For investors searching for higher yields, there is the challenge in analyzing whether dividends are...
PennantPark: BDC with Floating Rates
12/08/2017 5:00 am EST
I’m seeing smart money in the bond market selling on rallies and not doing a whole lot of buying on dips. This tells me that, ultimately, expectations for a bump in short-term rates won’t be too far behind the recent bump in long-term rates, suggests income expert Bryan Perry, editor of Cash Machine.
With Fed Funds trading at less than 1.00% and the three-month LIBOR, or London Interbank Offered Rate, at 1.38%, there is really only one possible direction for both of these rates which are tied to floating-rate debt to go, and that’s higher.
So, if a business development company (BDC) can generate a current yield of 8.0% or higher from a portfolio of floating-rate loans while paying a monthly dividend, I’m very interested in getting involved while short-term rates are still artificially low.
To that end, PennantPark Floating Rate Capital (PFLT) is, in my view, a fantastic way to increase one’s weighting in what should be an excellent place to ride the eventual rise in interest rates on the short end of the yield curve.
PFLT’s investment objective is to seek current income and capital appreciation by investing primarily in floating-rate loans and other investments made to U.S. middle-market private companies whose debt is rated below investment grade.
The current portfolio is made up of loans to 86 companies across 25 industries. Of those loans, 99% of them are structured as the floating-rate variety.
Most of the floating-rate loans carry an average maturity of three to 10 years. In addition, PFLT may obtain security interests in the assets of its portfolio companies to serve as collateral in support of the repayment of these loans. This collateral may take the form of first- or second-priority liens on the assets of a portfolio holding.
Net asset value for PFLT, as of June 30, is estimated to be between $13.95 and $14 per share, right about where the shares are trading. The company also priced a secondary offering of six million shares on Oct. 25 at $14.06 per share, which provides a brief opportunity in which investors can acquire PFLT shares with current dividend yield locked in at just above 8.0%.
For many high-yield investors, 8% might not sound as tantalizing as the yield on other BDCs, but it would be hard to locate another BDC that has such a solid loan portfolio and sound management that will provide decent share price stability as interest rates rise.
For my high-yield advisory Cash Machine, PennantPark Floating Rate Capital is a core holding with an ideal monthly dividend payout that makes it a prime income investment in the present market environment.
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