Fifth Street "Floats" in the Sweet Spot
11/25/2016 8:00 am EST
High-yield income opportunities exist in a few sectors where rising interest rates provide for tailwinds of increased dividend income and capital appreciation, notes income expert Bryan Perry, editor of Cash Machine.
I’m a big fan of Business Development Companies (BDCs) that own almost all floating-rate loans. Fifth Street Senior Floating Rate Corp. (FSFR) is a BDC right in the sweet spot of the business lending market.
This is a smaller BDC with a market cap of $260 million, trading at a 21% discount to net asset value, yielding 10.21% and paying a monthly dividend of $0.075 per share.
Loans issued by FSFR are made to larger and more stable clients as compared to most BDC peers. As such, FSFR offers potential for capital gains, as well as double-digit dividend yields if it moves toward normal valuation.
The company’s 1.0% base management fee charged by FSFR to manage the loan portfolio is one of the lowest fee structures in the industry. FSFR’s loan portfolio has strong credit quality.
FSFR has a well-diversified portfolio with 64 client companies. Information technology is the largest area at 29%, followed by healthcare at 17%.
Other key sectors include consumer discretionary at 14%, financial at 12% and commercial & professional services at 11%.
In addition, the portfolio has small exposure to the volatile energy sector, currently just 0.5% of assets.
FSFR has had a steady stream of insider buying in 2016. Leonard Tannenbaum -- CEO of external manager Fifth Street Asset Management (FSAM) -- now owns 7.8 million shares including his latest large purchase in September.
This represents a massive 26% ownership stake. This level of insider buying activity is rare in the BDC space and is notable.
Floating-rate assets have been given the green light, and the fact that we can garner a 10.23% yield at a steep discount to book value and get paid on a monthly basis is, in my view, very timely for addition to the Aggressive High-Yield Portfolio.
By Bryan Perry, Editor of Cash Machine