Solar Capital’s Stellar Yield


While addressing the CFA Institute in May, legendary value investor Seth Klarman suggested the stock market could suffer another decade without gains. That’s not something most investors want to hear. While awfully pessimistic, you have to consider the source credible. Klarman’s Baupost Group seeks out-of-favor stocks so a down market would certainly make his job easier. However, at his annual meeting in May, Klarman suggested he might return cash (currently sitting around $6 billion in cash) to investors if it got any higher.

With that in mind, I will write a series of five articles covering some of his current holdings. At the end of March 2009, Baupost Group reported holding 42 stocks in its 13F filing. One year later, this number is down to 19. The first we’ll talk about is Solar Capital (Nasdaq:SLRC), a closed-end fund operating as a business development company. Baupost invested prior to the IPO in February and holds 6.1% of its shares.

Average Size Deal
Solar Capital’s investments generally range between $20 million and $100 million and are a combination of debt and equity. It seeks to achieve both current income and long-term capital appreciation from its investments, which focus on middle market companies. At the end of its first quarter, it had investments in 33 companies with a total fair value of $839 million. It made one new investment in the quarter and added to an existing one for a total of $44.6 million.

The biggest portion of its investments is in subordinated debt and corporate notes, which represent 77% of the portfolio. Its income-producing investments yielded an average of 13.8% during the quarter, down 100 basis points year-over-year. Although slightly lower, overall it generated $1.90 a share in earnings compared to a loss of 78 cents in the same quarter a year earlier. Most business development companies fared well in the first quarter. So what is it that Seth Klarman sees in Solar Capital that he doesn’t see in other publicly traded BDCs?  

Analysts Like It
Since Solar went public in February, no less than seven analysts have initiated coverage of the BDC with six of them rating it a “Buy” and one “neutral.” This is a unanimously positive outlook. When Citigroup initiated coverage in March, it suggested Solar was trading at a discount to its peers, giving it a 12-month price target of $23. The median is $24. Based on current prices, it’s trading 18% below its 12-month target. This puts it in the same ballpark as other business development companies such as Ares Capital (Nasdaq:ARCC), which is 17% below its 12-month target, Apollo Investment (Nasdaq:AINV) at 20%, MVC Capital (NYSE:MVC) at 18% and Pennant Park (Nasdaq:PNNT) at 17%.

So, despite the fact analysts are bullish on Solar Capital, it doesn’t appear they see any short-term catalysts to warrant a higher target. Its current 2010 earnings per share estimate is $2.30, giving it a forward P/E of 8.6, which is similar to its peers. Maybe a look at some of its individual investments will provide a clue.  

A Few Familiar Names
As mentioned earlier, the biggest portion of its $839 million portfolio is in subordinated debt and corporate notes. The single largest investment outstanding is a $103 million loan at 14% to DS Waters, one of America’s largest water-cooler delivery companies. Owned by private equity firm Kelso & Company since 2005, the loan matures in April 2012. Given Kelso’s average holding period is five-and-a-half years, I’d expect it will be repaid before then. In the meantime, it’s providing a substantial amount of income.

Other loans with companies you might be familiar with include Earthbound Farms, a California provider of organic salads and fruits and vegetables; Direct Buy, America’s largest direct-to-consumer home furnishings club; and Rug Doctor, a manufacturer of rug cleaning machines and products. Its equity investments, which include five million shares in Direct Buy, have taken a hit. Fair value at the end of March was $51 million but cost $113 million. However, its equity investments represent just 11.5% of its overall portfolio. High-yield debt is definitely where it makes its money. I suspect Klarman likes Solar because it generates a total return he doesn’t believe can be had from other equity investments. You can’t argue with his success.  

Bottom Line
Seth Klarman believes price is everything when buying stocks. He’ll accumulate cash waiting for the right opportunity. Buying into Solar Capital tells me he believes it’s a good deal at current prices. Time will tell if he’s right. (For a look a differing view, check out Why Being A Copycat Investor Can Get You Hurt.)

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Wall Streeters pulled back, but foreclosures swamp Nantucket natives

FORTUNE — In the past decade, Nantucket Island has served as a barometer for the fortunes of Wall Street. The glass cracked after years of unsustainable pressures. But almost by magic, the barometer is rising once more even as something new and unexpected has come to the summer paradise: foreclosures, short sales, failed auctions, and a skinnier municipal budget. And while financiers can cut and run, it’s the locals who are being hardest hit.

“It’s two different markets,” says Brian Sullivan, a broker for Maury People Sothebys. There’s Wall Street, and everyone else. You can see that on Yahoo’s real estate listing for distressed properties on Nantucket: nearly two-thirds are listed for under $1 million, the price sector dominated by the island’s 12,000 year-round residents. But the banks have basically turned their backs on small borrowers, so anyone who does want to buy will have a hard time getting a loan. “They want to lend to people borrowing $1.5 million and up,” says Sullivan.

The tight financing explains part of the problem of foreclosures, a word that hasn’t been whispered on Nantucket since the savings and loan system blew up in the early 1990s. In the first six months of 2010 foreclosures accounted for 20 of 163 sales — twice the 2009 rate.

“If you could breathe, you could get a mortgage,” says David Callahan, co-owner of Jordan Real Estate, of the salad days. That’s how one home bought for $356,000 ended up selling on the auction block for $425,000. But that didn’t help the owner, according to Callahan, a small businessman in construction. He had used the home as a piggy bank, borrowing “half a million dollars” for all kinds of “toys.” As in so many places across the U.S., optimism triumphed reason, bringing disaster to the weakest links in the economy.

Jobs for residents simply evaporated when Wall Street vacationers pulled back. No one expected building permits to plunge as they did last year to 43, the lowest number since the town began keeping records in 1972.

Brokers like to say the market has re-priced by about 25%. Other barometers show a much more dramatic drop in value — with some properties now selling for close to half the value the town assessor had derived for tax purposes. That also hasn’t happened since the savings and loan crisis, when homes sold soon average for as 72% of assessed value, according to data assembled for Fortune by Rob Ranney, an appraiser for Denby Real Estate.

“Assessments are a snapshot of the market in the rearview mirror,” says Deborah Dilworth, town assessor. They tell you were prices have been. It’s been a long way from there to here. Just take a look at Brian Sullivan’s real estate blog which compares recent sales to assessed values – now based on 2008 sales. There’s the house at 66 Squam Road, bought for $1.08 million, assessed at $1.86 million; the home on 1.2 acres at 47 West Chester, picked up for $900,000, but assessed at $1.86 million.

At least those properties are selling. The island has seen failed auctions, the most spectacular for Point Breeze, a 19th century hotel, that went belly up after an investor decided to renovate at just the wrong moment. That’s how TD Bank got stuck with a $40 million note. An auction in February attracted just one bidder for $5 million; the bank kept the property.

Like a bad crab, some sales seem OK until you crack them open. That’s the story of 15 Top Gale Lane, a prime waterfront home. Once owned by commercial real estate developer Scott Lawlor, who never got to move into the newly built structure, because as Callahan puts it, he was a little too long on real estate.

Lawlor had alreadylost the John Hancock building in downtown Boston after his company defaulted in 2009 on a note then worth $525 million, but was scrambling to keep on top of mortgages in Nantucket and Greenwich, Ct. The home was unsurprisingly bought by a financial executive who prefers to remain anonymous for $19.2 million. Scarce trophy properties on the waterfront maintain their values even when sellers are anxious to move on.

Vultures on the island

It’s bargain hunters in the rest of the market who are feared, courted, and rebuffed. No one wants to sell too cheaply and yet they long for buyers. Jacquie and Bill Colgan of Summit, NJ, were determined bargain hunters. And they got their whale — a 10,000-square-foot bank-owned house for $1.175 million — about half it’s true worth, says John Merson, a local investor whose renovated 18th century home is about 60% rented this summer. People like the Colgans are a mixed blessing for Nantucket.

They will give the house a much needed facelift, ridding it of mold, renovating, and fixing the landscaping. And they envision the home as a multi-generational gathering place for years to come. But they are importing their own crew of workers to repair the house. The locals are just too expensive, even now, says Jacquie Colgan.

Thanks to the rising fortunes on Wall Street, sales in the first six months of 2010 have more than doubled to $246 million; of course, 2009 was amazingly anemic. But optimism is rising. Sullivan estimates that a recent bump in high-end transactions will translate into meaningful work for locals in the next 8 to 15 months. Last year, he said things were so grim, he saw no way out.

But now Wall Street vacationers are spending money freely once again, especially since July 4th weekend, when the super rich seemed to have finally returned, wallets open,. That week, ex-Goldman Sachs (GS, Fortune 500) honcho Jon Winkelried finally signed a contract to sell his property for just below the new asking price of $29 million — an island record and a figure that has some island residents shaking their heads in wonder: What year is it, again? Of course, when Winkelried put the waterfront property up for $55 million in 2008, that was an asking price no one took seriously then, either.

And then there’s this, says Sullivan: The 14-mile-long island has only about 8% of land available for private construction. The laws of tight supply and strong demand will eventually kick in to restore the economy to health.

So it seems the party lights are going back up, at least around the prized Nantucket waterfront, restoring some of the glow to the “faraway land” – one translation for Nantucket and a name ripe for fantasy literature. But the party is mostly cash only. And it’s strictly B.Y.O.B. — bring your own bug spray. The town has stopped spraying for mosquitoes last year. (Assessor Dilhurth, insists the spraying program was eliminated because it didn’t work, not as a budget casualty.)

But here’s the point: The pullback came amid the worst economic downturn in island memory and has affected every line item for the town — from the fire department to sand purchases for the winter icy roads when Wall Street SUVs remain parked in clapboard garages. Echoing the problems of local and state governments nationwide, there’s even a municipal hiring freeze to help manage thebudget.

The year-round residents are happy to see the twinkle slowly return to the waterfont. But for now inside Nantucket, patches of darkness prevail for those mowed down by the excesses that took place on another island about 200 miles west-southwest of here. And in the darkness, the mosquitoes buzz. To top of page

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A Show of Power From Dimon and JPMorgan

Jamie Dimon is not the modern-day John Pierpont Morgan. He is not the new king of Wall Street, and he’s certainly not President Obama’s BBF (best banker friend). At least, that’s what he will tell you over lunch at the Park Avenue headquarters of JPMorgan Chase, the descendant of the House of Morgan that came through the global financial crisis bigger, stronger and healthier than its rivals,  Eric Dash of The New York Times reports.

But taking a victory lap, or even basking in the adulation he has received while his fellow bank chiefs have been pounded, is the last thing Mr. Dimon claims to want.

Mr. Dimon knows all too well the dangers of swaggering in the footsteps of former Wall Street kings like Sanford I. Weill, his onetime mentor who helped build Citigroup, which grew so unwieldy it nearly went bankrupt, or Lloyd C. Blankfein, the Goldman Sachs chief whose crown has been tarnished by accusations of double-dealing under his watch.

Instead, Mr. Dimon worries openly that new financial regulations, which are expected to be passed by the Senate on Thursday and signed by Mr. Obama shortly thereafter, will cost his bank billions and that the jittery economy could suffer another setback. And that rivals, lurking in every corner of the world, are devising new ways to “clean our clocks.”

In fact, in the lunchtime interview, his outlook was so cautious, his tone so subdued, that it prompted a senior aide to gently interrupt: “Jamie, how about mentioning a few of our positives, too?”

For all the talk of gloom and doom, the postcrisis era looks brighter than Mr. Dimon is willing to acknowledge. In Washington, the financial industry was largely successful in blunting the toughest legislative proposals. On Wall Street, the deluge of losses is slowing, and ultralow interest rates are helping all banks mint money.

JPMorgan, in particular, is poised to increase its profit and gain market share in several businesses as many of its competitors continue to struggle to get back on their feet.

The crisis cemented Mr. Dimon’s reputation as a financial superstar — a brazen dealmaker who buys when others are selling, a strict risk manager who resisted the type of exotic businesses that felled others, and a charismatic leader who charms lawmakers and credit traders alike. He is now commonly referred to by a single name, like Pelé or Madonna.

“Right now, there are virtually no giants on Wall Street except maybe Jamie,” said David M. Rubenstein, a founder of the Carlyle Group and a longtime financial and political hand.

Mr. Dimon earned that distinction by playing as much defense as offense during the housing boom, which insulated JPMorgan more than most when the boom went bust. Then, when the bust became a full-blown financial crisis, Mr. Dimon went hunting for bargains, significantly expanding his position in investment and retail banking while those of others were shrinking.

Now, those efforts are paying off. Even with a slowdown in trading, analysts are forecasting a profit of 70 cents a share when JPMorgan reports its second-quarter earnings on Thursday, about the same as a year ago.

Of course, at age 54, Mr. Dimon has only just begun trying to build the kind of global banking empire he initially set out to create with Mr. Weill at Citigroup. While JPMorgan’s share price fared better than most in the banking sector through the turbulence of the last few years, at around $40.35, it remains at roughly the same place it was when Mr. Dimon took over as chief executive in December 2005.

And analysts point out that while JPMorgan’s overall operation is in better shape than most, the bank does not enjoy a top position in any single business.

“They are not Wells Fargo when it comes to retail banking. They are not American Express when it comes to credit cards. They are not BlackRock when it comes to asset management,” said Michael Mayo of Credit Agricole Securities. “And JPMorgan is not Goldman Sachs in emerging markets.”

Mr. Dimon is trying to make up that lost ground. Over the last three years, he has plowed more than $10 billion into his main businesses. He recently announced plans to build up his corporate bank and make an aggressive push into Brazil, China and a dozen or so other emerging markets that are growing at a faster pace than developed economies. That would put him toe to toe with banks like Citigroup, HSBC and Standard Charter, which have been in these markets for decades.

“We are prepared, and we are already good at it,” says Mr. Dimon, ever confident but also careful not to overpromise. (He notes the plan will unfold over several years.)

It is an approach right out of the Dimon playbook, mixing competitive paranoia with hardball deal-making and careful management of investor expectations. He made a name for himself as Mr. Weill’s young operations whiz, helping assemble Citigroup in the late 1990s through a series of flashy mergers. After arriving at Bank One in 2000, he spent the next few years fixing the ailing regional lender. Then, after Bank One’s merger with JPMorgan in 2004, he orchestrated a similar turnaround.

He spent three years stitching together the banks’ disparate computer systems and getting a handle on the financial risks lurking on its balance sheet. Every step of the way, he told investors that he was focused not on lifting quarterly profits but on building a strong company for the long haul. Mr. Dimon has refined that formula in recent years, seizing more than a few opportunities to reposition his bank while his rivals were in deep distress.

With his purchase of the teetering Bear Stearns — subsidized by taxpayers and steeply discounted at $10 a share — Mr. Dimon filled in crucial gaps in his investment bank. Where JPMorgan had traditionally been a big bond house, the addition of Bear kick-started its stock and commodities trading operations, and added a lucrative prime brokerage business, which provides financing to hedge funds, that had been high on his wish list.

He took Washington Mutual off the government’s hands for a mere $1.9 billion, giving his retail bank a giant share of the nation’s deposits and turning it, overnight, into a major player in California. (It helped, of course, that nobody else entered a bid.)

As panic gripped the financial industry, consumers and big corporations saw JPMorgan as a safe place to park their cash, even if it meant accepting a savings rate close to zero percent. With few competitors free to lend, JPMorgan’s bankers demanded big premiums from corporate borrowers to finance deals.

While rivals were retrenching during the crisis, Mr. Dimon ordered his lieutenants to expand. Although they shuttered scores of Washington Mutual branches, Chase opened more than 300 new retail locations over the last three years and added about 3,000 bankers to its ranks. One of every 13 bank branches opened since 2009 has been a Chase branch, according to SNL Financial.

Chase Card Services, meanwhile, has introduced three new types of credit cards in the last year. In the second quarter alone, it mailed out an estimated 164 million applications, according to data from Synovate, a research firm. That was more than twice the number sent out by American Express, the next most active issuer, and made up nearly one-third of the industry’s total mailings.

When the head of the credit card division offered to scale back as losses spiraled, Mr. Dimon was emphatically opposed. “We don’t want to do stupid things because we are losing a lot of money,” Mr. Dimon said, anticipating a rebound in the card business. “Hell no. We are going to do the right thing as fast as we can.”

Mr. Dimon was aggressive in dealing with Washington, too. Whereas the heads of Citigroup and Bank of America struck a conciliatory tone with policy makers, Mr. Dimon was downright confrontational. JPMorgan’s 22-person Washington office was spending more than $7.7 million on lobbying over the last five quarters, more than any other bank, according to the Center for Public Integrity.

Meanwhile, in speeches and in private meetings with lawmakers, he griped about credit card legislation, protested a proposed bank tax and complained that JPMorgan — which, he reminded them, accepted bailout funds with reluctance — was being unfairly punished for the sins of its competitors.

The result? A sweeping financial overhaul bill that most analysts say will not fundamentally change the way the industry does business. Many of the harshest measures were significantly watered down or delayed. JPMorgan, for example, will be allowed to retain its giant hedge fund unit, Highbridge Capital Management, and its status as a derivatives powerhouse.

Despite his semi-victory, Mr. Dimon says being the chief is less fun these days, now that politics are so intertwined with his job.

Mr. Dimon insists that the closeness of his relationship with Mr.  Obama has been “greatly exaggerated,” as was the portrayal of any fallout with the White House. Still, he remains adamant that Washington’s “indiscriminate vilification” of all banks was wrong.

“What I object to is the blanketing blame,” he said. “I think it is not accurate and leads to bad policy.”

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Commonwealth Bankshares, Inc., Norfolk, VA, Formalizes Agreements With Regulators

NORFOLK, Va., July 9, 2010 (GLOBE NEWSWIRE) — Commonwealth Bankshares, Inc. (Nasdaq:CWBSNews) (the “Company”) announced today that in recognition of their common goal to maintain the financial soundness of the Company, the Company and its banking subsidiary, Bank of the Commonwealth (the “Bank”), have mutually entered into a written agreement (the “Agreement”) with the Federal Reserve Bank of Richmond and the Virginia State Corporation Commission Bureau of Financial Institutions. Under the terms of the Agreement, the Company and the Bank committed to take certain actions to strengthen the Company’s and the Bank’s financial condition and maintain effective control over and supervision of major operations and activities, including credit risk management, capital, funding, liquidity and earnings.

“Management and the Board have been working proactively over the past six months and have made significant progress in addressing many of the issues subsequently cited in the Agreement, while at the same time, we continue to serve our customers with the high level of service and dedication for which our franchise is recognized in the market,” said Edward J. Woodard, Jr., CLBB, President and Chief Executive Officer.

“We are committed to taking the actions necessary to move forward. During the first quarter of 2010, our Board and Senior Management have continued the execution of our three year strategic plan and our three year capital management plan. We have substantially increased loan loss reserves, increased core deposits and reduced our reliance on brokered deposits. In addition, we have increased problem loan management staff, improved risk management practices and have maintained our “well capitalized” capital status. Many of the issues discussed in the Agreement have already been addressed and we expect to make further progress in the near future. We have a constructive working relationship with our regulators and will continue to coordinate closely with them as we work to address the remaining issues in the Agreement as quickly as possible. We are fully committed to seeing the Company return to profitability and realize the full potential of the Commonwealth Bankshares franchise,” Mr. Woodard concluded.

The Agreement imposes no restriction on the Company’s products or services offered to customers, nor does it impose any type of penalties or fines upon the Company.

About Commonwealth Bankshares

Commonwealth Bankshares, Inc. is the parent of Bank of the Commonwealth which opened its first office in Norfolk, Virginia, in 1971, creating a community bank that was attuned to local issues and could respond to the needs of local citizens and businesses. Over the last three decades, the Company’s growth has mirrored that of the communities it serves. Today, Bank of the Commonwealth has 21 bank branches strategically located throughout the Hampton Roads and Eastern North Carolina regions and an extensive ATM network for added convenience. The Company continues to grow and develop new services and at the same time, maintains its longstanding commitment to personal service. Our slogan conveys our true corporate philosophy: “When you bank with us, you bank with your neighbors.” Bank of the Commonwealth offers insurance services through its subsidiary BOC Insurance Agencies of Hampton Roads, Inc., title services through its subsidiary Executive Title Center, mortgage funding services through its subsidiary Bank of the Commonwealth Mortgage, and access to investment related services through its subsidiary Commonwealth Financial Advisors, LLC.* Additional information about the Company, its products and services, can be found on the Web at

* Securities offered through Infinex Investments, Inc., member FINRA and SIPC. Not insured by FDIC or any Federal Government Agency. May Lose Value. Not a Deposit of or Guaranteed by the Bank or any Bank Affiliate. Commonwealth Financial Advisors, LLC is a wholly-owned subsidiary of Bank of the Commonwealth.

This press release contains forward-looking statements, including, but not limited to, our expected progress on satisfying the terms of the Agreement. Words such as “anticipates,” ” believes,” “estimates,” “expects,” “intends,” “should,” “will,” variations of such words and similar expressions are intended to identify forward-looking statements. These statements reflect management’s current beliefs as to the expected outcomes of future events and are not guarantees of future performance. These statements involve certain risks, uncertainties and assumptions that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed or forecasted in such forward-looking statements. Factors that could cause a difference include, among others: changes in the national and local economies or market conditions; changes in interest rates, deposit flows, loan demand and asset quality, including real estate and other collateral values; changes in banking regulations and accounting principles, policies or guidelines; the impact of competition from traditional or new sources; and our ability to complete our recovery plan. These and other factors that may emerge could cause decisions and actual results to differ materially from current expectations. Commonwealth Bankshares, Inc. undertakes no obligation to revise, update, or clarify forward-looking statements to reflect events or conditions after the date of this release.

High-Yield Royalty Trusts Surge Amid Market Rally

With the market strongly in positive territory, stocks of all shapes are sizes are moving higher, and a look at the day’s worst performing tickerspy Indexes shows only five of more than 270 are trading lower for the session. A number of high-yield equity sectors are participating in the rally, with royalty trusts getting a big boost.

As a whole, the Royalty Trusts Index was ahead by 2.0% in late-morning trading. Components currently pay out an average of 7.3% annually, based on current values and distributions over the last year.

The sector is getting a lift in part by big moves in San Juan Basin Royalty Trust (NYSE: SJT – News) and MV Oil Trust (NYSE:MVO – News), which are both jumping by 3% today. The latter currently boasts a payout of 9.4% annually. Other winners in today’s session include Mesabi Trust (NYSE: MSB – News) up over 2%, and oil player Cross Timbers Royalty Trust (NYSE:CRT – News), which is yielding close to 8%.

Whiting USA Trust I (NYSE: WHX – News), an oil trust known for its huge dividends, is trading higher by over 2%. The Texas-based trust yields over 17%, and is trying to make its way back from the -8% fall it endured over the past month. Sector giant, BP Prudhoe Bay Royalty Trust (NYSE: BPT – News) is up 2%, while microcap player Torch Energy Royalty Trust (NYSE: TRU – News) is a noticeable laggard, falling -3% in today’s action.

Income oriented investors should note that royalty trust yields are normally calculated based on the annualization of the most recent payment, so in some cases a one-time event can impact yield statistics on a longer-term basis. Despite that fact, the Index is one of the best places to find consistent, high-yielding equity plays. Investors can track the Royalty Trusts Index for performance trends and a suite of other metrics at

Fun and informative, is a free investing website where you can track multiple stock portfolios and compare against 250 proprietary Indexes tracking themes from dividends to ETFs to green energy to precious metals. Best of all, lets you spy on the portfolios of nearly 3,000 Wall Street institutions and hedge funds and see graphs of their performance. Try today and find out how you stack up against investing legends like Warren Buffett!