I opened a new position in Prospect Capital Corporation (PSEC) this morning.
music selection: “Palace Of The King” — Kenny Wayne Shepherd
Prospect Capital is a closed end fund that operates as a Business Development Corporation (BDC). I’ve discussed BDCs here at the raptor before. These are usually high yield issues that like a REIT or MLP, receive a tax exemption if they distribute cash flows to shareholders as distributions according to IRS requirements. BDCs engage in investing in private businesses through debt and equity. Prospect is in a niche that serves private companies that are too large to get attractive bank financing but too small to float a bond. Debt investments are usually floating rate so there is good upside from rising rates.
Prospect was the recent victim of a hit piece in the Wall Street Journal. I’m sure that kind of article sells newspapers but it doesn’t serve the readers well. Prospect is a well run company and now thanks to some negative press, it can be purchased super cheap. The current asking price is only about 70% of Net Asset Value. I got in at 6.99 and the even dollar annual distributions yield 14.31% against my cost basis.
This is a pure income play and not a long term holding so I wrote an at the money covered call for extra yield. I sold PSEC160219C00007000 for 20 cents a contract. The trade will be in force 43 days and yields 24.25 annualized. I should pick up eight and a third extra cents per share from the January distribution bringing expected 43 day returns to 34.36% annualized. I’ll continue writing these calls if I can hold onto shares and strongly consider re-entering the trade as either a buy/write or cash secured put if I’m called away.
In other news Dupont is very likely to be assigned to me over the weekend. I’ll evaluate what to do there on Monday.
Devour your prey raptors!