The following is an update that was previously provided to subscribers of Premium BDC Reports along with revised target prices, dividend coverage and risk profile rankings, potential credit issues, earnings/dividend projections, quality of management, fee agreements, and my personal positions for all business development companies (“BDCs”).
Recent Baby Bond Trade
Today, I sold my AFC Baby Bond Notes at $26.92 for the reasons discussed in this update and will use as an example for upcoming discussions.
BDC Baby Bond Sheets
The following information is included in the “Bond Info” tab from BDC Google Sheets:
- BDC Baby Bonds trade “dirty” which means that there is a certain amount of accrued interest in the market price.
- You need to own the Baby Bond one trading day before the ex-dividend date to be eligible for the full quarter of interest.
- It is important to take into account which BDCs are “callable” and the potential for capital losses during the worst-case scenario.
- The Call Risk Capital Loss refers to the worst-case scenario of the bond being called tomorrow and takes into account 30 days of additional interest accrued before being redeemed.
- Breakeven Days refers to the number of days of interest needed to breakeven given the current market price.
The following sheet is from the “Baby Bond” sheet
As shown in the table below:
- AFC goes ex-dividend soon and has $0.43 of accrued interest priced in.
- AFC was callable on April 15, 2012.
- AFC currently has Call Risk Capital Loss of $1.35
- It would take 312 days of not being called before you would breakeven
Call Risk Capital Loss and Breakeven Days Calculations:
My Reasons For Selling AFC
I had some tax reasons for selling but it was mostly due to being overpriced with limited upside plus I wanted to lock in the following gains and will reinvest in something else.
Over the coming weeks, I will be spending more time discussing Baby Bonds that currently yield around 6% and much less volatile than stocks even during extreme scenarios experienced in December 2018 where I made multiple purchases of BDC stocks, bonds, and preferred shares. My personal portfolio includes various other bonds some of which are tax-related and likely not applicable to most but included in “Other” along BDC Baby Bonds shown below. Together these investments account for around 37% of my portfolio and this report will discuss all of my recent purchase and returns.
Subscribers of Premium Reports will receive real-time announcements of all upcoming purchases of BDC Baby Bonds and preferred shares but please be aware that these have lower returns and are not expected to outperform the S&P 500 or upcoming BDC stock purchases. However, these investments will easily outperform during volatility and/or downturn while continuing to provide a relatively safe and stable yield as they are senior to the common stocks. Also, I am constantly monitoring the balance sheets of BDCs which provide insight for bond risk measures including portfolio credit quality, changes to leverage, interest coverage ratios and redemption risk such as GAINM as discussed in the GAIN Deep Dive report.
To be a successful BDC investor:
- As companies report results, closely monitor dividend coverage potential and portfolio credit quality.
- Identify BDCs that fit your risk profile.
- Establish appropriate price targets based on relative risk and returns (mostly from regular and potential special dividends).
- Diversify your BDC portfolio with at least five companies. There are around 50 publicly traded BDCs; please be selective.