Solar Capital Ltd. (SLRC) is a special lender that is known as a business development company. It lends money at attractive rates to small and medium sized businesses, the type that are too thinly traded or too risky for individual investors to invest in on their own. In addition, most of SLRC's loans are to companies outside of Europe, which shields its performance from Euro troubles.
In Book Value We Trust?
Book Value and NAV are important metrics used to determine the value of this company, as its book of loans is how it generates most of its collateral and income. SLRC has its book value evaluated by independent third party companies. One of the methods these independent companies use to determine fair value of a company like SLRC is to look at indices of more liquid loans to compare the fair value of its portfolio. Because of this, some of SLRC's loans are marked at "fair value", which is definitely an arguable measure. This means some of SLRC's more "risky" loans are priced at less than 100% of book value. This is because the companies of some loans have been deemed "distressed". So in effect, much of SLRC's book value already accounts for riskier loans in its portfolio. Therefore, SLRC offers reduced risk because risky loans are already reflected in the Price/Book measure, but also because independent third parties determine these delicate judgments on SLRC's massive book of loans; thus eliminating the risk of irregular or tricky accounting practices. Currently, SLRC sports a book value of around 1.03x.
As per an interview with Jim Cramer, SLRC's CEO Michael Gross explained how the company loans money to growing companies primarily in the US. Although small and less liquid, these companies were performing well. Mr Gross insinuated to Cramer than there is a very low occurrence of defaults. He also noted how SLRC's experts research perspective companies for weeks and sometimes months, before approving any perspective loan candidate. Then, they don't simply buy syndicated loans available to the public. Instead, they approach management directly for these special deals, similar to Warren Buffet's Berkshire Hathaway's (BRK.B) dealings with Bank of America Corp. (BAC).
Since its IPO, in early 2010, the company has been a dream to yield hungry investors. SLRC has consistently paid $.60/share quarterly dividends over the past 2 1/2 years. At a current price of 23.17/share the yield is 10.36%, which certainly offers an enticing return to dividend chasers. To give perspective on this amazing return to shareholders, by using the "Rule 72" approximation, in around 7 years your SLRC investment will double assuming dividends are reinvested, and price/share and dividends stay static.
Insiders have consistently been buying stock over the recent past. Although the buying has not been overwhelming, it is certainly better than seeing lots of selling.
|Earnings Growth Projection '13||15%|
|Market Cap||$849 Million|
SLRC's unique model of providing special loans to otherwise uninvestable companies offers an opportunity to gain exposure to this special market. While offering a radiating dividend that can heat up a yield starved portfolio, SLRC sports consistent insider buying, and accountable price to book measures that offer investors measured comfort in owning shares. Solar Capital probably won't be a grand slam, but it won't turn into a black hole either. I would further investigate SLRC if your portfolio is in need of a consistently growing high yielder.
Additional disclosure: I may initiate a long position in SLRC over the next 72 hours.