ADVENT CLAYMORE CV SEC&IN II AGC
January 17, 2016 - 3:29pm EST by
jcoviedo
2016 2017
Price: 4.92 EPS 0 0
Shares Out. (in M): 32 P/E 0 0
Market Cap (in M): 159 P/FCF 0 0
Net Debt (in M): 170 EBIT 0 0
TEV: 0 TEV/EBIT 0 0

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  • Closed-end Fund
  • Discount to NAV
  • Small Cap
 

Description

 

Thesis

Advent Claymore Convertible Securities and Income Fund II (AGC) is a closed end mutual fund trading at almost a 19% discount to its daily marked to market net asset value due to the current dislocation in the corporate credit markets. AGC has limited exposure to the energy and metals and mining industries – the epicenter of the current default cycle -- and the fund’s holdings are concentrated in relatively high quality issuers. AGC owns mostly liquid issues and has no level 3 assets (i.e. the net asset value is likely a clean number.) Investors are currently paid an 11.4% distribution in monthly installments to wait for the discount to NAV to narrow. AGC should benefit when credit markets stabilize.

 

 

Overview

AGC is a closed end mutual fund that invests predominately in convertible bonds and convertible preferred stock. The fund also invests in corporate bonds and common stock. The fund invests globally though the majority of its investments are in the U.S. By mandate 80% of the fund’s assets must be invested in income producing assets and at least 30% must be invested in convertible securities.

 

 

Advent Capital Management, a credit oriented firm is the investment manager of the fund. Guggenheim Fund Investment Advisors is the Investment Adviser to the Fund.

 

AGC was launched in the middle of 2007. AGC’s performance over the last eight years is as follows:

 

Performance History

     

Year

Price

NAV

YTD

-10.53%

-8.40%

2015

-3.52%

-1.13%

2014

-6.41%

-6.59%

2013

21.69%

22.54%

2012

12.43%

14.66%

2011

-24.09%

-19.10%

2010

22.82%

15.82%

2009

58.11%

53.54%

2008

-55.58%

-57.84%

 

 

AGC currently trades at a 18.95% discount to its daily marked to market net asset value. This discount is at its widest level since the depths of the financial crisis.  Given the fund's performance has been roughly similar to peers we do not view the fund's current discount as justified by the ineptitude of the investment manager, rather due to the increase in credit spreads since the middle of 2014. Retail investors have sold thier shares in the fund in response to the choppy conditions in the credit markets. We view an investment in AGC today as an investment in a rebound in the corporate credit markets with a reasonable margin of safety.

 

 

AGC NAV.png

 

 

The Net assets of the fund were $227.4 million as of October 31st 2015. As of January 15th 2016, the net asset value of the fund was $195.5 million.

 

 

The fund currently pays distributions of $0.047/share per month. 64% of this distribution in fiscal 2015 was taxable income and capital gains while 36% of this distribution was a return of capital.

 

 

The Portfolio

AGC’s portfolio is well diversified. The fund’s exposure by asset class is as follows:

 

Asset Class Exposure as of 10/31/2015

   

Asset Class

Exposure

Convertible Bonds

83.6%

Corporate Bonds

46.3%

Common Stocks

22.5%

Convertible Preferred Stocks

16.8%

Short Term Investments

4.0%

Senior Floating Rate Interests

1.3%

Total Investments

174.5%

   

Short Call Option Premium

-0.2%

Margin Leverage and other liabilites

-74.3%

 

 

 

All of AGC’s investments are classified as Level 1 or Level 2 securities. In other words, all of AGC’s securities can be marked and therefore the daily calculated NAV should be a pretty accurate representation of the net asset value of the fund.

 

 

The fund’s investments by Geography as a % of the overall investment portfolio are as follows:

 

 

% of Investments

United States

64.6%

Japan

5.4%

France

4.8%

Germany

3.9%

Netherlands

3.8%

Canada

2.4%

Cayman Islands

1.8%

Austria

1.6%

United Kingdom

1.4%

Italy

1.2%

Luxembourg

1.1%

Switzerland

0.9%

Australia

0.7%

Bermuda

0.7%

Spain

0.7%

China

0.7%

United Arab Emirates

0.6%

Mexico

0.6%

Marshall Islands

0.5%

Hungary

0.5%

India

0.4%

Belgium

0.4%

Taiwan

0.4%

Ireland

0.3%

Liberia

0.3%

Jersey

0.3%

 

 

The fund’s exposure by sector in each asset class is as follows:

 

Exposure by Sector

 
   

Common Stock

 

Consumer Non Cyclical

7.8%

Consumer Cyclical

6.3%

Financial

3.2%

Technology

2.6%

Industrial

1.4%

Basic Materials

0.7%

Energy

0.5%

Total Common Stocks

22.5%

   

Convertible Preferred Stocks

 

Consumer Non Cyclical

6.1%

Communications

4.5%

Financial

3.8%

Utilities

1.5%

Basic Materials

0.3%

Industrial

0.3%

Energy

0.3%

Total Convertible Preferred Stocks

16.8%

   

Convertible Bonds

 

Financial

19.9%

Consumer Cyclical

14.8%

Communications

12.9%

Technology

12.3%

Consumer Non Cyclical

11.1%

Industrial

9.1%

Utilities

1.6%

Energy

1.2%

Diversified

0.4%

Basic Materials

0.3%

Total Convertible Bonds

83.6%

   

Corporate Bonds

 

Consumer Non Cyclical

8.7%

Financial

7.4%

Industrial

6.7%

Energy

6.4%

Basic Materials

5.5%

Communications

5.3%

Consumer Cyclical

4.9%

Technology

1.0%

Diversified

0.4%

Total Corporate Bonds

46.3%

   

Senior Floating Rate Interests

 

Consumer Non Cyclical

0.6%

Basic Materials

0.6%

Total Senior Floating Rate

1.3%

   

Short Term Investments

4.0%

 

 

Most of AGC’s exposure is in issuers with low investment grade or high junk ratings. The Credit Quality of the portfolio as of 11/30/2015 is as follows:

 

Credit Quality

 

A

2.22%

BBB/Baa

11.47%

BB/Ba

17.44%

B

19.06%

Below B

2.83%

Not Rated

46.98%

 

 

The specific securities owned by the fund can be found on pages 14 to 28 of its annual report which can be downloaded from this website.

 

http://guggenheiminvestments.com/GuggenheimInvestments/media/cefdoclib/gf/CEF-AGC-AR-1015.pdf?ext=.pdf

 

 

The fund’s holdings are concentrated in mostly securities issued by mid cap and large cap issuers. The top 10 issuer holdings of the fund are:

 

 

Shares or Face

Value

% of Portfolio

Frontier Communications Corp.

   

5.4%

11.13% Convertible Preferred due 06/29/18

103,554

10,265,308

4.5%

11.00% Bond due 09/15/25

1,860,000

1,954,153

0.9%

       

Allergan plc

   

3.0%

5.50% Convertible Preferred due 03/01/18

6,446

6,746,577

3.0%

       

Element Financial Corp.

   

2.5%

4.25% Convertible Bond due 06/30/20

3,960,000 CAD

3,178,048

1.4%

5.13% Convertible Bond due 06/30/19

2,696,000 CAD

2,400,611

1.1%

       

Alcatel Lucent

   

2.4%

0.00% Convertible Bond due 01/30/19

849,000 EUR

4,441,648

2.0%

4.25% Convertible Bond due 07/01/18

210,000 EUR

1,076,139

0.5%

       

Wells Fargo & Co.

   

2.4%

7.50% Convertible Preferred

4,519

5,373,091

2.4%

       

Fiat Chrysler Automobiles N.V.

   

2.0%

7.88% Convertible Bond due 12/15/16

27,500

3,568,124

1.6%

5.25% Bond due 04/15/23

942,000

942,000

0.4%

       

Sony Corp.

   

2.0%

0.00% Convertible Bond due 09/30/22

505,000,000 JPY

4,505,976

2.0%

       

Telecom Italia Finance S.A.

   

1.9%

6.13% due 11/15/16

2,400,000 EUR

4,211,368

1.9%

       

Priceline Group, Inc.

   

1.9%

0.35% Convertible Bond due 06/15/20

2,443,000

3,175,900

1.4%

0.90% Convertible Bond due 09/15/21

1,014,000

1,078,643

0.5%

       

Ctrip.com International Ltd.

   

1.8%

1.25% Convertible Bond due 10/15/18

3,140,000

4,170,312

1.8%

 

 

 

The fund’s energy exposure is concentrated in high quality low leverage e&p companies (WLL, CLR, CNX, NBL, SWN, MRO, MUR, HES, XEC, OXY) as well as refining companies (TSO, WNR.) The total energy exposure of 8.4% of NAV is quite manageable. The fund’s 7.4% exposure to basic materials companies is also a manageable level.  

 

Going through the fund’s holdings nothing is particularly exotic which would justify the high discount that the fund is trading at.

 

 

Negatives/Risks

AGC has a relatively high fee burden. In Fiscal 2015, the fund paid a 1.71% management fee, other operating expenses of 0.32% and interest of 1.17% of equity. The management fee is 1% of "managed assets" not net assets.

 

 

AGC has $170 million in margin loans and reverse repurchase agreements. This embedded leverage could force the fund to liquidate securities in the event of a September 2008 like collapse in corporate credit prices.

 

 

At some point, AGC is likely to cut its distribution rate as the fund generates net investment income (interest + dividends minus fund expenses) of around $0.201/share while paying out an annual distribution of $0.564/share. It is possible that the retail shareholders of the fund will sell positions when the distribution is cut.

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.

Catalyst

The fund's discount to net asset value should narrow as credit markets stabilize. If the fund's discount widens further shareholders can push for the fund to liquidate.

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    Description

     

    Thesis

    Advent Claymore Convertible Securities and Income Fund II (AGC) is a closed end mutual fund trading at almost a 19% discount to its daily marked to market net asset value due to the current dislocation in the corporate credit markets. AGC has limited exposure to the energy and metals and mining industries – the epicenter of the current default cycle -- and the fund’s holdings are concentrated in relatively high quality issuers. AGC owns mostly liquid issues and has no level 3 assets (i.e. the net asset value is likely a clean number.) Investors are currently paid an 11.4% distribution in monthly installments to wait for the discount to NAV to narrow. AGC should benefit when credit markets stabilize.

     

     

    Overview

    AGC is a closed end mutual fund that invests predominately in convertible bonds and convertible preferred stock. The fund also invests in corporate bonds and common stock. The fund invests globally though the majority of its investments are in the U.S. By mandate 80% of the fund’s assets must be invested in income producing assets and at least 30% must be invested in convertible securities.

     

     

    Advent Capital Management, a credit oriented firm is the investment manager of the fund. Guggenheim Fund Investment Advisors is the Investment Adviser to the Fund.

     

    AGC was launched in the middle of 2007. AGC’s performance over the last eight years is as follows:

     

    Performance History

         

    Year

    Price

    NAV

    YTD

    -10.53%

    -8.40%

    2015

    -3.52%

    -1.13%

    2014

    -6.41%

    -6.59%

    2013

    21.69%

    22.54%

    2012

    12.43%

    14.66%

    2011

    -24.09%

    -19.10%

    2010

    22.82%

    15.82%

    2009

    58.11%

    53.54%

    2008

    -55.58%

    -57.84%

     

     

    AGC currently trades at a 18.95% discount to its daily marked to market net asset value. This discount is at its widest level since the depths of the financial crisis.  Given the fund's performance has been roughly similar to peers we do not view the fund's current discount as justified by the ineptitude of the investment manager, rather due to the increase in credit spreads since the middle of 2014. Retail investors have sold thier shares in the fund in response to the choppy conditions in the credit markets. We view an investment in AGC today as an investment in a rebound in the corporate credit markets with a reasonable margin of safety.

     

     

    AGC NAV.png

     

     

    The Net assets of the fund were $227.4 million as of October 31st 2015. As of January 15th 2016, the net asset value of the fund was $195.5 million.

     

     

    The fund currently pays distributions of $0.047/share per month. 64% of this distribution in fiscal 2015 was taxable income and capital gains while 36% of this distribution was a return of capital.

     

     

    The Portfolio

    AGC’s portfolio is well diversified. The fund’s exposure by asset class is as follows:

     

    Asset Class Exposure as of 10/31/2015

       

    Asset Class

    Exposure

    Convertible Bonds

    83.6%

    Corporate Bonds

    46.3%

    Common Stocks

    22.5%

    Convertible Preferred Stocks

    16.8%

    Short Term Investments

    4.0%

    Senior Floating Rate Interests

    1.3%

    Total Investments

    174.5%

       

    Short Call Option Premium

    -0.2%

    Margin Leverage and other liabilites

    -74.3%

     

     

     

    All of AGC’s investments are classified as Level 1 or Level 2 securities. In other words, all of AGC’s securities can be marked and therefore the daily calculated NAV should be a pretty accurate representation of the net asset value of the fund.

     

     

    The fund’s investments by Geography as a % of the overall investment portfolio are as follows:

     

     

    % of Investments

    United States

    64.6%

    Japan

    5.4%

    France

    4.8%

    Germany

    3.9%

    Netherlands

    3.8%

    Canada

    2.4%

    Cayman Islands

    1.8%

    Austria

    1.6%

    United Kingdom

    1.4%

    Italy

    1.2%

    Luxembourg

    1.1%

    Switzerland

    0.9%

    Australia

    0.7%

    Bermuda

    0.7%

    Spain

    0.7%

    China

    0.7%

    United Arab Emirates

    0.6%

    Mexico

    0.6%

    Marshall Islands

    0.5%

    Hungary

    0.5%

    India

    0.4%

    Belgium

    0.4%

    Taiwan

    0.4%

    Ireland

    0.3%

    Liberia

    0.3%

    Jersey

    0.3%

     

     

    The fund’s exposure by sector in each asset class is as follows:

     

    Exposure by Sector

     
       

    Common Stock

     

    Consumer Non Cyclical

    7.8%

    Consumer Cyclical

    6.3%

    Financial

    3.2%

    Technology

    2.6%

    Industrial

    1.4%

    Basic Materials

    0.7%

    Energy

    0.5%

    Total Common Stocks

    22.5%

       

    Convertible Preferred Stocks

     

    Consumer Non Cyclical

    6.1%

    Communications

    4.5%

    Financial

    3.8%

    Utilities

    1.5%

    Basic Materials

    0.3%

    Industrial

    0.3%

    Energy

    0.3%

    Total Convertible Preferred Stocks

    16.8%

       

    Convertible Bonds

     

    Financial

    19.9%

    Consumer Cyclical

    14.8%

    Communications

    12.9%

    Technology

    12.3%

    Consumer Non Cyclical

    11.1%

    Industrial

    9.1%

    Utilities

    1.6%

    Energy

    1.2%

    Diversified

    0.4%

    Basic Materials

    0.3%

    Total Convertible Bonds

    83.6%

       

    Corporate Bonds

     

    Consumer Non Cyclical

    8.7%

    Financial

    7.4%

    Industrial

    6.7%

    Energy

    6.4%

    Basic Materials

    5.5%

    Communications

    5.3%

    Consumer Cyclical

    4.9%

    Technology

    1.0%

    Diversified

    0.4%

    Total Corporate Bonds

    46.3%

       

    Senior Floating Rate Interests

     

    Consumer Non Cyclical

    0.6%

    Basic Materials

    0.6%

    Total Senior Floating Rate

    1.3%

       

    Short Term Investments

    4.0%

     

     

    Most of AGC’s exposure is in issuers with low investment grade or high junk ratings. The Credit Quality of the portfolio as of 11/30/2015 is as follows:

     

    Credit Quality

     

    A

    2.22%

    BBB/Baa

    11.47%

    BB/Ba

    17.44%

    B

    19.06%

    Below B

    2.83%

    Not Rated

    46.98%

     

     

    The specific securities owned by the fund can be found on pages 14 to 28 of its annual report which can be downloaded from this website.

     

    http://guggenheiminvestments.com/GuggenheimInvestments/media/cefdoclib/gf/CEF-AGC-AR-1015.pdf?ext=.pdf

     

     

    The fund’s holdings are concentrated in mostly securities issued by mid cap and large cap issuers. The top 10 issuer holdings of the fund are:

     

     

    Shares or Face

    Value

    % of Portfolio

    Frontier Communications Corp.

       

    5.4%

    11.13% Convertible Preferred due 06/29/18

    103,554

    10,265,308

    4.5%

    11.00% Bond due 09/15/25

    1,860,000

    1,954,153

    0.9%

           

    Allergan plc

       

    3.0%

    5.50% Convertible Preferred due 03/01/18

    6,446

    6,746,577

    3.0%

           

    Element Financial Corp.

       

    2.5%

    4.25% Convertible Bond due 06/30/20

    3,960,000 CAD

    3,178,048

    1.4%

    5.13% Convertible Bond due 06/30/19

    2,696,000 CAD

    2,400,611

    1.1%

           

    Alcatel Lucent

       

    2.4%

    0.00% Convertible Bond due 01/30/19

    849,000 EUR

    4,441,648

    2.0%

    4.25% Convertible Bond due 07/01/18

    210,000 EUR

    1,076,139

    0.5%

           

    Wells Fargo & Co.

       

    2.4%

    7.50% Convertible Preferred

    4,519

    5,373,091

    2.4%

           

    Fiat Chrysler Automobiles N.V.

       

    2.0%

    7.88% Convertible Bond due 12/15/16

    27,500

    3,568,124

    1.6%

    5.25% Bond due 04/15/23

    942,000

    942,000

    0.4%

           

    Sony Corp.

       

    2.0%

    0.00% Convertible Bond due 09/30/22

    505,000,000 JPY

    4,505,976

    2.0%

           

    Telecom Italia Finance S.A.

       

    1.9%

    6.13% due 11/15/16

    2,400,000 EUR

    4,211,368

    1.9%

           

    Priceline Group, Inc.

       

    1.9%

    0.35% Convertible Bond due 06/15/20

    2,443,000

    3,175,900

    1.4%

    0.90% Convertible Bond due 09/15/21

    1,014,000

    1,078,643

    0.5%

           

    Ctrip.com International Ltd.

       

    1.8%

    1.25% Convertible Bond due 10/15/18

    3,140,000

    4,170,312

    1.8%

     

     

     

    The fund’s energy exposure is concentrated in high quality low leverage e&p companies (WLL, CLR, CNX, NBL, SWN, MRO, MUR, HES, XEC, OXY) as well as refining companies (TSO, WNR.) The total energy exposure of 8.4% of NAV is quite manageable. The fund’s 7.4% exposure to basic materials companies is also a manageable level.  

     

    Going through the fund’s holdings nothing is particularly exotic which would justify the high discount that the fund is trading at.

     

     

    Negatives/Risks

    AGC has a relatively high fee burden. In Fiscal 2015, the fund paid a 1.71% management fee, other operating expenses of 0.32% and interest of 1.17% of equity. The management fee is 1% of "managed assets" not net assets.

     

     

    AGC has $170 million in margin loans and reverse repurchase agreements. This embedded leverage could force the fund to liquidate securities in the event of a September 2008 like collapse in corporate credit prices.

     

     

    At some point, AGC is likely to cut its distribution rate as the fund generates net investment income (interest + dividends minus fund expenses) of around $0.201/share while paying out an annual distribution of $0.564/share. It is possible that the retail shareholders of the fund will sell positions when the distribution is cut.

     

    I do not hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise do not hold a material investment in the issuer's securities.

    Catalyst

    The fund's discount to net asset value should narrow as credit markets stabilize. If the fund's discount widens further shareholders can push for the fund to liquidate.

    Messages


    SubjectRe: Question
    Entry01/17/2016 11:51 PM
    Memberjcoviedo

    Thanks for your comments.

    Performance is not materially different than other mutual funds using the similar strategies. On a 5 year basis, AGC's NAV has returned -1.17% vs. the category average as defined by morningstar of -0.21%. On a 3 year basis AGC NAV has returned -0.07% vs. the category average of -0.65%. In the last 12 months, AGC's NAV has returned -8.90% vs. the category average of -9.37%. Its probably important to remember that the high yield and convertible bond markets completely imploded in 2008. I'm not going to argue that the investment manager is any good, but I don't think they are any better or worse than other mutual fund managers.

    While AGC's returns are representative of other funds in its category, its discount is substantially larger than other closed end convertible/high yield bond mutual funds at this time. For example, Pioneer High Income Trust (PHT) trades at a 2.1% discount to its NAV, and Credit Suisse High Yield Bond Fund (DHY) trades at a 9.6% discount, and Blackrock Corporate High Yield (HYT) trades at a 9.9% discount. Each of these funds employ a similar amount of leverage and have similar management fee structures. Since closed end funds have the burden of the fees paid to their investment managers they should trade at a discount to NAV reflecting the present value of future fee payments less any value the market might ascribe to the skill of the investment manager.

    One can hedge an investment in AGC either by buying the fund and shorting out all of its holdings or more simplistically buying AGC and shorting other convertible/high yield closed end funds that trade at larger discounts to net asset value. JNK/HYG also would be logical hedges since ETFs by design shouldn't trade at large discounts to their net asset value. Closed end funds have a structural advantage in that they are permanent pools of capital and therefore don't have redemptions.  

    Its important to remember that the NAV is marked to market daily. With the average high yield bond having fallen by about 15% in price over the last 6 months to around 85% to 90% of par. AGC's portfolio looks to have an average price of around 90% of par at present -- we only know the portfolio as of 10/31 so this is something of an educated guess. By buying AGC at a 19% discount to its net asset value, we are effectively buying this diversified portfolio of bonds at around 75% of par. A diversified portfolio of bonds trading at 75% of par requires an assumption of around a 35% default rate and 30% recovery rate to make sense. I find it very hard to beleive that such a scenario will occur given what AGC owns. If you are worried about a complete collapse in the credit markets like 2008, then hedging AGC with other closed end funds or ETFs would make a lot of sense.

    I believe that for the first time in years, high yield/convertibles are attractive after the steep sell off of the last 6 months -- JNK down 14% HYG down 12% in that time period. When high yield and other credit markets stabilize I wouldn't be surprised to see high yield spreads (currently over 750bps levels last seen in 2011 after the U.S. debt downgrade and before that late 2009) tighten by 200 bps and for AGC's discount to NAV to narrow to 5 to 10%. In such an event, AGC's NAV should appreciate by 15 to 20% (not including the 4% net income yield of the current portfolio) and its share price should appreciate by about 30%.

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