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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