Tweaking the Model with a Purchase
By: Tim McPartland,
Continuing the slow move toward short duration securities we are buying Triangle Capital’s 7% Senior Notes (ticker:TCC) which has a maturity date of 3/15/2019. This issue has a optional call date of 3/15/2015—meaning this issue could be called away in only 5 months. We will take a chance it won’t be called–but if it is called the issue is trading at par plus just 100 days of dividends–so we have no real risk in regards to a call. We would prefer to not have to mess around replacing the issue in the future so we hope it isn’t called.
We are purchasing this issue out of the ‘cash’ portion of the account as we have over 13% cash in the account which is higher than we would like at this time (you can’t win the game by sitting on the sidelines).
Note that Triangle is a Business Development Company–thus has an added layer of protection in the fact that BDC’s must have asset coverage ratios on preferred stocks of 200% or more and 300% on debt–thus if net asset value falls they must sell common stock to pump up the asset coverage ratio. If you want to understand more on the Securities Act of 1940 and how it adds safety to debt issues and preferred stocks of closed end funds (and thus Business Development Companies) you can read the article we wrote on Seeking Alpha years ago (no we don’t get paid if you access the article) which explains it all in detail. In the article we walk through a real life example of how one of the Gabelli Funds had asset coverage of 633% on preferreds which fell to 293% during the financial meltdown in 2008. They then sold over $1,000,000,000 in common the next couple of years driving the coverage ratio above 1000%. When a closed end fund (BDC) violates the ‘act’ all sorts of hell rains down on them–for one they must discontinue any dividends on common etc while in violation of the asset coverage ratios–and this would be a disaster to any BDC.