Seeking Alpha

Steven Bavaria

View as an RSS Feed
View Steven Bavaria's Comments BY TICKER:
Latest  |  Highest rated
  • My Utility Fund Vs. Reaves Utility Income Fund: Which Offered The Better Return Last Year? [View article]
    No, you don't deduct the management fees from the dividends paid by a closed end fund any more than you reduce AT&T or Verizon or any other corporate stock's dividend yield by your pro rata share of that company's administrative expenses. That dividend is what stockholders receive AFTER the fund's expenses have been paid.

    One other point, UTG is able to make a higher return and pay higher dividends than a straight-forward portfolio of similar stocks because it is leveraged. This is a tremendous advantage of closed end funds, since they can borrow at an institutional rate (1-2%) and re-invest in stocks that pay dividends of 5-6% or more in some cases, with fund shareholders receiving the difference. The 0.5% interest charge should not be lumped in with other expenses, since it is actually being spent on our behalf as shareholders, to increase our returns. Management doesn't get any of it.

    Meanwhile, thanks to Henry for doing this article and the research behind it. While I'm a huge fan of closed end funds and UTG in particular (although it's a bit pricey at this point compared to some other utility CEFs), it's nice to see a list like this of individual utility investment prospects.
    Apr 17 02:35 PM | 2 Likes Like |Link to Comment
  • Zero Leverage, High Yield, Cost Efficiency, And Diversification Does Not Make Up For Returning Capital [View article]
    Hi LB -
    Thanks for the "shout out" as my teenagers would call it. I have to admit, somewhat sheepishly, given the trend in this comment string, that I actually hold NFJ and have been pretty happy with it, given its almost 10% distribution and +/- 15% NAV return (market value return even higher) over the past year. A star, maybe not, but - so far - a nice solid brick in the wall of a boring sleep-well-at-night portfolio that returns a steady 10% or more a year. (As LB and some other readers know, I have a few "white knuckle" investments in there as well.)

    Apr 3 12:25 PM | Likes Like |Link to Comment
  • Review Of 2013: Why My 9% Yield Excites Me More Than My 18% Total Return [View article]
    As you may have noted from the hundreds of articles and comments on SA that discuss ROC, some ROC is to be expected and even healthy as long as it is not "destructive" (the definition of which varies all over the lot.) In general, one expects funds that get a lot of their own income in the form of ROC - MLP funds, funds that hold other funds that hold MLPs, or funds that pay out their earnings in ROC, like many of the "buy-write" or equity-option funds - to pass on some of their own income in the form of ROC distributions. Funds selling at big discounts can actually monetize some of that discount by paying out some ROC. The key - with any stock - is whether the fund or firm can afford to make its distributions while maintaining its ongoing ability to generate continued earnings to support that distribution, or whether it is cannibalizing itself.
    Mar 28 12:30 PM | Likes Like |Link to Comment
  • Oxford Lane Capital's Holiday Surprise: 9% Dividend Increase Plus Bonus Payment [View article]
    Interesting article about CLOs in the Financial Times:
    Mar 27 12:06 PM | Likes Like |Link to Comment
  • What Does A Closed-End Fund's Leverage Actually Cost? Achilles' Heel Or An Investor's Salvation? [View article]
    Wkirk's comment is right on the money in pinpointing the risks going forward. Looking back over the last few years, being able to take advantage of institutional leverage costs of 1-2% or so for up to 1/3rd of the total portfolio (the CEF leverage limit), with the proceeds re-invested in HY bonds, loans or other debt (or even equity) yielding 4-6% or more, has been an enormous yield boost for the average retail CEF investor. (Especially for IRA investors, who generally can not go out and borrow on margin at any price, in order to leverage their investment.) This is why holding HY bonds and similar instruments in a leveraged CEF form has provided such a yield advantage over straightforward open-end funds or non-leveraged ETFs. Unless you think the economy is going to rocket forward in the years ahead, which seems unlikely given the various socio-political and structural drags on it, I think the potential rewards of continuing with leveraged funds outweigh the risks for most long-term income-oriented investors.
    Mar 26 11:32 AM | 2 Likes Like |Link to Comment
  • The Most Important Consideration In How You Buy Bonds [View article]
    Hi Adam -
    I'm just discovering this article (somewhat late), doing an update frisk on EVV, which I've made a lot of money on in the past and believe might be attractive once again, with its short duration, interest rates getting ready to rise, and a 7.99% distribution. I notice on CEF Connect that while total expenses are 1.6%, the fees to the management are actually only about 1.16% (not bad for an actively managed closed end fund, and the managers of this one at Eaton Vance are first class) and the other .44% is the cost of interest on the leverage, which in fact helps the investor by increasing the return, and shouldn't be lumped in with the fee. So you may want to give it another look.
    Mar 25 04:51 PM | Likes Like |Link to Comment
  • Oxford Lane Capital's Holiday Surprise: 9% Dividend Increase Plus Bonus Payment [View article]
    Hi G -
    I've accumulated a fair amount of OXLC over the past year as I've gotten to know it and like it for the long-term because I think it's a pretty unique way to have a CLO investment (traditionally only available to institutional investors) in a retail portfolio. Having bought it at a whole range of prices over the past 12 months, I am virtually flat right now in terms of overall capital appreciation, but of course have enjoyed and continue to enjoy the 14% yield. If it never goes up beyond what I paid for it, but pays me 13-14% indefinitely, that's good enough for me. Its current price - about $16.50 - is just a little higher than the recent subscription price of $17, adjusted for the 70 cent dividend that went ex-dividend last week. In a perfect world, with nothing else happening to affect OXLC's value (which of course is not the case) you would expect the market price to drop by the amount of the dividend on the ex-dividend date, and then slowly climb back up by about 2/3rds of a cent per day (60 cent dividend over 90 days) as the next dividend "accrues" and is incorporated into the price. That to me is the base "price cycle" of OXLC. Other factors - credit events, increases and decreases in the dividend rate, changes in the NAV, the broader economic and interest rate context, etc. will all affect it too, but it is worthwhile to keep that base price cycle in mind as a starting point. The higher the dividend yield and the less frequent the payments, of course, the more pronounced the cycle will be for any stock.

    So if you like the stock for the long term, you will be in pretty good company (i.e. with others who've been accumulating over the past year) if you buy at these levels, certainly better off than all the buyers who got in after the two positive research reports came out earlier this year when it spiked up into the $18-19 range. But I'm the last person to ask about timing purchases, as you know from reading my articles. I try to buy stuff that makes sense and then "clip the coupons" (dividends, actually), and forget about short-term price movements. (The last part is easier said than done, but it's my goal.)
    Mar 24 03:02 PM | Likes Like |Link to Comment
  • Oxford Lane Capital's Holiday Surprise: 9% Dividend Increase Plus Bonus Payment [View article]
    CLOs are just a legal vehicle for holding assets. They are not a class or type of debt, so how a specific debt instrument - secured or unsecured - makes out in a bankruptcy court will be largely independent of whether it is held in a CLO or some other investment vehicle.
    Mar 19 03:11 PM | Likes Like |Link to Comment
  • Oxford Lane Capital's Holiday Surprise: 9% Dividend Increase Plus Bonus Payment [View article]
    Mr. Mom -
    Check out pages 12 and 13 of this investor presentation:

    The equity collects all the interest payments from the loan assets the CLO holds (typical interest rate about 6%), after paying for the debt used to fund it (average interest cost perhaps 2%), minus any credit costs (defaults, etc.) and administrative costs. In other words, a virtual bank.
    Mar 19 12:40 PM | 1 Like Like |Link to Comment
  • Oxford Lane Capital's Holiday Surprise: 9% Dividend Increase Plus Bonus Payment [View article]
    fliper -
    It may be an apples to oranges comparison to compare HY bonds to CLOs. HY bonds and corporate loans are an apt comparison. Same basic default risk and cohort of issuing companies. But HY bonds have twice the risk of loss because when they default you only recover about 30-35% (on average) versus 70-75% for loans.

    CLOs are a structured vehicle for holding loans, that turbocharges the risk (i.e. leverages it about 10 to 1 if you hold the equity) but also increases the potential return substantially. There is an equivalent vehicle for holding HY bonds, called a CBO (collateralized BOND obligation), which was invented back in the early 90s as sort of a regulatory arbitrage for insurance companies. They did the same thing with HY bonds that CLOs do for loans. Even greater risk and reward, but with lots more credit volatility given HY bonds greater credit risk. I haven't heard so much about CBOs in recent years, although the structured morphed into the CDO structure that got into so much trouble in the mortgage market. Just goes to show that structures are neutral. it's what assets you put into them that make all the difference. (So to answer your one question, equity in a CLO-type pool of unsecured assets would be more volatile and risky than equity in a conventional CLO comprised of secured loans.)

    I don't see CLOs going "mainstream retail" as an asset class, which is what makes the limited number of vehicles that make them available to retail investors, like OXLC, rather unique. I expect we will continue to see other funds, like some of the conventional bank loan funds as well as the so-called "multi-sector" income funds, expanding their "baskets" of approved investments to include CLO's (probably limited to 10 or 20% or so) to allow them to spice up their yields. But CLOs will remain a fairly exotic investment to the average retail investor and fund manager, as much because of the complexity risk and negative name association with the vehicles that crashed in 2008 than because of the actual risk.

    If I were a high yield bond investor and wanted to get the same high yield going forward but were concerned about the credit risk, I might split my investment and buy some lower yielding but safer (from a credit and an interest rate perspective) plain vanilla CEF loan funds (like the Pilgrim - now ING - that you mentioned, or the many other Eaton Vance, Blackstone, Black Rock, Nuveen, etc. offerings) and then spice it up with a bit of OXLC or even TICC (a blended BDC & CLO investment, managed by the OXLC management team).
    Mar 19 11:08 AM | Likes Like |Link to Comment
  • Oxford Lane Capital's Holiday Surprise: 9% Dividend Increase Plus Bonus Payment [View article]
    fliper -
    You are correct that so-called prime rate funds have been around a long time, although the number of them has exploded in recent years for the reasons I mentioned above. They have a lot of positive attributes, as I've been pointing out in numerous articles, like this one (, over many years.

    It is not correct to suggest that so-called term loan B's are less secured than term loan A's. The distinction is term and structure. Term loan As are generally revolving lines of credit, amortizing gradually over about 6 years - designed to fit the portfolio of a typical commercial bank. Term loan B's are generally longer term - 8-10 years, with a bullet (non-amortizing) payment at the end - designed to fit the portfolios of institutional investors, who don't want to get their money repaid in dribs and drabs. Both loans are senior secured and pari passu (i.e. equal) in terms of seniority of repayment (i.e. they share proportionally in the collateral).

    Most loans going into collateralized loan obligations are term loan B's, fully secured, etc. In addition, there are also "second lien loans" in the loan market, which are secured, but in second place behind the term loan As and Bs. They are still ahead of the high yield bonds and other unsecured creditors. CLOs hold some of them as well, just as do other institutional loan investors like the loan funds alluded to above.

    You are right that funds like OXLC that buy CLOs are higher risk vehicles than straight pass-through loans funds, since a CLO is like a virtual bank holding a portfolio of loans. Buying the equity of a bank leveraged 8-10 to 1 is obviously riskier than buying a pool of loans. That's why the yield on a typical loan fund is only 3% or so (if it's an open-end fund like Fidelity's, for example) or about 6% to 7% if it's a closed end fund with the additional advantage (and risk) of leverage as well as being able to fully invest its capital (unlike a daily-redeemable open end fund that has to maintain a cash reserve). Buying a fund like OXLC that invests in the equity of these "virtual banks" of course is higher risk and pays higher yields (14-15% versus 6-7%) than buying plain vanilla CEF loan funds.

    The market for CLO equity tranches is so thin that short-term movements are almost irrelevant to longterm investors. What is more important is that CLO equity returns can be modeled, based on one's estimates of the credit risk inherent in the portfolio (which can be directly analyzed by the fund management). As of the end of 2013, OXLC reports that the overall loan default rate within its CLO portfolio was about 3/10ths of 1%, quite small and certainly no threat to its cash flows or dividends, etc.

    While you can't remove risk from a portfolio and expect to make any money, I believe (and maybe it's a personal bias from having spent a lifetime in the corporate credit markets) that you can earn a traditional "equity" return of 10% or more with less volatility in the CLO and other high yielding corporate credit markets (BDCs, etc.) than you can in pure equities.

    It's easy to scare yourself and others by comparing CLOs and other corporate credit-related vehicles to CDOs that bought sub-prime home equity loans and sub-prime mortgage loans and were fraught with poor under-writing standards, fraud, you name it. But by now the results are in, and however the market valued them during the dark days of 2008, the performance of corporate loans and the CLOs that hold them was fine from a cash flow perspective, and people who held them through the crash did very well.
    Mar 19 09:17 AM | 1 Like Like |Link to Comment
  • Monthly Dividends And 8% Yield? Yes, Please [View article]
    Here is a link to their financial statements, annual reports, investor presentations, etc.
    Mar 17 03:11 PM | Likes Like |Link to Comment
  • Oxford Lane Capital's Holiday Surprise: 9% Dividend Increase Plus Bonus Payment [View article]
    I tend to agree with Chris on the impact of the Volcker Rule on the market and on non-bank CLO buyers like OXLC. While these issues are hard to understand, the attached link to the Congressional testimony of Eliot Ganz, counsel to the Loan Syndication & Trading Association, might be of interest:

    There are some issues here to keep in mind:

    * The corporate loan market (floating rate, senior secured, less than half the historical credit losses of the HY bond market) and the CLOs that hold corporate loans sailed through the 2008 credit crunch with a horrendous temporary short-term market value drop, but with cash flows largely intact and market values that popped back up to par in 2009-2010. So both asset classes demonstrated their resilience through the worst economic period since the great depression, and made a lot of money for their investors who kept their heads and didn’t panic.
    * Corporate loans – also – are the largest corporate debt market, far bigger than corporate bonds.
    * Going forward, with fixed rate government and investment grade bonds being a sucker’s bet that interest rates will go even lower for the next decade or so (i.e. you lock in low rates if you hold to maturity, or almost a sure capital loss if you plan on selling out midway to maturity, after rates start to climb), there is going to be a lot of interest in the corporate floating-rate loan asset class by both institutional and retail investors who want some sort of "fixed income" alternative or complement to the equity markets in their portfolios.
    * You can see this already in the large number of new loan CEFs created just in the last year or two (just screen for “senior loan” funds on CEF Connect), as well as the number of loan, “multi-sector” income funds and even some BDCs that have now defined their investment "basket” to include CLOs as well as more conventional fixed income.
    * So I think that regardless of what regulators do to make this asset class – corporate loans and vehicles that hold them – attractive or not for banks to hold on their own books, there will be enormous interest by banks and other investment firms to find ways to serve the investment demand for them by non-banks.
    * That has been the overall direction of the banking industry for 40 years (moving assets off the books of banks and more directly into the portfolios of retail and institutional investors), and it is not going to change, regardless of what Congress does with the Volcker Rule.

    I suspect OXLC management, knowing all this at least as well as we do, is positioning itself to take advantage of these trends.
    Mar 17 10:37 AM | Likes Like |Link to Comment
  • Monthly Dividends And 8% Yield? Yes, Please [View article]
    anarchist -
    The company just issued about 6.4 million additional shares of common stock at $17 per share. All that stock plus the previous existing shares would have to go to a zero NAV before the preferred would lose a dime, since the preferred and any other debt is senior to the common in bankruptcy. Regardless of what you think of the common as an investment (and this has been a challenging week for investors in the common stock), the preferred - if you can find any to buy, given how thinly traded it is - is a safe investment with a terrific yield.
    Mar 13 06:22 PM | 3 Likes Like |Link to Comment
  • Oxford Lane Capital's Holiday Surprise: 9% Dividend Increase Plus Bonus Payment [View article]
    This quote from today's Wall Street Journal article about the new "Volcker Rule's" impact on loans and the CLO market, and in particular the strength of the CLO market, may provide useful insight into why OXLC's management wants to raise additional investment capital, besides the obvious one of wanting to increase their fees:

    "Regulators also point to a robust CLO market, suggesting fears about the rule's impact are overblown.

    While the market underwent a hiccup in January amid confusion about how the Volcker rule could affect such securities, the volume of issuance has rebounded strongly in February and March, market watchers say. That has hurt the industry's argument that the market for such loans would suffer without regulatory relief, according to regulators.

    In February, $8.4 billion worth of CLOs were issued, up from $1.9 billion in January, according to Thomson Reuters PLC."

    Obviously the CLO market is booming, as is the underlying syndicated loan market. Here's the link to the whole article:

    (If it won't open and they ask you for a log-in, you can see the article for free by googling "Volcker Rule and CLOs")
    Mar 13 05:26 PM | 1 Like Like |Link to Comment