can't argue with anything you wrote except you need to pay careful attention to how much of the NII currently is PIK and becomes PIK . . . as they restructure the energy credits it could be a problem . . . PIK was already 25% of total NII last quarter . . . but if we skirt recession AND they do a good job certainly 90 cents could be sustainable, although it would require an NAV more like $8-8.50
there is definitely some room for expense control, including making the fee reduction permanent, which offers upside and is a growing possibility as external managers start to see more activist activity in this space
well I am glad to be in the same BDC as you . . . I notice Jack Silver seems to lightening up on PFLT and shifting to SUNS . . . they are pretty similar but PFLT has a slightly lower cost of funds
check out the Barrons article on Tannenbaum, FSAM, FSC etc. I think the FSC baby bonds are a good short here as I think they are going to find massive fraud eventually
ugh, typing too fast, the 8%, base cost is 5% not 4-4.5%, so including charge offs it is 6%, coupon of 8% is 2% net net, not 2.5%, sorry, still think that is a conservative projection with significant upside if underwriting quality, coupons, or expense control exceed my skeptical projections.
Cost of funds around 3%. (includes amortization of renegotiation fees that they exclude but I amortize basically they are semi-recurring), base management fee of 1%, other expenses (including incentive fee) around 1% adds up to call it 4-4.5%, average coupon 8% for net margin of 3.5%, that would be conservative because coupons may move higher but if they are going to 80-90% leverage in very slow growth environment I assume they stick to very senior and very secured. Charge offs? Figure 2% CDR with good recovery rate so call it 1%. That gets a 2.5% net margin figure. How do you see it?
They may have done you a favor depending on the time of day they sold, most of those stocks went down as they day went on.
yeah it is gonna be tight getting NII up to the 26 cent area where the dividend is sustainable . . . if they add another $200ml in earning assets on the various credit facilities as a NET spread of 2% you get an extra $4ml in NII, divided by 26 million shares, that is 3 cents per quarter, or 25 cents
if they could get a 3.5% spread (possible in the current pricing environment) then you get 29 cents per quarter, which would be full coverage
I wish they had ripped the bandaid off instead of restructuring so many of these credits into zero current pay instruments. Anyway, updated analysis:
$7.82 if energy marked to zero, so figure NAV more like $6.50 at the low in the event of recession.
Current NII (less fee waiver and PIK is about 18 cents). So long run (next full business cycle from here) looks like about 65 cents would be a very sustainable dividend.
They did such a good job managing through the last downturn, nursing the bad credits back to health, that there could be a bit of upside from those numbers. But 9x a very safe 65 cent dividend would be $5.85. For me that is fair value.
Good summary RC. I bought some GLADO the '21 prefs today, y-t-m of about 12%. They are on the opposite end of the scale on energy -- about 20% of NAV. However, they are concentrated in four loans, all of which recently received significant equity injections from the sponsors.
GLAD of course sucks but if you take the last reported NAV of a little over $9 and haircut the energy 75% and everything else 15% you get $5 in NAV, which covers the prefs 2.2x. Interest is covered about 3x currently although after a recession it will be tighter. Whaddya think?
This my only BDC exposure except for a little PFLT at $10.70. I think there is potentially still another 25%-40% down for the sector if we have a full blow recession. I have my eye on the baby bonds -- I think will see alot of double digit yields soon.
If you write off all the energy and mark everything else down 15% (which would be a worst REASONABLE case scenario) I have NAV around $5.80. Recurring NII would be around 60 at that point. I see anything below $4 as a stretch and even from here I would guess you earn a 10% return over the next five to seven years outside of a 2008 scenario. The real risk is that they have to delever at the bottom. I need to analyze their credit faciilities further on that.
If you write off 100% of energy and 15% of everything else NAV today would be $5.80.. I think that would be a full blown recession..
Recurring NII would drop to about 60 cents. So I think GLAD is now pricing in a full scale recession. So is PNNT.
Totally agree with you that this is an emotional investor base and could easily overshoot to the downside. I am in the prefs now which are pricing in a 15% chance of bankruptcy, which I think is too high. Would rotate back to common at $4.50.
RSO is vastly more leveraged and does not offer the statutory protections of a BDC although I agree that you are probably getting paid for the risk.
I think the NAV at last quarter end was around $9.12, they have about $1.70 in energy/oil&gas, so I am giving that about a 50% haircut and then trimming the rest to reflect the spread expansion since quarter end.
either 1) margin calls on big holders or 2) oil and gas bankruptcies, or 3) fear that they are going to get approval to do an offering (massive?) below NAV or combo
Did Mr. G get another margin call today like 2008? Hope not for his sake.
I bought a little at $5.25 as a crazy and total spec BUT given how aggressively the bid was taken up there are definitely desperate sellers here so a $4 handle in the short term wouldn't surprise me.
Honestly not sure why I bought it . . . couldn't resist down 13% on the day but probably stuuuupid.
Bonds are yielding 21% here so they may be a better bet, although unsecured of course.
I think at $7.35 any shorts should cover and it may be time to buy, at least for a January bounce.
Assuming current NAV is $12.00ish, you have about a 40% discount to NAV. I can't argue that they have performed well since cleaning up meVC. It looks now like they were born on third base in that respect, i.e., took over meVC at the exact optimal time and got luck.
ROE for the portfolio is right around zero for the 2007-current period, which is awful, no arguing that. And the pivot to mezzanine in 2014, right as mezzanine peaked, was a poor decision, least for the short term. According to my calculations the balance sheet is okay but weak. Interest coverage is 1.8x past on the last available quarterly and asset coverage of the baby bonds (in a 30% stress scenario) is only about 2x.
But the bar is so low at a 40% discount to NAV. If they can earn an industry average of 7.5% ROE over the next cycle at a 40% discount the return on market price is 10.5%. Plus shorts have to pay out the near 7% yield. At this points shorts are pretty much betting on massive fraud, which I put a less than a 10% chance.
If you go long for a short term trade I think there is a good chance of a 10-15% January bounce from here. For a buy and hold I would wait until the SEC filings are current or they get a couple of data points (e.g., a good earnings quarter or a one year extension of the revolver.
Anybody else still following this?