I recently sold my shares in MCC and bought shares in FSC.
My reasons:
- FSC has a larger and more diversified portfolio. 137 portfolio companies vs 76 at MCC
-FSC did not pay a February dividend. This directly improved FSCs NAV by at least 0.07 per share from 9.17
-FSC had only 2.6% writedown from Q3's NAV from credit losses. MCC lost around 3.9% from credit losses for the quarter. (0.18 of FSCs write down came from spread widening which had nothing to do with credit impairment)
-FSC trades at a steeper discount to book value than MCC, providing a higher NAV on my share count and thus improving my book
-FSC has a better profile for rising interest rates. FSC gains 7.3m to net investment income from a 200 bp rise. However, MCC pretty much breaks even at 200 bp rise. Not much of an increase at MCC. If you compare the tables more closely.. you will see what I'm talking about.
-FSC has MUCH less oil/gas exposure than MCC. FSC has less than 2% at risk in oil/gas loans... this amount was also stress tested for the current environment and FSC is happy with the results. By comparison, MCC has 6.8% portfolio exposure to oil/gas investments. FSC also has an aircraft leasing business that benefits from lower oil/gas prices.
My projected true NAV level which takes into account the 0.07 to NAV and gives back the spread change of 0.18.... = $9.42 per share adjusted NAV for FSC.
That means the stock is trading about 75 cents on the dollar based on todays price of $7.10.
Additionally, the dividend level at FSC is perhaps the most well covered dividend of all the BDCs. This will provide NAV growth as there will be income in excess of dividends.
FSC had an NAV near $10.44 back near the end of 2010. So 4 years later it dropped to $9.42. (based on my projections) and therefore... they lost $1 of NAV over 4 years or about 0.25 per year. They paid around $1.15 per year in dividends. So they are generating good returns despite the slow NAV decline caused by accumulated non-accruals. They total business still provided over 8.5% in ROE@NAV for investors over the last 4 years. I mean, it's not bad in a 2% interest rate environment by any means... and the ROE will go up as interest rates go up. So just hang tight and enjoy the return. And hey... keep in mind that FSC was smaller in prior years... they grew! So now they are more diversified than ever before. This should gives a better ROE because non-accruals should be less lumpy and have less of an impact on the individual portfolio company level. FSC also has a number of NII growth initiatives they are working on... Like the new Joint Venture... etc.
So STOP COMPLAINING about the stock price. The dividend cut was a really good thing. Be happy. Enjoy the yield and eventually the dividend will go back up.
I decided to post this as a insta-blog because I felt too lazy to write out a full article but thought I'd give my reasons for the switch.