Re: Interesting Bond issues
Recently I have started putting some money on these type of bonds.
http://www.fool.com/investing/general/2013/11/06/baby-bonds-monster-yields-with-less-risk.aspx
Baby Bonds: Monster Yields With Less Risk
Don't want to stomach the volatility of high-yield business development company stocks like Prospect Capital (NASDAQ: PSEC ) or Ares Capital (NASDAQ: ARCC ) ?
Do you fear Main Street Capital (NYSE: MAIN ) , Fifth Street Finance (NASDAQ: FSC ) , or Apollo Investment Corp. (NASDAQ: AINV ) might slash their high dividends in the future?
There might be a perfect alternative just for you.
Meet BDC baby bonds -- small, publicly traded "notes" that pay routine quarterly interest to investors. Unlike traditional bonds, which require a minimum investment of $1,000, these baby bonds can be had for as little as $25 each, making them attractive to income investors on a budget.
Why baby bonds?
Baby bonds pay a high rate of interest (5%-8%) while offering more protection than the common stock. Baby bonds are paid after all other debt obligations of the BDC, but before shareholders. Thus, before a BDC can pay a dividend to its shareholders, it has to first cover its obligations to baby bond investors.
Baby bonds are a good way to grab high yields from BDCs with less price and dividend risk, making them suitable for investors with a lower risk tolerance.
Baby bonds offer a consistent interest rate until they mature at a specific time in the future. In between, there is often a "call" date, after which the BDC can call the baby bonds, pay investors par value, and cancel the notes.
Here's a list of available baby bonds by BDC:
Ares Capital Corporation is the biggest and one of the oldest business development companies. Ares Capital provides very good protection for its baby bond investors, as it finances most of its assets (71% of outstanding debt as of the last quarter) with unsecured financing.
Because it finances itself with mostly unsecured debt, a majority of Ares Capital's assets are safe in the event of a market decline and default. A high level of secured debt was behind the failure and collapse of BDCs during the 2008 financial crisis. Ares Capital operates with minimal secured debt, which is reflected in its lower-than-average baby bond yields.
Prospect Capital Name Ticker Face Yield Current Yield Call Date Maturity Date Prospect Capital
PRY 6.95% 6.69% No call November 2022
Prospect Capital is the second-largest BDC, with a balance sheet in excess of $4 billion. Like Ares Capital, the company has financed itself primarily with unsecured debt, protecting its assets in a downturn. Some 86% of its assets are not pledged to debt ahead of the baby bonds, insulating baby bonds from default risk.
Prospect Capital's notes differ in that they cannot be called before their maturity date. Thus, investors who buy the 2022 notes can know with certainty their expected return when the notes mature. The attractiveness of these notes is evidenced by the fact they trade above par value.
Main Street Capital
Name Ticker Face Yield Current Yield Call Date Maturity Date
Main Street Capital MSCA 6.125% 6.50% April 2018 April 2023
Main Street Capital is one of my favorite small BDCs. This tiny middle market lender has some of the best credit quality of all the BDCs, competing for smaller deals that are off the radar of larger business development companies. Main Street Capital's notes offer a yield close to the common stock, giving investors a way to get high dividends without the risk of a declining stock price.
Baby bonds can be a great way to invest in your favorite BDC with lower risk than the equity. Their small $25 denominations make it easy for investors to compound quarterly distributions by purchasing more bonds with each interest payment. For BDC investors, baby bonds are a great place to store cash while waiting for your favorite BDC to sell at a price you'd like to buy.
