just sold mine into this mini ramp 10% in a week was enough . . . glta . . . fair value is about $9.25 IMHO but if credit overshoots to the upside like it did to the downside in early January a quick run to $10.50 is in the cards
I bought a little last week. There is alot of gamma here because the CLO is performing okay so this could see $9 in a hurry.
Do shareholders of both need to approve . . . I assume so, based on the size of the deal. I am doing a fair value calculation now and will post in a couple minutes.
CLO exposure peaked at 22% of assets (38% of equity) in 2014. The gentle de-levering they currently are doing seems to be concentrated in loans rather than CLO equity.
Okay, I found your mistake (unless I am using the wrong credit agreement, I am looking at the one dated Dec 2013 attached to the original proxy).
It is 70-80% on the firsts depending on category and only 50% on the seconds. So if you re-run those numbers I think you will see mine are correct.
re: CMFN, I don't follow it but the Q1 so far has been alot worse than Q4 for high yield. If NAV dropped $1.48 last quarter why wouldn't you assume it is down, say, another $1.75 this quarter. Still a 30% discount but . . .
Here is the math I am using. Tell me what I have wrong if you don't mind. Some of it involves estimates of course because we know spreads have gone out since year end but don't know exactly how much fair value of the loans has declined.
Anyway, there was 170ml of first and 23ml of second (rounding up) at year end. Assume 15ml of losses on firsts and 3ml on seconds (probably too low given the spread blow out). That gives them 155 and 20 respectively. Assuming 70-80% allowable LTV (not sure of exact number are you?) and 50% respectively that gives max advances of $118.5ml to $130ml, borrowing base, probably closer to the former. Call it $10ml in current cushion.
That means if spreads move out another 100 bps (that would be another leg down of course) they will be around the noncompliance area. Will they get waivers? Sure, no doubt.
BTW, they have been taking a bit of leverage off the last couple of quarters as principal payments have exceeded new investments moderately. They probably are continuing to run off the portfolio this quarter, not sure what they have said about that.
Anyway, net net, because they overlevered at the top they are forced to do modest delevering at the exact moment there are bargains appearing. And they are only a solid leg down (similar to the leg from mid November to today) from potentially being forced to ramp up the delever, locking in permanent capital losses.
Things will probably be just fine, but there is alot of gamma to this investment right now..
ACSF had so many things going for it. A reasonable fee structure, a focus on first lien senior secured etc. It had potential to actually be a sustainable, buy and hold type of investment. Instead of shooting for an 7-8% or so ROE in a bubble-ish credit environment they decided to try for 10-12% and ended up putting the full 30% of the nonqualified bucket into CLO equity. If they had kept the CLO bucket at say 15%, yes, their NII would have peaked out at around 88 cents per quarter but still would have been a nice, sustainable 7% yield -- with the potential to recycle their senior assets into higher coupons during the downturn. Now the downturn is at hand (over?) and they are just one credit swoon/lender panic from being forced to de-lever at the bottom of the credit cycle.
I am encouraged that the special committee is all independent directors. They probably had to agree to reverse the fee waiver to get the advisor on board. Current NAV is probably around $3.40 in light of the post Dec 31 deals and the spread widening. Say it takes six months to complete a sale and the NII is enough to cover the ongoing expenses. Say high yield stabilizes but doesn't rally. What would a buyer pay?
25% discount to NAV would be $3.40 times .75 or $2.55. That is probably the best case scenario. Worst case is that spreads blow out further, it takes a year to get a deal done, and they only get .65x NAV. That would be maybe $2.90 times .65 or about $1.95, which is about where I would give this a whirl. We'll see what they say on the call.
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.