We Added Prospect Capital Baby Bond to Portfolios

Reader Mike W sent us a note today because we had not added the newer Prospect Capital 6.875% baby bonds (NYSE:PBC) to the various lists–we have now added it.

Given that we have been trimming a bit in the perpetual preferreds we bought in December (and earlier) we were in the mood for a purchase and thus looked this issue over and determined for a investment grade issue, with a maturity in 2029 the $24.70 purchase price was pretty darned good. We bought a full position in personal portfolios.

Additionally there was enough cash in the Medium Duration Income Portfolio to also pick up 200 shares in that model. That is the first purchase in that seldom traded model in 6 months.

We are aware that over the years Prospect Capital has been criticized for poor management so prior to purchase we checked Scott Kennedy on Seeking Alpha (one of the few writers we have a good level or respect for) and he had a recent article on PSEC. The article is worth a read if interested in BDC Prospect Capital (or their baby bonds).

Scott Kennedys article is here.

17 thoughts on “We Added Prospect Capital Baby Bond to Portfolios”

  1. This issue came to market last year in mid December. Not the most fortunate timing as it promptly sank to a low of $20.03….. for a whopping 8.6% yield. I’m not knocking the issue. I own some and have no plans to sell at present yield. Just saying as Tim has also stated, BD holders (not just this one) can really get antsy when the world is ending.

  2. PBC at 24.70 seems interesting. XD is on Feb 28 so accrual is practically 12/13th of the 0.4296875 payout: 0.3966 …. yield ~ 7.07%

    1. Aarod – Technically speaking I would argue that your math assumptions are too aggressive on PBC. Interest accrues from interest payment date to interest payment date, not XD to XD. Yes, you qualify for 100% of the interest on XD, but you still don’t get paid until 2 weeks later so on a time value of money point of view, only 10/13 of interest has accrued not 12/13. On a 10 year bond such as PBC, there’s probably not a hill of beans difference as to the actual calculated yield but the shorter the bond, or stated maturity preferred, the more important the difference. So I would say that using interest payment date to interest payment date is the more conservative and the more accurate way to look at it…

      1. 2WR, thank you! I think you are right – what you expressed is the accurate and better way to consider it. Many thanks

        1. 2WR, someone may chime in from another perspective: could one also consider that as soon as XD shares could be sold, making those funds available for additional work, irrespective of two-day settlement period and pay date ?
          Nevertheless, I think that what you stated is consistent with YTC/YTM calculators and the appropriate way. Thanks again!

          1. Aarod – I suppose someone could make that argument but as you said, it would not be consistent with YTC/YTM calculators. It would also be difficult to capture that coupon payment in its entirety the day of XD payment but I suppose that’s a whole other game to play for those who try.

  3. IHIT does not have an active link nor likely III rated. Its a CEF. If my memory serves me, Tim (or someone) posted that it should be fairly safe. However, recent discussion expressed concerns with Termed CEFs as they approach end, and the importance of doing due diligence by checking holdings in reports.
    FWIW, I would not rely on cefconnect dot com data for holdings as at times it is inaccurate or stale, especially for Invesco and PIMCO CEFs.

    Moody’s last week rated Prospect Capital’s Medium Term notes – Baa3. I did not spot ratings for the three BBs. Using Grid’s mapping rule, this put the BB’s ratings at what ??? One or two notches below?

    1. After Tim’s first article on IHIT, I bought some at about $9.95 average cost basis. Glad I did.

      Am now flipping a portion of my holding, trying to sell in the $10.30 area, and buying back in the $10.18 area.

      The mandatory redemption at around $9.83 in a few years ( 4 years? Or 3 years? ) does not make the present price sustainable in the long run, so I’m trying to take advantage of this temporary situation.

    2. aarod–you have to sort the wheat from the chaff. The IHIT and IHTA hold securities that mature around the termination date of the fund (plus or minus a few years).

      I wouldn’t get near some of the ‘term’ securities with a 10 foot pole. Why. They have a termination date–but they have no target price AND the biggest point is that the securities they hold have maturities that go out 10-20 years after the liquidation date. What this means is that if they liquidate the trust on whatever date if the bonds are down 20% because of where interest rates are at you are going to take a huge hit at liquidation because they are going to sell at current market values.

      I was reviewing one the other day and they have an average maturity of 7 years–but averages mean zip–some of their holdings were out 40 years in maturity.

      I think I will write a article of sorts in the next 5 days addressing some of these things. Since the article came out in Barrons (I didn’t read it-just heard about it) I have seen folks talking about some real crap funds that are out there.

      1. Tim, in case you’re interested, the funds mentioned in the Barron’s article are GDO, HYI, BGB, EGIF.

    3. forgot–yes I don’t have much on those few CEF term trusts because I really can’t add them to the data mix I have now–too much work. But someday I will do more CEF stuff.

  4. Speaking of your portfolios Tim, I’m curious about your choices risk-wise. All but three securities (GGO-A, RMPL-, and PBC) you have rated as ‘C’. As a newbie I would love to hear your reasoning regarding your portfolios risk level in the current environment and what would prompt you to begin upgrading more issues to ‘B’ or better. Or would you at do so at all?

    1. I intended first portion of my previous post as a reply to Mikeo. I was trying to express that IHIT is unlikely a C in Tim’s rating gauge.

      1. Yes aarod–if I rated those they would be ‘b’ for safety of dividend, but with the caveat that the closer it gets to liquidation the dividend will drift down some.

    2. Hi mikeo–I haven’t defined those III ratings for all readers up to now as those pages are litely used so far–believe it or not we continue to add and add to those pages–in fact I have someone working on it right this minute and when we rebuild the sort function those pages will be more usable.

      In a nutshell ‘c’ is average–average for dividend safety (which is what this rating is). My choices are to help me be close to my 7% total return goal and even using ‘c’ rated issues I am a little short of goal. If I went to the ‘a’ and ‘b’ rated shares I would be down in the 5.75% area as that would be mostly either utilities or CEF preferreds with super low coupons.

      I would upgrade my quality if we hit a recession because I truly believe that we will see plenty of bankruptcies in the business development company space which is where I like to be right now (with a strong economy). i.e. All the Gabelli CEF preferreds are ‘a’ or ‘b’ and I would take them even with coupons of 5-6%.

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