FSC - Fifth Street Finance Corp

[kai99]

Wad do you guys think of this stock.

 

Quantitatively it's pretty slick. at 0.94 P/B. Good gross, operational, and profit margins. DVD at 10.75%.

 

Based on Peter Lynch's earnings line, it also looks attractive

 

TBH i can't find much happening in their annual report. But it seems a little forgotten by the market.

 

Technically on a short term downtrend though.

 

Anyone with more experience with this type of companies can share something? Thx!:)

 

[PatientCheetah]

Never seen a company with share counts going up in lock steps with profits, large negative cash flow supported by equity/debt issuance, I would stay away, has an Enron/Allied Capital/Ponzi scheme feel to it, or it could just be my ignorance on how business development company works

[thepupil]

Externally managed business development company where investors are being charged 2% of assets (not equity) and only a 6% discount to book.

 

Start with the assumption management exists to extract fees from you, that the assets are fake or are manipulated in value, the interest has a large non cash component (PIK), that the dividend isn't covered, that fees eat up all value add, that there is no value add to begin with, and that you will be screwed, that the underwriting on loans is poor, and that the credit cockroaches are many.

 

Then try to disprove those assumptions.

 

If you have no idea what I just said, stay away. If you do and can disprove those assumptions, let me know so I can put her in the PA next to my ACAS. I love me some shitty retail yield products

[kai99]

Hi thx for the replies, tbh i was only attracted to the stats out of a scan.

 

Do you mind sharing a little more about the kind of system this company operates on. How would you spot poor under writings and credit.

 

Many thanks in advance

 

Externally managed business development company where investors are being charged 2% of assets (not equity) and only a 6% discount to book.

 

Start with the assumption management exists to extract fees from you, that the assets are fake or are manipulated in value, the interest has a large non cash component (PIK), that the dividend isn't covered, that fees eat up all value add, that there is no value add to begin with, and that you will be screwed, that the underwriting on loans is poor, and that the credit cockroaches are many.

 

Then try to disprove those assumptions.

 

If you have no idea what I just said, stay away. If you do and can disprove those assumptions, let me know so I can put her in the PA next to my ACAS. I love me some shitty retail yield products

[thepupil]

- It is a business development company, which is a 40 act registered investment company, that is (usually) not taxable at the corporate level and is required to distribute the majority of its profits to investors (hence the fat dividend)

 

-to paint the whole sector with a broad brush, they generally charge high fees, in this case an external management company charges 2% of total assets. So this company has 2.8B of assets and 1.4B of liabilities. They charge 2% on the whole $2.8B, so that's 4% of equity.

 

-to once again paint with a broad brush, the sector tends to invest in higher risk securities: mezzanine loans of smaller companies, equity of said companies, quasi venture capital, etc.

 

- they generally lever said risky assets. the only way to attract a compliant shareholder base that will tolerate high fees on permanent capital is to provide yield. people love yield. the road to hell is paved with positive carry

 

- because they cannot retain earnings (like REITs and MLPs) they are dependent on capital markets to grow and they want to grow so they can grow their fee base

 

- there are some good actors (i believe Ares and Golub are pretty well regarded but don't hold me to that) and some bad actors, the most infamous bad actor of all time was allied capital. Watch these videos to see Mr. Einhorn's epic takedown of the company. If that video sparks a man crush on David Einhorn, read the book Fooling Some of the People All the Time

 

 

 

So evaluating a BDC is akin to evaluating an opaque financial company. you have to trust management and/or get out before shit hits the fan. I can't really tell you how to evaluate the credit quality but i would just say this is a fresh, unproven pile of credit investments and you should be wary.

 

I could be totally wrong, but it sounds like you are just getting started in terms of figuring things out  and looking at stocks.

there are probably better places to look and people with whom to invest. And this doesn't look cheap at all.

 

i should note that investing in these can be quite lucrative if the company can keep up the "issue equity at  a premium" game long enough.

 

that's all i got for now. I own one. You can look up the ACAS thread if you are curious. It's a shitty company, but at least it has a bunch of cash and is unleveled, trades at a sizable discount,  and is undergoing some corporate change/restructuring that in my opinion makes it interesting. But note the venerated Packer's objections to the company.

[kai99]

Hi the pupil,

 

Many thanks for all that information. Never really knew how to look at this. Will learn more about them!

 

- It is a business development company, which is a 40 act registered investment company, that is (usually) not taxable at the corporate level and is required to distribute the majority of its profits to investors (hence the fat dividend)

 

-to paint the whole sector with a broad brush, they generally charge high fees, in this case an external management company charges 2% of total assets. So this company has 2.8B of assets and 1.4B of liabilities. They charge 2% on the whole $2.8B, so that's 4% of equity.

 

-to once again paint with a broad brush, the sector tends to invest in higher risk securities: mezzanine loans of smaller companies, equity of said companies, quasi venture capital, etc.

 

- they generally lever said risky assets. the only way to attract a compliant shareholder base that will tolerate high fees on permanent capital is to provide yield. people love yield. the road to hell is paved with positive carry

 

- because they cannot retain earnings (like REITs and MLPs) they are dependent on capital markets to grow and they want to grow so they can grow their fee base

 

- there are some good actors (i believe Ares and Golub are pretty well regarded but don't hold me to that) and some bad actors, the most infamous bad actor of all time was allied capital. Watch these videos to see Mr. Einhorn's epic takedown of the company. If that video sparks a man crush on David Einhorn, read the book Fooling Some of the People All the Time

 

 

 

So evaluating a BDC is akin to evaluating an opaque financial company. you have to trust management and/or get out before shit hits the fan. I can't really tell you how to evaluate the credit quality but i would just say this is a fresh, unproven pile of credit investments and you should be wary.

 

I could be totally wrong, but it sounds like you are just getting started in terms of figuring things out  and looking at stocks.

there are probably better places to look and people with whom to invest. And this doesn't look cheap at all.

 

i should note that investing in these can be quite lucrative if the company can keep up the "issue equity at  a premium" game long enough.

 

that's all i got for now. I own one. You can look up the ACAS thread if you are curious. It's a shitty company, but at least it has a bunch of cash and is unleveled, trades at a sizable discount,  and is undergoing some corporate change/restructuring that in my opinion makes it interesting. But note the venerated Packer's objections to the company.