Hmmmm, OK. It's sort of hard to do much analysis of your reasoning since there's no numbers in it.
I get it that BDCs are fairly high risk investments. The accuracy of the NAV calculation is difficult to assess, and in any given quarter the BDC may announce that XX% of it's loans have defaulted. The flip side is the BDC pays you well for accepting that risk, and some of them have a good track record of not having a high percentage volume of loans go to non-accrual. If PSEC is going to continue to spit out $1.00 per year forever, it's of course worth more than $7.00 today.
PSEC seems fairly low risk to me at the moment. Last reported NAV at $10.17 and a $7.00 share price gives you a $3.17 cushion in your favor. Management could be lying their pants off about the current NAV, and it might still be above $7.00. Something like 97% of income is recurring interest income, so they dividend seems safe, for now. Safe dividend and very large discount to book seems like a safe investment, not a risky investment. Something fundamental really needs to collapse for the low share price to make sense. Maybe it will happen, maybe not, time will tell.
BDCs in general may be risky, but buying them at a 30% discount to their reported NAV seems a good way to mitigate that risk.
You sound like an investor that wouldn't buy PSEC at $6, $5, $4 or at $2, because, well, PSEC is just too risky (in a way that can't be quantified) for you.
I'm not expert on these BDCs, but I'm interested to read the bear arguments. The only one that holds a lot of weight for me is the argument that there is something going on in the economy or with interest rates or in the specific BDC's portfolio that is going to significantly increase non-accruals, and therefore permanently reduce NAV. For me, that is the kiss of death for BDCs. The rest of the arguments don't hold much weight over the long term. I think the average BDC loan is ~4-5 years, so if the NAV is REALLY $10.17 per share, over the course of 4-5 years PSEC is going to get paid back $10.17 per share, and reinvest it along the way. If there are no defaults the share price should head back up toward NAV, and while I wait for that I get paid a buck a year.
I also wonder whether activist investors will come after PSEC in the next year or two in the way they've come after TICC and FSC (other BDCs). PSEC's fees are fat and juicy (2% and 20%), so I don't know why some asset manager doesn't propose to manage the assets for 1.5% and 15%? Let the shareholders decide in a proxy fight. 10-1 PSEC's management's response would be to match the 1.5% and 15% and viola, the share would probably jump a $1.00 just on the news.
Anyway, Merry Xmas! |
