It's refreshing to see that someone actually read the transcript, as opposed the the mass of posts that assume something then shoots their mouth off.
I agree that a "rights offering" is the most likely thing to happen. And as stated in the transcript, Prospect may retain some shares -- which as you stated, allows PSEC holders to benefit from dividends and price appreciation. Nevertheless, the mechanism of the spinoff has not yet been determined. There are many ways for this to be net neutral in NAV, earnings and dividends. Personally, I would like to see them retain some ownership in the CLOs and online lending since those are currently generating a significant portion of the dividend. The real estate should, however, be put into a REIT and IPO'd. Those don't generate the kind of returns needed to sustain the dividend. (At best they might yield 7%. Further, most multifamily equity REITs do not trade much above BV. I own some IRT, and it's a good thing to have in a regular account. But a multifamily equity REIT does not belong in a BDC. Period.)
Regardless of how they spinoff this stuff, I seriously hope they look around at the competition and structure mgmt fees similar to the "best in class." If Prospect has too high of a mgmt fee or if they want an ATM in place, then there won't be much demand in the secondary market. Similarly, as they sell more stock via SPOs, the mgmt fees MUST NOT grow linearly. There are many other details, but these are some of the big ones. I know Prospect knows this, but I wanted to mention it here as it's something to watch for.
The IPO of AGNC was back in 2008 at a price of $20. Since then shareholders received over $20 in dividends. But was not a spinoff, it was a start-up company that was managed by ACAS. The IPO of MTGE was 2011 or 2012 (I'm too lazy to look it up), but the IPO price was also $20. Factor in dividends, people did okay with that. Regardless, these were not spinoffs.
What is critical for PSEC and its proposed spinoffs is how they do it. I am not keen on a "rights offering" and I would much prefer to see Prospect create the new subsidiaries and initially own 100% of the stock. Then sell some of the stock in public offerings to grow those businesses. This frees up cash and reduces the 30% bucket, but at the same time if can increase the net value for PSEC shareholders. Further, dividends can still flow to PSEC shareholders -- which according to the CC, should remain neutral initially and hopefully grow later. As the value in these grow, PSEC can sell more shares for its BDC business.
The one way that would really burn PSEC shareholders is if they sold a ton of PSEC stock and used that money to "buy" the spinoff companies and turned around and distributed shares in the spincos to shareholders. Given the current price of PSEC and that the purpose is supposed to create value, that should not be on the table. Technically, they could do that, but I think there is plenty of demand in the secondary markets for doing this the "right" way. There is definitely demand in the secondary markets for the multifamily REITs. The do not need to do all three at the same time.
I may be on the hook for taxes. I'll check into this, but now that you mention it, I think you are correct. Oh well, at least I can buy-back the SNR for a little less.
I pulled the trigger this morning and sold NCT at just under $24. I would like to get the SNR, but I'm not sure it is worth more than $19. Equity (including cash) is $820 million. At 62 million shares, that gives BV of a little over $13. I can see a premium to a triple-net equity REIT. But it's new and I don't see it running away to over $20.
I was holg ARCP and recently sold for a fairly good loss. So the decision to sell NCT and offset the loss with capital gains was simple. Why pay taxes on the distribution of SNR? I'll be looking for a good entry point into SNR. I don't need the golf or whatever they next come up with for the cash from the CDOs.
See you people on the SNR board soon. Hopefully you-know-who does not pollute that board. LOL
"Good value at this price" sounds like you just bought something and want others to follow -- so you can take profit. I'm just calling things as they are. Maybe you see value in ARCP or Sea Drill right now. A drop in price does not mean something is undervalued. Is that your invesment/trading strategy? I guess I missed part of the thread where you cited the pros and cons to RSO and made a rational decision to buy it.
I don't know if Cole is damaged good, but clearly there is something else going on within ARCP and it isn't good. I cut my losses and liquidated every share of ARCP that I had. Intentially reporting AFFO numbers that are 10% higher for Q1 and Q2 is material. Following up with selling 100 million shares after these were reported might be enough get a few people convicted of fraud. I was not going to stick around for further downgrades or other events that could breach covenants.
I wanted to believe what I herd on last Wednesday's conference. That explanation about how ONE accountant made a mistake in Q1 and tried to cover up her mistake by making another in Q2. Oh, and nobody else knew... That's simply not possible as there is an entire team of accountants who review these things before they are released. Necessarily, that means other high-level management knew. And if they knew, the it goes all the way up to Schorsch.
Maybe I am wrong, but the trading of 240 million then another 100+ and another 100+ and yet another 100+ says a lot of people are running for the door. This is not a "buy the dip" situation. It's a wake up call -- the risk factor is growing by the day. (I'm kicking myself for not selling as soon as they admited that their AFFO was intentially overstated.)
What impact would legal action have on shareholders? For example, ARCP sold 100 million shares of stock a few months ago at $12, and other offerings at higher prices before this. These were after the accounting errors were made. If some of these people sold today at $8 they realize a $4/share loss, minus some dividends. If courts award some plaintiffs compensation (not to mention lawyers taking their share), who pays? Surely the lawyers will go after the previous CEO, as well as the BOD and asset manager. I don't think they can sue shareholders, but surely there is some impact to them.
About catching the bottom: Yea, I would not try it. ARCP was holding at just under $10 after the market opened. Shares traded were maybe 20 million within the first 30 minutes. By noon, over 100 million were traded and the stock dropped below $8. It could bounce back to $10, or fall further to say $6. It's a coin flip. At some point there will be enough shareholder value regardless of any liquidating of assets. I'm not going to gamble. I'm holding and like many others, I'm not happy about this.
The BOD is saying that they believe that accounting errors were intentially not corrected. I read that as fraud. Legal suits will follow and likely be setled. I own some ARCP, but I am not buying or selling until I understand the impact to shareholders. Unfortunately there is not much information outside what ARCP already reported. The silence does not give me any warm and fuzzy feeling. The knee-jerk "sell now and ask questions later" should cause the trading to be suspended.
Maybe they will have a conference call later today?
I doubt you own any PSEC. Nevertheless, selling stock below NAV, even if only through DRIP, is not good for shareholders.
Personally, I think they should be buying back stock. They could take advantage of SEC guidelines on Rule 10B-18 and repurchase stock in the open market. And if they feel they need to continue the DRIP plan, they could hold these securities for the DRIP. This say they keep people who want to DRIP happy without diluting NAV. A few weeks ago when PSEC was trading below NAV I made several phone calls and gave my opinion about buying back stock. They have a buy-back plan in place and they will be questioned about their decision. Back in 2011, their excuse was that they did not have authority to buy-back stock, otherwise, they would have. I don't think Barry can talk his way around not doing anything this time. I'll be on the call and I will remind Barry of what he said back in 2011. Barry is already pocketing over $50 million per year in fees. There is no way he can tell us that they can make more money (on a per share basis) by selling below NAV. On a per share basis, earnings would look much better if they bought back stock. And yes, use the credit facility which costs 2% if necessary. That would be like a risk-free loan with a 13% spread. They would have to be completely stupid if they did not buy back stock when this was near $9 or less. It would be good for the asset manager too if they bothered to think about it. That's my strong opinion!!
If you know how to program, you can download the details from their 10-Q or 10-K and maintain a database. That would take come coding to extract the data you want. From that as a starting point, you could then monitor the performance of the portfolio and flag things that need further research.
This is more-or-less exactly what a BDC should be doing for its portfolio companies. Specifically, they should be monitoring each company's revenue, expenses, debt, etc,. as well as data on its clients. These are things that should be done before they invest in the company, but far more research is needed before a final investment is made. This is standard stuff.
The SA author is not very knowledgeable about finance, economics or securities -- specifically BDCs. He is a recently retired, small-time retail investor. Not that there is anything wrong with that, but he is simply telling people about his unfortunate bad-timing experience with one BDC -- NMFC.
I did not look at everything in NMFC's portfolio, but I did look at NMFC's most recent 10-Q and looked at the history of UniTek Global Services. Their UniTek loan just went bad and I wanted to see NMFC's history with the company.
First, NMFC is a relatively new and smaller BDC. Yet it has over 15 companies in its portfolio where each one represents 4-5% of the entire portfolio. The risk is highly concentrated. Further, the interest some of these companies are paying is over 12%.
Second, NMFC has consistently added more PIK to UniTek's loan: In December 2012, $30 million in loans to UniTek were 9% with no PIK. By June 2013, loans increased to $36 million and interest was then reported as 11.75% (including 2% PIK). In June 2014, loans increased by another $2 million (via PIK no doubt), but the loans were now 15% (including 4% PIK). UniTek was in trouble and NMFC's equity (via warrants) was written down from $1.6 million to $0.4 million in one quarter, but the loan value was still being reported above par. With the bankruptcy the loan will be converted into equity. Further, lenders have agreed to throw in more cash. Wow!! (IMO: The PIK was bogus NII.)
Third, fortunately the UniTek holding was the only company where NMFC had any real PIK. Nevertheless, I do not think they were being honest about the value of UniTek. If that is true, what else are they hiding?
If there is any take-home about this it is that we need to keep an eye on the holdings within a BDC's portfolio. One loan that goes bad will happen. But as the manager of a portfolio, for which they are paid VERY well, I expect better underwriting and monitoring.
I finally got around to casting my votes via online proxy. My votes:
1) WILLIAM J. GREMP -- I voted against. He does not bring anything of value.
2) Sell shares below NAV -- I voted Against. This has its advantages in a crisis, but PSEC has routinely sold below NAV for the wrong reasons.
I might have voted yes to selling below NAV if there were conditions that were favorable to shareholders. But the terms state only that they won't sell shares in ONE offering that reduces NAV by 15% from its last reported value. This clearly states that they can do another such offering in the next quarter as long as that does not reduce NAV by more than 15% from its last reported NAV. And they could do this again and again. Shouldn't something like this have STRONG conditions that would warrant selling below NAV? I can see "special cases" where selling stock would be preferable to liquidating assets for pennies on the dollar. But that kind of wording is not in the proxy or any other filing. As such, it opens the door for too much abuse.
I sincerely hope other shareholders vote NO to selling below NAV. If PSEC mgmt is 1/2 has smart as they think they are, then they can figure out how to run this BDC in a way that benefits both mgmt and shareholders. Selling below NAV is not good for shareholders. (FYI: Barry may own 4 million shares, but he also is personally taking over $50 million per year from mgmt fees. Don't talk to me about how many shares he has. The pps could drop 50% and he'd still make out big time.)
I have better than an estimate. This is in the press release, as well as SEC filings.
Record date for spinoff is October 27 and the distribution of new stock is November 6. Between Oct 27 and November 6 is when the FMV is determined. Three markets will exist:
1. SNR WI: SNR "when issued". Basically SNR only.
2. NCT WI: NCT when issued; NCT only
3. NCT: This will still trade with rights to both companies
The record date of October 27 is misleading in the sense that NCT will still trade with rights to both companies through November 6. November 7 will be the first date in which NCT and SNR trade as seperate companies. The "when issued" stock symbols will be used to determine FMV of the individual companies. You can buy SNR alone via SNR-WI, but the pps may be a little volatile at first since the "market" does not relly know how well it will perform.
At any time in the window, the price of SNR-WI + NCT-WI should equal that of NCT. If not, and this happens frequently, traders will play it. Be careful about playing this.
Post 2-1 reverse split, NCT-WI is worth between $6 to $8. And SNR-WI is worth between $18 and $22. (You get the $6 for NCT-WI by liquidating everything now. That is the low end.)
"Cannot always trust Car Ichan who has his own agenda"
I would have ommitted the "always." If a guy like Ichan tells you t buy something, it's becasue he already bought it. If he tells you to sell it, he eigher already sold or wants to buy it at a lower price. Either way, he is not speaking in one of these "interviews" for nothing. He has an agenda -- and what is good for him is probably not good for you. :-)
To some extent this may be part of the reason -- improve ressults at FSC and FSFR. AUM for FSAM grew a considerable amount over the past few years, but at what expense to FCS and now FSFR? They have been selling shares of FSC every chance they could; the result is that we saw the pps fall from over $13 to $12 to $11 to $10 and now to $9. But FSAM never had a problem with selling more and more stock. And what they did in the last offering of FSFR was criminal -- a SPO that trippled the number of shares at 15% below NAV! Then announce an IPO of FSAM and boast about how fees from AUM were growing 70% or more year-over-year.
No doubt they would have a very difficult time doing another SPO anytime soon. And until they can show shareholders something, another SPO would kill investor sentiment. And without fee-income growth, the value of FSAM would not be worth much.
Another reason may be the market volatility. If the IPO were done on a bad day, proceeds may be 10-20% less than what Leonard was to get. Leonard is already taking $50 million or more per year in dividends from FSAM. I think he can afford to wait to cash out. (The $50 million may not be accurate, but it's probably close to that.)
Looks like FIG just acquired a portfolio of golf courses and country clubs for $307 million. The golf courses are all in sunny Arizona. I don't know if they will turn around and sell some or all of them over time to NCT as it liquidates or recovers money from the CDOs. But reading the tea leaves says this is the direction for NCT.
A stock buyback at these prices is equilivant to a non-leveraged, risk free 14% investment.
Selling shares at these prices, even if it is only via DRIP, dilutes value and the cost of capital is very expensive -- 14%. It would be very, very difficult to borrow at those rates and many investments that generated a good risk/reward return. Bottom line is that it hurts the company's image. How can they justify selling share at 10% discount? That question will come up in the next CC.
I sincerely hope people vote "NO" this December in selling below NAV. Frankly, I cannot understand how that got approved last year or the year before...
BDC Buzz is using Seeking Alpha as a advertisement platform to get people to suscribe to his news letters or "premium" research papers on BDCs. By predicting the next earnings or reported NAV, he can then come back and say "see, I told you so." If he is wrong, then he'll publish an article explaining where he went wrong in his prediction, and possibly suggest that PSEC did something funny with the books to get things to look better.
What I find ironic is that he wants to stear people away from risk, yet he is long an ETF that is 2x leveraged in BDCs. I can see betting on one of those for a short-term flip, but I would not want to hold something like that for more than a few days.
I also think that he is making too much of the fact that PSEC did not turn off its DRIP. The stock price is trading 10% below NAV and I do think that PSEC should shut that off if the pps remains in this range. I email and also spoke with IR at PSEC and discussed this. Specifically, I mentioned that they should use their buyback plan to repurchase the ones they sold below NAV. PSEC should be working on building a better shareholder frendly image. They have been relatively active in giving investor presentations for exactly that reason. But selling stock below NAV will paint a very different picture -- one where the management is interested only in AUM at any cost. Analyst's will ask about selling below NAV. They have plenty of time between now and the earning call. I hope they do the right thing.
The December I truely hope that shareholders vote NO to selling below NAV.
Back then you could park your cash in a CD and collect over 5%. The world has changed. You cannot compare today's USA to the USA of 1950 or 1960. In term of today's interest rates, this may be the new normal. If that is true, who in their right mind would park money in the bank for many years? Doing so guarantees that you lose 2% or more buying power every year. Small wonder so many people are buying stocks or below investment-grade bonds. Inflation is not going to skyrocket anytime soon. Even after the markets have been flooded with funny money by almost every central bank, deflation is a bigger risk than inflation.
What the Fed has been doing is supplementing our economy with money that was lost over the years due to exporting jobs. Printing more money may have stopped for now, but interest rates won't be rising. The next round of FOMC members is going to be more dovish than the one we have today. That should tell you something.
How did we get here is simple: Third-world countries started to flood the market with cheep labor. That was true before 1980, but it accelerated since then. Disparities in the standards of living will shifted toward equilibrium -- i.e. more jobs went to China, India or other parts of Asia. Economies such as China are so large now that our economies are linked together. "Our" economy now has an extra 3 billion people (India, China, etc.). The standard of living in China and India (large cities) has improved so much that they alone will soon produce 1/2 of all college graduates. Eventually, they will be consumers just like you and I. But we are still many years away from having equal standards of living.
Currently exports from China to the US far exceed imports into China. It took 20 years to go from balanced trade (pre-1985) to a trade deficit of over 300 billion. This seems to have reached its peek and the trade deficit has been flat for three years. But it will take many years to get back to a balanced trade.