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Sleep Like A Baby: Buy These Baby Bonds, Yields Up To 9.6%

Published Sun, 31 May 2020 11:00:00 -0400 on Seeking Alpha

We discuss some baby bonds that offer high yields but are actually quite safe due to what we believe is a misunderstanding by investors.
These baby bonds are issued by business development companies - BDC's which have legal leverage limits such that no BDC baby bond has ever defaulted.
The 2 BDC baby bonds we will discuss are 1) Harvest Capital’s HCAPZ baby bond, and 2) MVC Capital’s MVCD baby bond.
Co-produced with Preferred Stock Trader
Introduction
The thesis of this article is that there are high yielding baby bonds in the market that are underpriced due to safety fears that are overdone. The baby bonds we are speaking of are one’s issued by BDCs. BDCs are legally required to keep leverage below certain limits for the exact purpose of keeping them out of financial trouble. This makes default on these baby bonds highly unlikely and thus makes them undervalued at their currently generous yields-to-maturity (YTM).
The market for fixed-income securities (baby bonds and preferred stocks) has been very strong with prices moving up quite rapidly. We are planning on making this article part one of a two-part article on fixed-income securities from companies with legal leverage limits. There is still a window to get some very nice bargains, but we are not sure how long this window will be open, so we are trying to highlight some of our investment ideas now while opportunities still exist.
In a zero-interest rate world, we believe that BDC baby bonds will ultimately go back to yield-to-maturities of 5.5 to 6.0%, as they were before COVID-19, and possibly even lower. And those who have locked in high yields now will be very pleased.
Since we are writing about bonds from 2 different companies, instead of the usual focus on one company, we will not be taking a deep dive into each of these companies. But we will provide the information necessary to make our investment thesis clear. If you wish to learn more about the companies that have issued... Read more

Stock name Last trade   P/E Earnings/Share Dividend/Share Dividend yield
MVC CAPITAL 8.87   13.6 0.65 0.60 6.80