Great Time To Sell The Fidelity Floating Rate Fund

| About: Fidelity® Floating (FFRHX)

Summary

The fund did quite poorly in 2008.

NAV has been dropping weekly.

Much of the bank debt is riskier than shareholders realize.

The Fidelity Floating Rate Fund (MUTF:FFRHX) is a bank debt fund that has too much risk. Back in 2008, this fund got crushed. The amount of debt in this fund that is off by 25% is astounding. As debt markets continue to fall, you'd be smart to bail out.

In 2015, the NAV at the beginning of the period was $9.85. There was 0.375% in income and 0.425% in losses. The average fees were 0.98%. After everything, the NAV was $9.42. A total loss of 0.53%.

Total assets are $10.784 billion. 46.2% of the loans are BB rated and 38.9% are B rated. 87% are bank loans. 11.5% is technology, 10.4% healthcare, 7.6% telecom, and 6.3% gaming. The 30 Day SEC yield is 5.26% and the average maturity is 4.1 years.

I dug into the Annual Report on the SEC Edgar web site. I am focusing on the loans that are substantially down in value. As you might guess, many of these are in oil and gas.

Pacific Drilling (NYSE:PACD) is a penny stock trading at 37¢ a share. According to the quarterly report, Pacific has $151 million in cash and $146 million in accounts receivable. This is to $37.7 million in accounts payable and a whopping $2.94 billion in debt. Yikes! No wonder the senior bonds were trading so low. The fund holds four different series of debt issued by Pacific. As of 10/31/15, the largest loan had purchase value of $21.5 million and was down to $11.589 million. There is a smaller amount of debt with a maturity of 12/1/17. As of the October report, it was listed as a purchase of $1.5 million and a current value of $1.03 million. According to Finra, that debt is now trading at 34¢ on the dollar. Moody's has downgraded the company's debt to Caa2. Pacific is a small holding of the fund.

A loan from Seadrill (NYSE:SDRL) had a purchase value of $47.293 and was worth $27.473 in October. The loan matures 2/21/21. It's difficult to say what the bank debt is trading at but a bond with a maturity of 2020 was worth 67¢ at the end of October and is now worth 30¢.

A Peabody Coal (NYSE:BTU) loan due 9/24/20 was purchased at $33.348 million and has fallen to $22.040 million in October. I don't know what the bank debt is trading at but an unsecured bond has lost 93% of its value according to Finra.

There is $32 million in Chesapeake (NYSE:CHK) bonds and loans. Chesapeake's woes are well known. Here is an article on Seeking Alpha.

I counted over $800 million in debt that was down over 25% in value. This report was from October and as of today, the NAV is $9. So the fund is down 4.45% in four months. Remember, this is a floating rate fund. When these are sold by financial advisors, they are sold as safe. The growth chart of $10,000 shows that $10,900 in 2007 became worth only $7,700 in 2008. This thing has the durability of a tech fund when the markets go south.

I'd recommend you sell this fund. The risk is not worth it. Maybe if you want to do some bottom feeding in a year or two, it would be a great place.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

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