accretive to net investment income per share"
For me, the critical part of the statement above is the 13% to 16% ROE. So far, other new senior loan JV's I've seen have not produced 13-16% ROE's.
If you take the most optimistic scenario, assume FSFR maximizes their use of their 30% non qualified bucket for this JV, assume leverage at .85:1 or higher, no further yield compression, make an allowance for the "quality" of senior loans that are going to be in this fund, and don't factor in any non accruals going forward, you can make an argument that once the secondary capital is fully deployed (and leveraged) it "could" be accretive to NII. That it is dilutive to NAV cannot be disputed.
Under this scenario, existing shareholders had to make the sacrifice so FSFR could grow the franchise.
One thing to keep in mind is the external manager is where the real money is made with externally managed BDC's and Mr. Tennenbaum owns FSFR's external manager. The external manager lost nothing in this highly dilutive secondary, and benefits to the tune of about an extra $16mm in fee income once this new equity is deployed & leveraged. That's $16mm each year.
Based on the winners and losers here, one could make an argument that FSFR is more concerned with increasing fee income to the external manager than operating in their shareholders best interest.
Hi to you too.
I think you're price target is about right.
Shares may trade higher due to FSFR's higher than average dividend yield for a senior floating rate BDC, but when next quarters results are official, and investors realize they won't be earning that dividend, reality will sink in and this thing will be priced along with other BDC's that aren't earning their dividend.
I don't think it's just a coincidence that FSC & FSFR both raised their dividend beyond what their portfolios are earning in an attempt to make their secondaries more attractive to investors.
The Fifth Street franchise has proven to be a wealth destroyer for shareholders, although it's a real money maker for the external manager.
FSC IPO'd in June 2008 $ $14.12. NAV was $13.02 at IPO.
Today FSC's share price trades 31% lower than the IPO price and NAV is 25% less.
FSFR IPO'd a mere 13 months ago at $15.00 and already is trading 17% lower than it's IPO price, and now with this highly dilutive secondary, has managed to destroy NAV per share by over 15%.
With so many BDC's where management operates in their shareholders best interest, I don't see any reason to consider the Fifth Street BDC's.
.....Last NAV was $15.13 so..............
New NAV is $12.80. A little less if the over-allotment shares are exercised.
So what's fair value for a senior floating rate BDC with a NAV of $12.80 that won't be earning their newly raised dividend going forward?
What you are forgetting is that all these new shares are being sold way below FSFR's last reported NAV of $!5.13. Expect NAV after this secondary to be below $13.00. Existing shareholders just got screwed.
I wouldn't look at this secondary as "dilution."
Yes they are adding additional shares, but this secondary will be highly accretive to NAV & NII per share for existing shareholders.
TCAP is netting $25.81 per share from this secondary. Add the new equity raised to TCAP's previous net equity, and then add the new shares to the previous share count.
$445,774,416 -- Q2 net equity
$110,983,000 -- New equity from secondary ($25.81 x 4.3mm new shares)
$556,757,416 -- New net equity
27,939,795 -- shares outstanding at end of Q2
4,300,000 -- New secondary shares
32,238,795 -- New share count
Then divide the new net equity by the new number of shares. That will get you TCAP's new NAV of $17.27. That's better than an 8% increase in NAV, plus I haven't factored in the over-allotment shares which most certainly will be sold.
In addition, once this new capital is deployed, it will easily be accretive to NII for existing shareholders. Keep in mind TCAP has already funded about $58mm in new investments in July which accounts for about half the new capital being raised today.
Secondaries like this highlight why the strong have major advantages over the weak.
In all due respect, expecting a BDC like TCAP to eventually trade down to NAV "just like all the other BDC's," is way off the mark.
As long as things like ROE, superior underwriting, and dividend growth matter to investors, TCAP will always trade at a significant premium to the broader sector.
A well run, internally managed BDC is a different animal than your typical externally managed BDC, and will always trade at a higher multiple.
Heck, a well run, internally managed BDC will always trade at a higher multiple than a well run externally managed BDC.
You're comparing apples to oranges.
Why would you expect one of the best to eventually trade where the mediocre trade at?
There will be times when TCAP is more favorably priced than others, but if you're waiting for them to trade down to NAV, I think you're going to be disappointed.
ARCC has originated over $1B in new loans in each of the last three quarters, with an average of over $500mm in net portfolio growth per quarter over that same period.
Over those last three quarters NII & Core EPS has dropped.
I don't think volume is the answer.
ARCC has positioned their investment portfolio toward safety and has not been reaching for yield, which is arguably a good thing to do, but this has resulted in earnings not covering the dividend.
On the bright side, the credit quality of ARCC's portfolio is quite good, and they do still have some spillover income to supplement the dividend coverage shortfall.
Overall, a mixed bag here, but BDC's that don't cover their dividend from recurring income generally don't command the strongest share price.
For starters NII of $0.31 is a long way from the dividend of $0.38.
Another thing, covered in the prospectus from the recent secondary but not really mentioned in todays press release is that there were significant realized losses from ARCC's exits in Q2. This will offset previous realized gains and will lower the amount of spillover ARCC has going forward. Also, some of that spillover will have been used to cover the dividend for this quarter, and the additional shares from the recent secondary will lower that spillover even more.
I agree with Slcehamrick that yield compression has been pressuring ARCC's profitability. It's been that way for the last couple of years but it's getting to the point now where somethings got to give.
ARCC has great management but lending in the overly competitive middle market is not the place to be right now. I'd been an ARCC shareholder for quite a few years but exited the last of my shares last week. I will only invest in lower middle market lenders until conditions change for middle market lenders.
The trend has been against ARCC and the information from the prospectus for the last secondary was the last straw for me. There are better BDC opportunities elsewhere.
I don't remember who it was, but someone here quoted a number of the preliminary statistics on Q2's results from the secondary prospectus and said "all is good." I don't know how you could read that and walk away with that opinion, but I guess that's what makes the market.
Geez, thanks for the compliment. I'm not used to that after posting a less than bullish comment here on Yahoo.
Possibly a deal too good to be true???
I suppose anything is possible, but I think it's unlikely.
There isn't much better they can be doing right now than investing as much as they can in the SSLP, which is what they are doing. 20% of all new investments in Q2 were in the SSLP, and overall it represents about 24% of their investment portfolio.
I've held ARCC for a long time, and based on your comments, I think we both feel this is a well run BDC.
But, conditions are difficult for middle market lenders at this time. Yields on new loans continue to drop. The weighted average yield of ARCC's originations in Q2 was 9.2%, well under the 10.2% weighted average yield of their entire portfolio, and that includes the 20% of those new originations invested in the SSLP. The trend on profitability for middle market lenders is down.
I agree, they did this secondary to grow their business. I suppose one could make an argument that they needed to continue to grow, even if shareholders do not benefit from this recent secondary.
However, I get anxious when I see a BDC "growing," and the only one benefiting from the growth is the external manager. That hasn't been the trend with ARCC, but IMO this recent secondary does little to nothing for existing ARCC shareholders while the benefit to ARES is clear cut.
In a nutshell, I'd say good management operating in a difficult lending environment.
Maybe you didn't understand why I was asking.
I know the answer, but was wondering if you do.
$0.01 accretive to NAV is nothing to get too excited about.
If you put pencil to paper and tried to figure out how much leverage they have to use just to cover all their costs and pay the dividend to those new shares, in other words break even, you wouldn't be too excited about that either.
The only one that is going to noticeably benefit from this secondary is the external manager, not shareholders, and believe it or not, I am a shareholder.
Although I am more in agreement with hajohn with regard to this secondary, you are technically correct on the accretive to NAV point, but just barely.
If you go to ARCC's July 17th 497 filing, you will see ARCC's net on this secondary is $16.63 pr share.
So how much does $224,505,000 (13,500,000 shares x $16.63) increase ARCC's NAV?
Drum roll please..............................$0.01.
Let me ask you a question. At what point does this secondary become accretive to NII? As NII increases, so can the dividend.
Will this secondary do anything to increase NII per share? And if so, how much leverage does ARCC have to employ to make that happen?
I rarely post on Yahoo message boards.
Our back & forth has been the exception because of all the baloney you have been posting here. I'm a MAIN shareholder and decided to not let your inaccurate statements go unchallenged. In defending your position, you have not been able to provide any supporting data, and for obvious reasons. Name calling has been your primary strategy.
I always hold a concentrated portfolio. Usually no more than 10-12 stocks. I currently hold 4 other BDC's. I haven't been inclined to post on those other BDC boards because no one is making ridiculous, misinformed statements as you are here.
I do plenty of trading. With MAIN, when opportunities present themselves, I trade around my core position. As I mentioned earlier, I bought trading shares during their last secondary. MAIN is my largest BDC holding, and it is an overweight position at this time, but is not the largest holding in my portfolio. I went overweight a couple of BDC's during the recent downturn and will lighten up when I feel they get back to fair value. I felt buying BDC's during this downturn caused by the Russell exclusion was a very safe investment/trade.
I don't get married to any stock I hold. You're confusing not letting inaccurate statements go unchallenged for pumping. I never rated MAIN a strong buy, you did. I rated it a modest buy when it was cheaper. You rated it a strong buy immediately after you recently bought, even though your target price was only 6.38% higher than your purchase price. Who's the real pumper here? Maybe 6.38% share price appreciation is a strong buy to you. It isn't to me.
One thing you're right about, we've spent too much time disagreeing with each other. "Discussions" like ours are why I don't post on public message boards very often. I'm interested in a fact based conversation and you eschew the facts and prefer name calling.
Why don't you get your last shot in and let's end this conversation.
You have changed your tune BIG TIME. Reread your previous posts.
I know one thing I got right. On June 4th I stated:
"...The Russell reconstitution will pass in a month or so, the share price will likely move back up, and you'll stop crying about how "they" screwed you."
Pretty accurate, don't you think?
You keep believing the reason MAIN's share price was depressed because "the market" didn't like the secondary. Ignore the effects of all BDC's being excluded from the Russell indices, which included MAIN's short interest rising over 100% in the last few months. Ignore that over 4mm shares of MAIN traded last Friday, which was the result of funds required to sell BDC's doing so, and the shorts covered by buying into the forced selling. Now that the Russell exclusion is history , MAIN, and all BDC's have moved up.
If your recent "strong buy" rating is a good one, and that remains to be seen, my "buy" rating back during the secondary, when you were crying about how you were getting screwed by MAIN, was better. I purchased trading shares at $31.28. I've collected 3 dividends plus the $0.275 special, and am up a total of 7.9% on my purchase. Your recent purchase if basically flat. I haven't sold my trading shares yet so I'll realize the same upside as you, but you'll never realize the 7.9% I've already earned.
If you knew why MAIN's share price was depressed, you could have confidently bought all you'd want, WHILE PRICES WERE LOW. Instead, because you didn't understand what was going on, you followed the herd after the fact. That's what I meant by being reactive.
As far as out performing the DJIA by a couple of points, are you aware the DJIA is only up 2.4% this year? Is that really something to brag about? The S&P would be a better measurement, but I'm guessing you haven't out-performed the S&P. Last I looked there were no BDC's in the DJIA.
I find it funny you have a "strong buy" on a stock you only expect to rise 6.3%. Talk about a pumper........