Monday, December 8, 2014

Bought 100 TCRD at $12.83/Sold 433+ RMT at $12.76-Average Cost Per Share $7.91/

Big Picture: No Change

Stable Vix Pattern (Bullish):

Recent Developments:

Japan's 3rd quarter GDP  was revised down to -1.9 from the previous quarter. The previous estimate was that Japan's economy had contracted by 1.6%. Japan is in a recession caused by the government significantly raising the sales tax to 8% from 5%.

Crude oil accelerated its downward slide. MarketWatch Energy investors are being punished big time, particularly those who invest in small E & P companies and natural gas producers.

I filled up my Saturn Aura over the weekend at $2.79 per gallon. I was able to knock that price down to $1.79 per gallon with Kroger fuel points. I will buy gift cards at Kroger, including $50 Shell gift cards, for myself when I receive 4 times the face value in fuel points. A $50 Shell card would generate 200 fuel points or $.2 off per gallon. I would be paying otherwise with a debt card linked to the same checking account that is used to purchase the gift card, and that account pays almost nothing of course in interest.

The China Fund (CHN), which I own, declared a year end distribution of $3.7561 per share, consisting of $3.4669 per share in long term capital gains and the remainder in short term capital gains and income. I own some shares. This will be the 4th large distribution since I originally purchased shares in 2011. The China Fund-Distribution history I will consider selling the position before the ex dividend date using the reasoning explained below in Item # 2.


BDC's continued their downward slide today after PSEC slashed its monthly dividend. Prospect Capital Press Release

Fortunately, I have sold my PSEC position down to around 125 shares with an average cost per share near $9.5. I have predicted several times that PSEC would cut its dividend here at SA and in my blog. South Gent's Comments on PSEC: Prospect Capital Corporation | Seeking Alpha The suspension of PSEC's ATM program is viewed by me as a positive, since PSEC was diluting existing shareholders by selling shares at below net asset value per share. I noted earlier an article, published at Motley Fool, where the author pointed out some failed investments made during an earlier period when PSEC "opportunistically" sold stock below net asset value per share.

Tax loss selling is also contributing to price declines. At the moment, I am doing what I normally do when a sector collapses in price. I prepare a shopping list.

I am catching a falling knife by buying BDC shares in small amounts, spacing out the purchases in time. When and if there is a price recovery, I will consider selling my highest cost shares.


1. Bought 100 TCRD at $12.83 (see Disclaimer): I am a naturally contrarian investor, and have always been in that camp. I could not be anything other than a value/contrarian investor. Consequently, it is not surprising that I am now gravitating slightly in the direction of BDC stocks. Two inherent risk in contrarian investing are value traps and just being premature with a purchase, even though I prove to be correct about the stock's value longer term.

Snapshot of Trade:

Closing Price Day of Trade 12/5/14: TCRD: $12.88 -0.21 (-1.60%)

Security Description: THL Credit Inc. (TCRD) is an externally managed BDC that invests in middle market companies.

TCRD's IPO was in 2010 when the company sold shares at a public offering price of $13, with the underwriters paying $12.52 per share. Final Prospectus

In 2012, TCRD sold more shares at a public offering price of $14.09 per share, with the underwriters paying $13.5264. Final Prospectus Supplement The last reported net asset value per share prior to that offering was $13.17 as of 6/30/12.

The last TCRD stock offering was in 2013 with the company selling shares at a public offering price of $14.62, with the underwriters paying $14.0352. The last reported net asset value prior to that offering was $13.2 as of 3/31/13. Prospectus Supplement

So far, TCRD is not classified by me as a serial issuer of common stock. And, both share offerings after the 2010 IPO were well in excess of net asset value per share.

The BDC recently sold $45M of a 6.75% senior unsecured noted maturing in 2021. Prospectus That senior note is an exchange traded bond: THL Credit Inc. 6.75% Notes (TCRX)

TCRD  SEC Filings

THL Credit - Investor Relations

BDC Buzz wrote an article on THL Credit which was published at Seeking Alpha last September. He also wrote an article discussing THL's dividend coverage that was published last May.

THL Credit recently announced a joint venture with Perspecta Trident to invest primarily in senior secured first lien loans.

Prior Trades: None

Dividends: The current quarterly dividend is $.34 per share. The ex dividend date is 12/11/14.

November 2014 Investor Presentation (graph of dividends and net investment income at page 15)

Chart: On the day of my purchase, the stock slightly pierced to the downside its 50 day SMA which was shown at $12.93: TCRD Interactive Stock Chart The Yahoo Finance chart showed the 200 SMA line at $13.56 as of 12/5/14. The 200 SMA was broken to the downside in early 2014 and the stock has been trading below that line starting around 3/3/14. In short, the stock price is weak, which is the case for the entire BDC sector through most of 2014.

Recent Earnings Report: For the 2014 third quarter, net investment was $.36 per share, two cents higher than the quarterly dividend. The net asset value per share was reported at $13.29, up from $13.28 as of 6/30/14. The weighted average yield of income producing investments was 11.3%. The debt ratio was .63 down from .7 as of 6/30/14.

As of 9/30/14, TCRD had a 45% weighting in first lien debt and 27% in second lien debt.

SEC Filed Press Release

Two investments remained on non-accrual at the quarter's end: Express Courier and Wingspan.

The company remains "optimistic that we'll recover our capital" in the Express Courier investment. Page 3 Q3 2014 Results - Earnings Call Transcript | Seeking Alpha.

THL made a $7.1M investment in a secured subordinated term loan issued by Express Courier, headquartered in Franklin, TN, back in 2012. (see also page 73, 2012 Annual Report at page 73 Form 10-K) That investment was valued at $6.601M as of 12/31/13 (page 102 Form 10-K) and at $7.699M as of 9/30/14 (10-Q at page 7)

Wingspan has been recapitalized in an effort led by TCRD. A subsidiary of Wingspan, Dimont & Associates, became an independent company after the quarter's end. TCRD's subordinated investment in Wingspan was converted into a controlling interest in Dimont with TCRD providing $4.5M in subordinated capital to Dimont.

Dimont and Associates is a hazard insurance claims service. Dimont Becomes Independent Company

The investment in Wingspan had an amortized cost of $18.447M and a fair value of $6.569M as of 9/30/14: Page 10-10-Q.

TCRD's debt and warrant investments made in C & K Market, "as well as certain interest due" ($14.3M in cost), were converted into common and preferred equity positions when that company emerged from bankruptcy in August 2014.

C&K Market-Home (operates 43 grocery stores;) Press Release-Emergence from BK (apparently the new debt financing is being provided by Solar Capital and GE Capital).

Q3 2014 Results - Earnings Call Transcript | Seeking Alpha ("book value reflects the preservation of shareholder capital, a modest level of retained earnings and accretive capital raises since our IPO", at page 2)

Rationale: As with all other BDC stock purchases, the goal is to harvest the dividend income and to exit the position at any profit whatsoever. Assuming a total cost of $12.83 per share, and a continuation of the $.34 per share dividend, the dividend yield is about 10.6%.

The general goal is to harvest at least one year of dividends and to sell the shares at a profit. A profit on the shares requires patience,  some discipline on the entry price and sometimes a little luck.

For externally managed BDCs, I prefer to buy when the market price is at least 5% lower than the last reported net asset value per share.

My purchase at $12.83 was at a 3.46% discount to TCRD's last reported NAV per share of $13.29.

The closing market price today was at a 5.34% discount, so I would have been better off waiting one trading day and strictly complying with the greater than 5% decline guideline.

I view the relatively stable net asset value per share and the share issuances at premiums to net asset value per share to be positives.

Risks: Some loans have gone on non-accrual and have been converted into controlling equity interests. It remains to be seen whether management's optimism about recovering the original investment is warranted, only time will tell. Until I see more concrete evidence that the controlling equity interests are likely to be successful, I will probably refrain from buying more than 100 more shares in 50 share increments in the manner described below. On the positive side, the Wingspan investment had already been substantially written down, as noted above, before I made my first investment.

The risks are highlighted by the preceding discussions about defaults and a conversion of debt into equity interests.

The company discusses risks incident to its operations starting at page 32 of its 2013 Annual Report. Form 10-K I view it as a duty of every investor to familiarize themselves with the risks acknowledged by the BDC.

BDC stocks are in a clear downtrend of unknown duration.  I am catching a falling knife whenever I make any purchase now, which explains the small purchases spaced out over time.

It remains to be seen whether market related factors, including tax loss selling and piling on by momentum short sellers, are the primary causes for BDC share price declines recently, or whether investors have changed their perceptions about their desirability, more or less indefinitely. I am just gingerly adding some positions. 

Future Buys: I may average down with a  50 share buy when and if the discount expands to 7%+. That would put the average down price at below $12.36 and then another 50 shares when and if the discount expands to 10%. If I averaged down with another 100 shares, I would then consider selling the highest cost 100 shares lot, bought first, when I could do so profitably, keeping the lower cost lots that would improve my dividend yield based on the total average cost per share.

Closing Price Monday 12/8/14: TCRD: $12.58 -0.30 (-2.33%)

2. Sold 433+ RMT Shares at $12.76-Average Cost Per Share=$7.91 (see Disclaimer): 

Snapshot of Trade: 

Snapshot of Profit: 

2014 RMT Sold 433+ Shares +$2,057.88 Long Term
The foregoing does not include the fractional shares. The top line includes the total profits realized throughout 2014. I did not include in this snapshot prior 2014 sells which are shown in previous posts.

Royce Micro-Cap Trust Declares Fourth Quarter Common Stock Distribution of $2.19 Per Share

Snapshot of Total Cost: When I sold 126 RMT shares back in July, which were purchased with some of the dividend payments, I took a snapshot of the total cost numbers for the remaining shares calculated by my broker. Item # 6 Sold Taxable Account: 126 RMT at $12.6 (7/12/14 Post). I realized a profit of $149.91 from selling those shares bought with dividends only.

Rationale: I am skeptical that the stock market can continue moving upward without a serious correction. I am harvesting some profits while I still have them.

More importantly, my trading strategy for closed end funds is to consider a purchase when the discount to net asset value is greater than the 3 and 5 year averages and to consider selling when the discount shrinks to less than those averages.

The historical discount information can be found at CEFConnect under the "pricing information" tab.

CEFConnect Page for RMT

12/5/14: -6.23%
Average Discounts:
1 Year:  -10.57%
3 Years: -11.79%
5 Years: -13.04%

The discount has fallen since RMT announced a $2.19 year end distribution, with an ex dividend date on 12/11/14. Individual investors are apparently and inexplicably buying that tax event. The market price had risen $.26 per share when I sold today which will narrow the discount further when the fund reports its net asset value per share after the close.

When I was buying shares, the discount was far wider than now.

For example, referring to some of the lots just sold, I bought 50 shares in early 2010 when the discount was then -16.55% and another lot in 2009 when the discount was at -16.87% (8/21/09-net asset value per share then $8.12, closing price $6.75).

Over the subsequent years, the net asset value per share has increased even after adjusting for the dividend payments and the discount has shrunk.

I consequently made money in several ways with the RMT odd lot purchases: (1) dividends, (2) an increase in net asset value adjusted for the dividends, (3) a profit on all shares purchased with dividends, and (5) a narrowing of the discount to well under the historical norms. That is the ideal scenario and result for me when I buy CEF shares.

RMT has enjoyed robust gains since March 2009. Last year, the total return was 50.14% based on the market price. The annualized  total return over the past 5 years, through 12/5/14, was 19.05% based on the market price.

RMT's total annualized return from 3/9/09 through 12/5/14 was 32.06%. Calculator

I am satisfied and have no need or reason to press my good fortune on this investment.

I would also note that Tennessee, where I reside, does not have a state income tax on earned income or on capital gains realized from stock transactions. I would have to pay a 6% tax on a capital gains distribution from a mutual fund which would be almost $57 on the upcoming RMT distribution which I will not have to pay after selling the shares for a LT capital gain before the ex dividend date.

Closing Price Monday 12/8/14: RMT: $12.57 +0.07 (+0.56%)

The discount in fact narrowed to -4.48% as of 12/8/14, based on the preceding closing price and a net asset value per share of $13.16, down from $13.33 last Friday. At my sale's price of $12.76, the discount to net asset value declines further to just 3%.  

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