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Time for a New ‘Buy’

NOTE–I just bought a 1/2 position for 24.94. If we get some slippage I will add to the position.

I have surveyed the Business Development Company (BDC) landscape and have come up with what I believe are the 2 best buys available for my level of risk tolerance.

1st I will be buying some of the new Capital Southwest Corp (CSWC) 7.75% baby bond (CSWCZ). Honestly this is one of the top BDCs available in my mind. The baby bonds were issued with a Baa3 rating from Moody’s (per June 7 ratings action)- this is very unusual – of course virtually no baby bonds from BDCs are rated. Ratings mean zip if the company is poorly managed–so I have scrutinized SEC reports.

Like most business development company’s CSWC is required to maintain a 150% asset coverage ratio–but they have a self imposed limit of 166% which is tighter than the official requirement.

CSWC has maintained a relatively flat share net asset value during the last 2 years–no small feat in these times of skyrocketing interest rates and indicates there have been very few write downs in the portfolio.

The investments made by CSWC are mostly 1st lien loans – I don’t want a BDC that have a portfolio full of 2nd lien stuff – that is worth zip to me – I want to be paid 1st.

The portfolio is in the $1.3 billion dollar range (as of 3/31/2023)–a fairly large portfolio for a BDC. The debt portion of the portfolio has been self rated as shown below. 1 is performing ‘better than expected’–a 2 is ‘as expected’ 3 is ‘below expectations and 4 is ‘crap’. As of 3/31/23 .3% of the portfolio is on ‘non-accrual’.

CSWC was formed in 1961 and elected to become a BDC in 1988–so this one has been around quite a while.

Here is the company’s 3/31/2023 10-K (annual report)

and here is the ‘glossy presentation’ from May 23, 2023.

As always this is not a recommendation to purchase this security and everyone should do their due diligence by reading the 10-K and by perusing the presentation and other pertinent data.

17 thoughts on “Time for a New ‘Buy’”

  1. Yes, picked up some of this myself along with many other BDC bond holdings. Let’s recall that not a single publicly traded BDC in history has ever defaulted — they have not even come close. The 150% asset coverage would mean a BDC’s portfolio would have to have 33% losses for assets to equal liabilities 1:1. This type of loss rate is unheard of, and indeed, no BDC has come close to this. Even in peak downside scenarios non-accrual rates reached in the 10-14% range, and that still does not mean total loss of the loan. I would in fact look at these as some of the best opportunities, including baby bonds by issuers such as GAIN, SAR, and HRZN.

  2. Tim, you mention that you bought a 1/2 position. I am fairly new to investing and am unclear about the concept of a position. I have always thought that a “position” can vary from person to person. For one person a position might be $1000 whereas for another, it might be $500 and for a big investor, maybe $10K. And that their individual definition of position might apply across all their investments or can vary by type of investment – eg, $1K for stocks, $5K for corp bonds, $10K for cds.
    So am I wrong in my assumption about position? For you, what do you consider a full position?

    1. That is right mlinok. Position is highly variable. You could say that investing to you means owning 20 stocks, therefore 1 position = 5%. Another person would split up into categories (reits, finance, …) and then each category might have a different weighting such as reits might be 10%, and finance is 5%, so then position $ amount is even different for that person. Yet another person might break up their asset allocation into domestic, international, or yet even by market cap (large, small, …), or yet by type like fixed, etc.
      Someone would really have to define their asset allocation strategy to you to provide a complete and accurate answer. For example, this is a bdc, and I invest 1% of my portfolio for BDC’s. The rest of my portfolio is broken down from 99% and is as such: …

    2. An informal term. When someone says a Position I assume it means typical amount bought for each issue of that type. A half position would be a smaller investment, often stated that way to indicate less risk taken on. My positions are many different sizes so I rarely use that term I’ll just say large amount, small amount etc.

  3. Where is this available? I’m new to Schwab from TDA and they show it but won’t let me buy it. Thanks!

    1. The only 4 i would consider are MAIN, CSWC, ARCC, TSLX. These are the common stocks. Not a great time to buy as the market is in a jubilation phase right now.

    2. 2wr—ah ha I was hoping no one would have caught that – it is coming soon in a separate write up.

      1. I was wondering about your take on BDC’s common prospects- upward trend for now, but when rates finally drop…
        –Highly respected Scott Kennedy always has some buys, holds, sells, so I’m not sure if he is looking out toward decline in rates or just looking for a fairly quick trade.
        And some CEF issues like RIV-A (A1 rated), as well as some other common- with & without leverage).

          1. A cautious cautionary tale… not too hopeful with the way the Fed is going- for now.
            Lots of reporting on SA- makes the head swim- promos and warnings.

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