Does The CFA Exam Waste A Billion Dollars?

Introduction
The Chartered Financial Analyst (CFA) designation is an achievement that is very difficult and time-consuming to reach. Many companies in the investment industry seek to hire and promote candidates that have achieved a CFA charter. These companies will usually encourage employees to register and take the exams. With the June exam now in the rearview mirror for many people (this author included), it is time to ask, should companies even support their employees taking the CFA exam?

Analysis
The week before this year's exam as I was sitting in a library and noticed many other candidates studying, I thought back to a common press release that is published each year by Challenger, Grey & Christmas Inc that attempts to quantify the lost productivity due March Madness. Following in the footsteps of that article, I will document out the lost time, quantify it and see if the markets show any excess volatility in that period.
The CFA institute reports that successful candidates spend at least 300 hours studying for the exam. Since the pass rate is often below 50% for the exams, this number will be reduced down to 200 hours on a per candidate basis. If you studied less than that and passed the exams, congratulations! If you studied more and still failed, there is always next year.
Looking at the link above, we can see that the number of student taking the exams has risen each year from just over 76,000 in 2002 to over 149,000 for the June 2012 exam. This number includes all registered candidates, so it overstates the number of people that actually took the exam (if you look around on exam day, you will see a good number of empty chairs for level 1 and 2). Assuming the number of candidates sitting for the exam increased by 5% over the previous year, the estimated total for June 2012 is 120,000 people.
The Challenger article cites the average private-sector wage as $23.29 per hour. It is safe to say many candidates in the financial industry dwarf this wage, but candidates in other countries may make less. For the purposes of simplicity, I will round this number to $25 per hour as a wage.
Using the simple math of Average Hours Studied * Number of Candidates * $25 means for 2012, over $600 million of productivity was lost by the CFA exam. If we use the higher estimates for this number, it could easily translate into over a billion dollars of productivity lost to the exam.
Here are some estimates for the past 5 years. Note: I excluded the December test takers from this calculation, so these estimates may understate the effects:
June 2, 2007: 71,897 participants, $359 million
June 7, 2008: 92,081 participants, $460 million
June 6, 2009: 104,116 participants, $520 million
June 5, 2010: 111,731 participants, $558 million
June 4, 2011: 115,027 participants, $575 million

Conclusion
Given the above information, it comes back to the point, should companies still sponsor the CFA charter? The lost time in productivity is staggering. Companies are losing worker hours. The average charter holder will have studied for over 900 hours to pass all three exams. This time could have been spent making business contacts, working more or anything else. Despite all of this, many people (myself included) still believe that the curriculum is beneficial and has enhanced their productivity at work. This is evident in the steadily increasing enrollment to take the exam each year. Congratulations to everyone who studied and sat for the exam. Enjoy these next few weeks before results come out and hopefully the CFA Institute does not add a Level IV to the testing requirements.

To DRIP or Not to DRIP (Seeking Alpha Article)

I just posted a Seeking Alpha article over here that outlines BDCs and whether or not reinvesting your dividends is worthwhile.

The companies to be examined for this article will be American Capital (ACAS), Apollo Investments (AINV), Ares Capital Corp (ARCC), Blackrock Kelso Capital Corp (BKCC), Kohlberg Capital (KCAP), Main Street Capital Corporation (MAIN), PennantPark (PNNT), Prospect Capital (PSEC), Solar Capital (SLRC) and Triangle Capital Corp (TCAP).

BDC Weekly Roundup 8/5/2011

Between this debt ceiling debate and the S&P downgrade, things have been busy at the BDCR. Here is a quick update post.  The BDCR Index was crushed this past week with a -5.97% loss from a level of 296.91 on 7/29/2011 to 279.19 for the week ending 8/5/2011. The major winners were TCAP (+4.30%) and GAIN(+2.99%) and the major losers were MCGC(-25.31%) and AINV (-15.03%).

Chart:

News:
The markets are going crazy. I hope everyone was able to get their trades through these past few days. If I was able (cannot trade due to restricted list) to trade, I would have gone with some of the top guys from my previous article.

Good luck out there!

BDC Weekly Roundup 7/22/2011

Will Congress figure out this Debt Ceiling business already? They are playing with fire and worrying the market. The BDCR Index had a mixed week with a 0.53% gain this past week from a level of 312.45 on 7/15/2011 to 314.09 for the week ending 7/22/2011. The major winners were ACAS (+4.08%) and ARCC (+3.9%) and the major losers were CODI (-4.92%) and KCAP (-2.99%).

Chart:

News:
Earnings season is coming up next week, most of the BDC-R companies will report earnings.

A look at High Dividend Stocks (BDC / Finance) and Ranking Them

(This article will also be cross-posted on Seeking Alpha, if you read the article there and have come back here, welcome to BDCR! If not, thank you for still reading. Due to some extensive work over these past few weeks, I now have some great historical data on the BDCR companies. This post is the first of hopefully many deep dives into the companies.)


It is quite common for a major financial website to post a link of "dividend darlings". A dividend darling list typically involves a group of companies that have a strong history of paying increasing dividends over their lifespan. If you look on Forbes, Investopedia or Seeking Alpha you will see lists containing some chosen companies.
This article will include a "dividend darling" list that is exclusively focused on BDCR-followed companies. Not only will the current dividend high-rollers be highlighted, but I will rank the companies based on history and dividend coverage. All of the information gathered is available on the SEC website and/or your favorite financial website (Yahoo, Google, DailyFinance, etc). I want to reward companies that have been around for awhile and ding those that are not paying and covering their dividends. This means that a company like American Capital (ACAS), which was once the top of the heap in terms of dividend payers, will now be more towards the bottom of the list.
Below is the criteria:

1. Is the company currently paying a dividend? I am penalizing a company that does not pay a regular dividend. I know owning ACAS over the past year with a 94% return would have been a far better total return, but I am looking at BDCs strictly on a yield-basis and not a total return basis for this article. 10 pts
2. Does the company have a strong dividend history? For example, Prospect Capital Corporation (PSEC) likes to publicize its history of dividend increases and consecutive dividends. One thing it fails to mention is that in May of 2010, the company slashed its dividend by 10 cents per quarter, skipped most of its June dividend and changed over to a monthly payout (which overall I believe was a good thing). This list will penalize a company for doing that. 3-6 pts (3 pts for never missing a dividend, 3 pts for never cutting a dividend)
3. Is the dividend currently covered by net investment income? I covered this in a previous post in which I explained why I believe it matters. Below you can see the updated chart. Again, the same situation applies where I multiplied a monthly dividend payer by 3 to turn it into a quarterly dividend. 3 pts
4. How long has the company been paying dividends? I believe companies that have successfully navigated the 2007-2009 period should receive an extra credit above those companies which may have IPO'd over the past two years. 1-2 years is 1 pt; 2-5 years is 2 pts; 5+ years is 3 pts

Given this format, the max score a company could receive is 22 (5+ years of consistent dividends covered by NII) and the minimum score is 1 (company is still in business). For the BDC-R companies, the range of scores was 21 as a max and 3 as a min.
click to enlarge image
Results

Discussion of Results
As you can see, most of the companies are in the higher range of the numbers. This is partially due to the sample selection (I do not track some of the newer BDCs at the moment) and the favorable market conditions for BDC companies.
The main negative on the scoreboard was dividend cuts. Only 5 of the companies listed here have not cut their dividend. Of those 5, PennantPark Investment Corporation (PNNT - first dividend June 2007) and Compass Diversified Holdings (CODI - July 2006) have been around for awhile. Solar Capital Ltd. (SLRC - March 2010) and Horizon Technology Finance (HRZN - December 2010) are new to the world.
The other major reason for taking away points is the fact that most of the companies listed do not cover their dividend with net investment income. This means that they are either not covering their dividend or are cannibalizing their portfolio to meet payout requirements. One such company is MVC Capital (MVC). It realized losses on portfolio companies at 23 cents per share so it could meet its dividend payment of 12 cents per share. By continuing this payout, it reduced its book NAV from 17.71 to 17.38 during the six month period ending April 30th 2011.
Only 7 out of the 26 companies are "safely" covering their dividend as of their last reporting dates, which safely means their NII is greater than or equal to their current dividend. These companies are PNNT, HTGC, Kohlberg Capital (KCAP), KKR Financial Holdings (KFN), Triangle Capital (TCAP), GLAD and MCG Capital Corporation (MCGC).
The Clear Winner
PNNT (PennantPark Investment Corp) comes out ahead of the pack with a solid dividend history and good earnings numbers. It scored a 21 out of a possible 22 and the only detraction was due to the firm's lack of longevity (only paying dividends since June 2007).
The first runner up is Hercules Technology Growth Capital. There has been a fair amount of good press on HTGC this year and it appears that the company has done a good job of backing up what people are saying about it Nicholas Marshi, one of the top posters on BDC companies on Seeking Alpha, did an extensive write-up on the company in March of this year.
Surprises
Former-troubled BDC KCAP (Kohlberg Capital) is also sitting high on the list. The company was hit with a shareholder lawsuit in 2010, a changing of auditors (it switched from Deloitte to Grant Thornton) and restatement of earnings (again check the SEC website for the filings). For example, the restated as of June 30th 2009 earnings adjusted total assets down by $25m, which slashed the NAV from 11.09 to 9.73 and gave more fuel to the arguments it had with its lender BMO. It appears that the company may have weathered the storm and could be worth a deeper look into its financial statements and conference call logs.
Disappointments
At the bottom of the list is EQS. While not a BDC, EQS was a strong dividend-paying stock for 8 years and at this point it is too early to tell if the new management will be able to revitalize the company. SAR (remember GNV Investment?) is also sitting at the bottom as it has yet to show any signs of breaking out of GNV's slump.

BDC Weekly Roundup 7/8/2011

Two weeks in a row of gains. Hopefully things are going to pick up, but the current yields on these securities are attractive. The BDCR Index gained 1.68% this past week from a level of 312.63 on 7/1/2011 to 316.56 for the week ending 7/8/2011. The major winners were NGPC (+8.36%) and KED (+7.73%) and the major losers was MCGC (-0.48%).

Chart:

News:
I will have an extended article up this week concerning dividends. It seems like the BDC companies have been in the spotlight (along with REITS) on the major news sites these past few weeks.
HRZN - Releases outlook - http://www.horizontechnologyfinancecorp.com/releasedetail.cfm?ReleaseID=589294
KED - Schedules earnings release - http://biz.yahoo.com/bw/110706/20110706006188.html?.v=1
MAIN - Closes a new $155m revolver with BB&T - http://www.bizjournals.com/tampabay/news/2011/07/08/bbt-extends-deal-to-main-street.html?ana=yfcpc
PSEC - Closed another $105m in investments (good to see they are putting that money to work)
TTO - Acquired a 40% interest in a PNM subsidiary - http://biz.yahoo.com/e/110706/tto8-k.html

BDC Weekly Roundup 7/1/2011

I hope everyone had a great 4th of July weekend. The posts have been coming a much slower rate due to me working on some new ways to source data. My current process is too time consuming and does not allow me to do the kind of in-depth analysis I would like to do.

The BDCR Index fought back and rose 2.31% this past week from a level of 305.41 on 6/27/2011 to 312.63 for the week ending 7/1/2011. The major winners were KED (+10.21%) and ACAS (+9.30%) and the major losers were EQS (-1.25%) and TCAP (-1.12%).
Chart:

News:
ACAS - Raising money through another stock, AGNC - http://seekingalpha.com/article/276766-mreit-american-capital-agency-s-secondary-provides-a-19-yield
KED - Boosts dividend by 22.6% and the stock soars - http://finance.yahoo.com/news/Kayne-Anderson-Energy-bw-2437001925.html?x=0&.v=1
NGPC - Announces new CFO - L. Scott Biar

BDC Weekly Roundup 6/17/2011

Been a busy few days here, but wow this is a rough market.

The BDCR Index had a slid another -1.47% this past week from a level of 309.35 on 6/10/2011 to 304.81 for the week ending 6/17/2011. The major winners were NGPC (+6.08%) and CODI (+5.52%) and the major losers were EQS (-6.30%) and MCGC (-5.51%).

Chart:


News:
ACAS - CEO Malon Wilkus buys 11,5000 shares, Senior VP Brian Graff unloads 926 shares
EQS - New board was elected without issues. - http://finance.yahoo.com/news/Equus-Announces-Results-of-iw-1454894910.html?x=0&.v=1
FSC - Releases newsletter - http://ir.fifthstreetfinance.com/phoenix.zhtml?c=216346&p=irol-newsArticle&ID=1572963&highlight=
Also, their CEO Leonard Tennebaum bought 10,000 shares on 6/14.
KCAP - Declares second quarter dividend of 17 cents (unchanged)

Motley Fool article on FSC and other BDCs - http://www.fool.com/investing/general/2011/06/18/is-fifth-street-finance-the-perfect-stock.aspx A bit ironic considering FSC (and of course PSEC) just did an equity raise this week.

BDC Weekly Roundup 6/10/2011

I am back! The test was difficult and I feel they did a poor job of testing the curriculum, but onwards and upwards.

The markets have been getting pummeled since my last post. The S&P 500 has declined about -3.96% and the BDCR Index has mirrored the decline by a -3.21% decline over that time as well. For the past week, the BDCR declined by -1.42% from a level of 313.81 on 6/3/2011 to 309.35 for the week ending 6/10/2011. The major winners were KCAP (+2.84%) and SLRC (+2.77%) and the major losers were TINY (-7.18%) and TTO (-5.74%).

Chart:

New:
No news articles this week, will restart those next week and begin content again.

BDC Weekly Roundup 5/6/2011

(EDITOR's NOTE: I will be on a reduced schedule for the next few weeks due to a certain exam. After that exam I intend on posting actual content and analysis with regularity again)

The BDCR Index had a downward slide this past week by an amount of -2.84% from a level of 328.66 on 4/29/2011 to 319.61 for the week ending 5/6/2011. The major winners were TCAP(+5.26%) and KFN(+1.19%) and the major losers were FSC (-8.03%) and EQS (-6.24%).

Chart:

BDC Weekly Roundup 4/29/2011

The BDCR Index had a nice recovery this past week by an amount of 2.46% from a level of 320.59 on 4/22/2011 to 328.664 for the week ending 4/29/2011. The major winners were CODI (+9.26%) and BKCC (+7.90%) and the major losers were TTO (-0.93%) and GLAD (-0.44%).
Chart:

News:
This week is earnings release week! Will post with any major news.

Monroe Capital Corp - Another New Filing

(This post is also being published on Seeking Alpha - either as an Instant Blog or real article)


Monroe Capital Corp filed papers to register as a BDC on March 3rd, they just recently filed amended papers on April 19th (N-2/A) for their shelf statement (correcting a typo in the original filing and increasing the fees). This new BDC is a division of Monroe Capital, a smaller private lender that was established in 2004 and currently manages around $440mm. There is an "MCAP" (Mango Capital) traded on the OTC BB, so for this stock, they went with "MRCC" instead (all of the good M tickers are taken). There is a backlog of new BDCs to profile and that raises a concern. We all know from Porter's 5 Forces that Barriers to Entry is a key driver for a company maintaining superior returns. It appears the SEC registration process is no longer a barrier for a number of smaller CLO/PE managers and the potential returns are worth the effort. Will this increased competition hurt some of the other BDCs? Only time and the 10-Qs will tell.


Organization
The company will use Monroe Capital BDC Advisors, LLC (MCAD), an entity formed for the purpose of serving as investment advisor. MCAD will provide MRCC with investment professionals and portfolio selection. Interestingly, they will also use another LLC - Monroe Capital Management Advisors (MCMA), LLC to serve as the administrator. The two entities mean that expenses are split - MCAD will receive the management and performance fees and MCMA will bill MRCC the proportional share of expenses. This setup is slightly different from other external managers and it may result in additional expenses, but there is no way to know how this setup will affect returns.


People in Charge
The investment decisions will be led by Theodore L. Koenig and Daniel M. Duffy. Theodore Koenig is a former lawyer, coming from the defunct firm of Holleb & Coef. After Holleb, he was president and CEO of Hilco Capital. Daniel M. Duffy comes from a more traditional finance background by way of CapitalSource and GE Capital. From what I can find on Mr. Duffy via his old CapitalSource bio:

Mr. Duffy has over 21 years of experience in corporate finance providing both debt and equity capital to companies in a wide range of industries. Mr. Duffy has been with CapitalSource since April 2003. Prior to joining CapitalSource Mr. Duffy was managing director in charge of GE Capital's debt placement team. Mr. Duffy joined GE Capital via its acquisition of Heller Financial where he spent 12 years acting in a number of leadership roles including co-head of the media lending team senior credit officer in corporate finance senior credit officer in equipment finance and team leader in loan workouts. Prior to joining Heller Mr. Duffy received his B.S. in accounting from Northern Illinois University in 1984. 

The filing also mentions that 18 professionals from Monroe Capital will also be supporting the firm. There will be no direct employees.


Fees
This is something interesting to note. In the original filing (glad I did not post this last week), the management fees were stated as 1%, as of the 4/19 filing, management fees are stated as: "calculated at an annual rate equal to 2% of our total assets (which includes cash, cash equivalents and assets purchased with borrowed amounts)." The inclusion of cash and cash equivalents makes this one of the higher management fees. The first part of the incentive fee is 20% of Net Investment Income subject to an 8% annual hurdle rate.
The first, payable quarterly in arrears, equals 20% of our pre-incentive fee net investment income (including interest that is accrued but not yet received in cash), subject to a 2% quarterly (8% annualized) hurdle rate and a “catch-up” provision measured as of the end of each calendar quarter. Under this provision, in any calendar quarter, MC Advisors receives no incentive fee until our net investment income equals the hurdle rate of 2% but then receives, as a “catch-up,” 100% of our pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than 2.5%. The effect of this provision is that, if pre-incentive fee net investment income exceeds 2.5% in any calendar quarter, MC Advisors will receive 20% of our pre-incentive fee net investment income as if a hurdle rate did not apply. The first component of the incentive fee will be computed and paid on income that may include interest that is accrued but not yet received in cash.
The second part is:
The second part is determined and payable in arrears as of the end of each fiscal year in an amount equal to 20% of our realized capital gains, if any, on a cumulative basis from inception through the end of the year, computed net of all realized capital losses on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fees.

This is similar to other BDCs like BKCC where a huge liability may be payable at the end of the year and introduce some seasonal earnings into the 10-Q analysis. One other note - Monroe is also looking to pay up to 50% of the fee (pursuant to SEC approval) in MCBDC stock.

Portfolio Composition
The company expects to invest most of the proceeds of the IPOunitranche or junior-secured. The firm
expects to make investments in the $5mm to $25mm range, but maintains that range may drift as the firm's capitalization increases. As per the filing, the initial portfolio will have these statistics:
  •   Loans with a weighted average yield of 7% to 8%;
  •   Emphasis on middle market transactions;
  •   Minimum of 90% senior debt investments (including unitranche debt);
  •   Maximum concentration of 15% in any one industry;
  •   Average loan position of less than $5,000,000; and
  •   Loans with maximum loan-to-enterprise value ratio of between 50% to 70%


Risks
Standard risks are outlined here. The N-2/A has a lengthy list of risks as well that are worth reading.

I will keep everyone updated as this company moves along and IPOs.

BDC Weekly Roundup 4/22/2011

The BDCR Index had a slight loss this past week by an amount of -0.13% from a level of 321.00 on 4/15/2011 to 321.00 for the week ending 4/22/2011. The major winners were ARCC (+3.12%) and EQS (+3.03%) and the major losers were TINY (-2.90%) and TCAP (-2.79%).

Chart:

News:
CODI - Some insider transactions - http://www.sec.gov/cgi-bin/own-disp?action=getissuer&CIK=0001345126
FSC - Releases annual letter - http://finance.yahoo.com/news/Fifth-Street-Finance-Corp-pz-3301990663.html?x=0&.v=1
HTGC - Closes $75m convertible offering
MCGC - Sells stake in Avenue, realizing $51.4m in proceeds (not return) - http://www.bizjournals.com/washington/news/2011/04/18/mcg-capital-sells-stake-in-avenue.html
PSEC - Adds two new lenders, increases Revolver - http://finance.yahoo.com/news/Prospect-Capital-Announces-iw-3521834156.html?x=0&.v=1

BDC Weekly Roundup 4/18/2011

The BDCR Index continued the downward slide this past week by an amount of -1.17% from a level of 324.75 on 4/8/2011 to 321.00 for the week ending 4/15/2011. The major winners were CODI (+1.14%) and FSC (+1.15%) and the major losers were HTGC (-6.18%) and KCAP (-4.67%).

Chart:

News:
ARCC - Closes an $86.5 mm investment
BKCC - Motley Fool calls BKCC a "perfect stock" and gives it a 7 out of 10 score. Wow. - http://www.fool.com/investing/general/2011/04/15/is-blackrock-kelso-capital-the-perfect-stock.aspx
FSC - Closes convertible offering, CEO Leonard M. Tannenbaum purchases $2m in concurrent private offering.
GAIN - Ups dividend by 12.5% - http://finance.yahoo.com/news/Gladstone-Investment-prnews-3583817188.html?x=0&.v=1
HTGC - Joins the convertible party with a $75 million senior notes offering. Changes articles of incorporation to increase maximum share issuance from 60mm to 100mm.
TTO - Downgraded by Ladenburg Thalmann

TPG Specialty Lending Appoints a New CEO

I am not sure why I have been focusing on this company so much, but it has been fun to follow a BDC from origination through the IPO.

TPG has picked Michael  Fishman, age 48 to be the CEO and act as a director for the company, effective April 1, 2011. He brings to the firm a wealth of experience (over 20 years) and in his role at Wells he served as a leader in the division responsible for providing senior secured financing to middle-market firms in the range of $10mm-$750mm.

It appears that Michael also served on the Board for the American Bankruptcy Institute until 2005 and is active in some local Los Angeles charities.

It is hard to find some of the deals he has worked on but it appears most of his deals would be in the sweet spot for TPG.

Random google results on him:
Michael's LinkedIn Profile
Condo bought in San Fran

Prospect Capital (PSEC) - What a Difference a Year Makes

(Author's note: I originally started this post with the goal of highlighting some of the changes PSEC has made to their company over the past year. In light of their recent equity raise - a private offering of 9 million shares at a market price destroying $11.40 a share maybe the management of PSEC still is learning. To be fair, the offering does add to Book Value. Although their continued practice of announcing "good news" and trying to sneak in some "bad news" does not sit well. The only way you can find the current pricing of the offering is to go into the SEC filing that I linked above.)

It has been just over a year since Prospect Capital's attempted acquisition of Allied was denied by Allied's management in one of the most eviscerating letters you will see written by a public company . Let us review some of the highlights:

• As a result of this review, Allied’s Board of Directors has unanimously concluded that this revised offer does not constitute, and is not reasonably likely to result in, a “Superior Proposal” as defined under our merger agreement with Ares Capital Corporation (“Ares” or “ARCC”). Allied’s Board of Directors has unanimously reaffirmed its recommendation that Allied shareholders vote for the transaction with Ares announced on October 26, 2009.

Allied added the bold for emphasis.

• During our discussions, Prospect made claims to have access to a significant amount of third party capital. While we were intrigued by these references, Prospect was unwilling to disclose any details, including the identity of the mysterious capital source, nor was Prospect willing to provide any information regarding the financial outline of a potential transaction.

Allied called Prospect out for their lack of transparency in the transaction and refuted the idea that Prospect had been an actual suitor. It is interesting to note that ARCC never increased their takeover offer in response to PSEC.

• We believe Prospect’s unsolicited offer does NOT provide Allied shareholders “Superior Value” as compared to the Ares transaction.

PSEC had made an offer that on its surface was at a premium to ARCC's offer. At the time of PSEC's revised offer to acquire ARCC, the transaction would have resulted in a 20% premium over ARCC's offer. Allied noted that after this offer was made, PSEC's stock dropped more than 5% and eroded the premium. In front, most of the market knew that taking over Allied would have been too much for PSEC to handle. After the offer was withdrawn, PSEC's stock price rebounded.

• We believe a merger with Allied would put Prospect’s dividend at risk, resulting in a near term dividend cut, which would reduce Prospect’s stock price and imply a lower value for Allied’s shareholders

For PSEC to complete this transaction, they would have to more than double the current share count. Given PSEC's eroding Net Interest Income, the only way to maintain the dividend would be to pay out of Capital Gains realized upon completion of the merger and asset write-ups. At the time of the offer, PSEC was already underfunding their dividend by 50%. In retrospect, the management team at Allied was correct and PSEC cut the dividend in May from 41 cents a quarter to 10 cents per month (25% reduction per quarter + they "skipped" the Q2 dividend by only paying 10 cents, although the change to monthly does provide a salve). Further underscoring the lack of transparency, the management team at PSEC hid this dividend cut in another news release discussing Q4 results. The market did not take this news well and the stock dropped another 10% in the aftermath.

• We believe Prospect lacks the managerial expertise to run the combined company.

This one is calling a spade a spade. Allied acknowledged PSEC was still in the "Junior Varsity" of the BDC league and would have a difficult time handling the merger. While this may or may not be true, PSEC did have a much smaller investment/support staff and they would have tripled their investment portfolio.

• There is no assurance that any agreement with Prospect could be reached or closed

Allied knows PSEC has not done its research and any delays would only hurt shareholder value. Also, Allied had already agreed to pay ARCC a $30mm "break-up" fee if the merger did not come to pass (it dropped to $15mm if the ALD shareholders had voted against ARCC).

• We believe Prospect has limited liquidity to operate the combined business

Ares (ARCC) had more relationships and available credit lines to draw than PSEC. Since that time PSEC and ARCC have both reorganized their debt structure. For example, PSEC's revolver is now is one-month LIBOR plus 325 basis points, subject to a minimum LIBOR floor of 100 basis points as opposed to 400 basis points with a floor of 200 basis points.

• We believe the Prospect management platform is inferior to the Ares management platform, providing weaker long term growth opportunities for Allied’s shareholders. Allied’s Board has no confidence in Prospect’s ability to manage the assets in Allied’s portfolio.

Again, this is basically saying PSEC was not ready for the big-time yet.

• We believe the acquisition of Patriot Capital further weakens Prospect’s platform, making Prospect a less attractive merger partner.  

There is always the risk of taking on too much at once. Allied and Ares were already down the line with regards to integrating their firms with ARCC purchasing the unitranche fund in November 2009. While these steps may call into question if Allied would have considered another offer from any BDC, PSEC was still working on integrating the PCAP assets at this time.

• Prospect has a track record of highly dilutive equity capital raises which we do not believe provides responsible growth to shareholders.

Most BDCs at the time were issuing shares below NAV that were dilutive to shareholders. This was the nature of the beast in 2009-2010 before capital markets reopened. The below chart (care of PSEC's Prospectus) shows the dilutive issues.

• We believe, by combining with Prospect, Allied shareholders would be inheriting a much riskier portfolio.

Prospect had recently acquired the PCAP portfolio, which if you had the chance to review before the acquisition was head scratching at best (one investment made prior to PCAP going under was in a hot-tub maker even though the recession had already taken hold). Prospect's management has turned the portfolio around and as of December 31, 2010, about 2.3% of the net assets were on non-accrual (as opposed to 6.8% as of the Allied letter).

Allied management closed the letter with a unanimous "No" against PSEC and the ARCC merger went through as of April 1st 2010.

BDC Weekly Roundup 4/8/2011

The BDCR Index had a small loss this past week by an amount of -0.27% from a level of 325.61 on 4/1/2011 to 324.75 for the week ending 4/8/2011. The major winners were TTO (+2.48%) and NGPC(+2.33%) and the major losers were PSEC (-4.68%) and KCAP (-3.87%).

Chart:

News from the past week:

BKCC - Earnings release AND call on May 9th. I suppose they would prefer investors not have time to really dissect the 10-Q this time...

FSC - Issued $150m in convertible notes with a conversion price of $14.76 and an interest rate of 5.375%

GAIN - Sale of $5.6m equity investment in Cavert and reinvestment into Subordinated Debt - http://www.gladstone.com/article.php?q=%3FModule%3DMediaViewer%26GUID%3D18077006%26Ticker%3DGAIN

PNNT - Sibling company PFLT has a poor IPO - http://www.reuters.com/article/2011/04/08/pennantpark-ipo-idUSN0829180920110408?feedType=RSS&feedName=rbssFinancialServicesAndRealEstateNews&rpc=43

PSEC - Publishes updated earnings guidance, new investment disclosures and sneaks in a secondary. They priced the offering at 11.40 which was highly below the current price, but accretive to Book Value - http://www.sec.gov/Archives/edgar/data/1287032/000104746911003314/a2203200z497.htm 

BDC Weekly Roundup 4/1/2011

The BDCR Index enjoyed a healthy gain this past week by an amount of 2.11% from a level of 318.75 on 3/25/2011 to 325.762 for the week ending 4/1/2011. Note, the index is still below the high set on February 22nd 2011 of 337.57. The major winners were ACAS (+8.12%) and TCAP (+5.54%) and the major losers were GAIN (-3.06%) and NGPC (-2.97%).

Chart:

News items from this past week. Looks like the first week of May will be a busy earnings season:

ARCC - Earnings release scheduled for 5/3.

FSC - Locks in a 4.03% borrowing rate for 10 years - http://finance.yahoo.com/news/Fifth-Street-Finance-Corp-pz-1409467551.html?x=0&.v=1

KCAP - Seeks to win shareholder approval to issue shares below NAV (common in 2009), but Nicholas Marshi disagrees - http://seekingalpha.com/article/261391-dubious-feelings-about-kohlberg-s-equity-raising-plan

KED - Increases dividend from 30 cents to 31 cents per share - http://finance.yahoo.com/news/Kayne-Anderson-Energy-bw-736572173.html?x=0&.v=1

KFN - Investopedia looking at yield vs. P/E - http://stocks.investopedia.com/stock-analysis/2011/Single-Digit-PE-Stocks-With-Juicy-Dividends-CH-KFN-HCII-KED0328.aspx

PNNT - Earnings release scheduled for 5/4.

PSEC - Popular with Wall Street insiders - http://www.fool.com/investing/general/2011/03/28/wall-streets-buy-list.aspx

SLRC - Earnings release scheduled for 5/2.

BDC Weekly Roundup 3/25/2011

The BDCR Index enjoyed a slight gain this past week by an amount of 1.26% from a level of314.725 on 3/18/2011 to 318.75 for the week ending 3/12/2011. The major winners were KCAP(+8.22%) and TINY(+7.44%) and the major losers were SAR (-5.07%) and MAIN (-4.95%).

Chart:

News for the week:
ACAS - Lots of "For Sale" Rumors - http://seekingalpha.com/article/260156-american-capital-strategies-appears-poised-for-purchase
ARCC - Prices convertible offering of $200m - http://www.snl.com/irweblinkx/file.aspx?IID=4092627&FID=10939606
KCAP - Declares 1Q dividend of 17 cents
MAIN - Secondary offering of 3.5million shares at 18.35 - http://www.bizjournals.com/houston/news/2011/03/22/main-street-capital-prices-shares-for.html?ana=yfcpc
PSEC - Making some new investments - http://www.snl.com/IRWebLinkX/file.aspx?IID=4092630&FID=10928102

BDC Weekly Roundup 3/18/2011

The BDCR Index extended last week's losses and fell this past week by an amount of -2.64% from a level of 323.26 on 3/11/2011 to 314.725 for the week ending 3/18/2011. The major winners were HRZN(+1.25%) and PSEC (+0.51%) and the major losers were TICC (-8.64%) and TCAP (-8.11%).

Chart:

News from the past week:
BKCC - Seems like everyone has been talking about them
Slow week otherwise for BDCs, most of the major firms released their 10-K financials and you can find those online at EDGAR.