AFC: A Compelling Preferred

Includes: AFC, ARCC
by: Bob Grunewald

AFC is a preferred security originally issued by Allied Capital. Allied Capital was a Washington, DC based BDC (business development company) that provided subordinated debt financing to middle market companies. Unfortunately they could not survive the financial crises and were ultimately acquired by Ares Capital (NASDAQ:ARCC). Ares, a New York based BDC survived the crises by adopting a more conservative portfolio approach dominated by senior loans. Ares has a nearly $3B market cap and $2.6B of book equity beneath the $230 million of old Allied preferreds. Ares is currently levered less than .5X and has a common dividend yield of 9.1%.

The AFC preferred notes currently yield 7.6% (BBB rated) and sell for $22.60 on a face value of $25. If it takes 3 years to trade back to par, your annualized return would be 11.2%. If they trade to par within a year, which I think is likely, your annualized return would be 19%.

The equity is interesting and will do well over time, but the preferred is compelling.


These notes don’t have a lot of liquidity, so even a little selling can drive the price down. However, look at these drops as buying opportunities.

Disclosure: Author is long AFC