BGB: Why I'm Passing On This Fully Covered 11% Yield From A Discounted Term CEF
Summary
- Taking a quick look at BGB, a term fund in the senior loan space.
- BGB yields 10.98% with a -12.48% discount, with 108% coverage.
- ~1.9% annual alpha from discount contraction is outweighed by poor performance and potentially unlimited extension of fund life.
- This idea was discussed in more depth with members of my private investing community, CEF/ETF Income Laboratory. Get started today »
Author's note: This article was released to Income Lab members on May 23, 2020, and data are from that date.
In this short note, I'd like to take a quick look at Blackstone/GSO Strategic Credit Fund (NYSE:BGB), the third-ranked DxYxZ fund from our latest "Quality" Closed-End Fund Report. As of May 29, BGB sported with a discount of -12.48%, a yield of 10.98%, and a 1-year z-score of -1.3. It charges a baseline expense ratio of 2.18% and the distribution is 108% covered according to its latest annual report number. It has $556 million assets, making it a medium-sized fund.
Valuation
The discount at the original time of writing of -13.64% is quite attractive vs. its 1-, 3- and 5-year averages of -7.55%, -7.41% and -8.86%, respectively. However, do note the fund has traded at wider discounts in the past, although these periods did not last long.
(Source: CEFConnect. Data as of May 23, 2020)
Performance
BGB is classified as a senior loan fund by both CEFConnect and CEFdata. According to CEFdata, BGB ranks in the bottom half of the peer group in terms of 1-, 3-, and 5-year performances.
(Source: CEFdata)
Portfolio
BGB holds the majority (~90%) of its assets in senior secured loans, with a small slice of high-yield bonds (9.3%) and a sprinkling of equity (1.1%).
(Source: BGB Factsheet)
The ratings distribution shows a fairly junky profile, as expected for a senior loan fund.
(Source: BGB Factsheet)
In terms of industry allocation, BGB's top five sectors are electronics/electric, business equipment and services, healthcare, building and development, and oil and gas. Apart from oil and gas, the other four sectors are overweight vs. the S&P Leveraged Loan index.
(Source: BGB Factsheet)
Here are the top 10 issuers of BGB.
(Source: BGB Factsheet)
Term structure
One of the main attractions of BGB is that it is a term fund, due to liquidate on September 15, 2027, "absent shareholder approval to extend the life of the Fund." This means that around ~1.9% of annual alpha is available simply by holding onto the fund from now until the termination date in around 7.5 years' time, should the dissolution proceed as planned. Of course, the usual caveats about fund sponsors trying to worm their way out of liquidating their fund applies. In the case of this sponsor, the sister fund Blackstone/GSO Senior Floating Rate Term Fund (BSL) voted earlier this year to extend the life of the fund by five (!) years, from 2022 to 2027. It seems likely that management will offer a similar proposal to shareholders for BGB. It should be noted that as long as shareholders approve, the life of BGB can be extended any unlimited number of times.
BGB will dissolve on or about September 15, 2027, absent shareholder approval to extend such term. Upon dissolution, BGB will distribute substantially all of its net assets to shareholders, after making appropriate provision for any liabilities of BGB. Pursuant to BGB’s Amended and Restated Agreement and Declaration of Trust, prior to the date of dissolution a majority of the Board of Trustees, with the approval of a majority of the outstanding voting securities entitled to vote (as defined in the 1940 Act), may extend the life of BGB. If approved, the dissolution date of BGB may be extended by a period of two years or such shorter time as may be determined. The dissolution date of BGB may be extended an unlimited number of times.
(Source: BGB Annual Report)
BGB's baseline expense ratio of 2.20% is 4th-highest out of the peer group, which I view as a negative.
(Source: Stanford Chemist, CEFConnect)
Summary
Overall, I did not come away impressed with BGB. Its performance has been lagging while it charges above-average management fees for the peer group. Moreover, its chief draw, the nearly +2% annual alpha available from its term structure, is far from a certainty of being realized based on the fund's charter and actions taken with the sister fund, BSL. The positives are an attractive valuation at current prices, and a 11.43% yield that is covered according to the fund's latest earnings numbers, although as we've seen recently, full coverage doesn't guarantee against distribution cuts in today's difficult economic environment.
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