This fund is a leveraged fund with a certain amount of equity (from the shares owned by some on this board) and then debt in the form of pref shares. These pref shares have an interest rate which is set by monthly auctions (every 28 days) - actually has 4 different series with on resetting each week. As a result of the collapse of the CP market and as a result of fears about credit woes in HY land, the cost of leveraging the fund has just gone from 5 to 7%. This means they will likely have to cut the dividend or eat into principal to pay the dividend. Which they have been doing recently with nav down from 2.25 to 2.07 recently.
Leverage is roughly $130 MM with equity (at nav) of $210 MM. So modest leverage with assets/equity of 1.65x. So, assuming a 7% investment return and 5% funding cost and ignoring costs, the firm was probably earning a 11.5% on assets and paying out 3.5% in interest expense. This means it could have sustained an 8% yield with a flat nav ignoring costs. Adding in a 1.5% fee and dividend rate should have been 6.5%, hence to pay a 10% yield it had to eat into principal annually by 3.5%. With the recent turmoil in the markets NAV has fallen more recently due to losses on mark to market of bond principal.
With the increase to 7-7.5%, the cost in part above would now be 4.5%ish bringing the net after fees yield down to 5.5% for sustainable dividend. But since the NAV has reset lower due to higher yields in HY bonds, I expect the current yield is probably about 8-9% on assets. This results in 8%x1.65-4.5%-1.5%=mid 7% range. With need to pay a 9ish% yield if at a big discount, stock would likely trade to a 10ish% discount.
News 
Market Data 
Discover 
AI
