Hi RC . . . I think you have it just right, it is the speed of the deterioration . . . essentially none a year ago, now 9%, that has people worried.
Plus lets not kid ourselves, they are pretty fully levered. True with the SBIC facilities they can go to about 1.2x equity in total debt, but that would be very risky in year six of this economic expansion.
My thought experiment is this. Suppose we are now entering a mild to moderate recession and NAV drops another $2 to $7.92 at the bottom with recurring EPS (forget taxable, I am talking comprehensive GAAP) of, say 85 cents over the next business cycle. What's that worth? Market is pricing that scenario at 8x, which may be too low.
Hmmm, can't decide whether to buy another #$%$ BDC!
I am no expert, but I think the issue is whether Consol Energy can avoid bankruptcy, i.e., whether nat gas prices improve. If CNX equity goes to zero and if nat gas stay slow people seem to be guessing that there won't be any dividend growth. The story is probably alot more complex than I am making it. . . .if you had time to pour into this I believe it could be a really good opportunity, even if the dividend is just maintained here you get 9+% tax deferred.
or they could amend the law to allow BDCs to reserve for losses in calculating their distributable income . . . but yeah, the model is flawed: BDCs have to trade above NAV to work long term, but because they need to trade above NAV once they lose NAV they can never regain it
interesting study would be how many times has a BDC trading more than 10% below NAV for more than, say, six months, returned to trade above NAV by more than 5%
Yes, they are robbers, but can they steal the company twice? Maybe, depending on expenses, which still looked high to me. Need to get under the hood on that.
They are still overlevered and dependent on either the properties appreciating or the capital markets remaining generous, or both.
But at $20 I think it is a decent risk adjusted return from here. Unfortunately for me I am in at $25.
In recent years there has always been a distribution, but there are no guarantees with these guys. Totally speculation, but I think the distribution will be smaller this year. It is true that the discount is pretty large, which suggests they would want to go big BUT they are buying back shares (think around 3.5% of the fund this year off the top of my head) and performance has been sort of weak this year, as alot of the weak sister CEFs and BDCs they invest in with an eye toward activism have performed poorly.
My guess is $1.20. Let's start a contest if, any one else is lurking.
BTW I think $14 was a good price for a long term buy and hold I think they can earn 6% on the underlying assets, get 2% annually in alpha, and then a 12% discount brings the total EPS up to around 9% of your entry price, or $1.26.
I think there is also fear of Goldstein &Co, both in terms of the continuing overcompensation and the possibility they go back to running it like a personal country club.
But in a market where micro caps are super expensive, you could probably do worse than this.
he did a great job cleaning up the old meVC but his investments have been turds overall . . . I wonder about their due diligence process they have had several companies that turned out to be frauds over the years . . . I think $9 on a $13ish NAV is about the right price . . . they have that high priced mezz debt group now so rest assured they will continue origiinations and not just buy back stock, although I agree with fcardman that buybacks would be the best use of funds here . . .course you could say that about alot of BDCs
"much less levered" -- huh . . . they have way too much debt for what is still primarily a concentrated equity fund . . . both revolvers are fully drawn and expired yesterday.
No press release as of yet. The revolvers both expired yesterday. Not sure what is going on but if they didn't get an extension they are technically insolvent, although I am sure Tokarz will work something out he really has backed himself into a corner at this time.
they de-risked significantly in August which probably paid off on Monday during the spread blowout . . . still think BV probably drops another 50 cents in the third quarter
assuming they are still filing 8-ks the revolvers expire tomorrow and have not been extended . . . surprised there isn't more of a rush for the exits
their revolvers were only extended through Sept 30; look at the latest 8-k; cash on hand is minimal; they probably will get extension but . . .
Very risky investment at this time:
1) revolvers almost fully drawn, maturity end of the month, all assets pledged to revolver!
2) no SEC filings
3) possible massive fraud in Europe
4) auditor just resigned
5) modest liquidity right now for the junky credits and equity they own
no bankruptcy but a rights offering out of the blue would not shock me