DSU - DSU: Revisiting A Fully Covered 8.5% Dividend From A BlackRock CEF

Summary

• BlackRock Debt Strategies Fund is a fixed-income CEF.
• The fund focuses on leveraged loans, which compose over 80% of the collateral.
• The CEF has a fully covered 8.5% dividend yield and is down only -4% on a one-year lookback.
• The fund is currently trading at a -8% discount to NAV.

Thesis

The BlackRock Debt Strategies Fund (DSU) is a leveraged loan closed-end fund from the BlackRock family. The fund has a fully covered 8.5% dividend yield, and is down only -4% on a one-year lookback. When compared to its leveraged loan CEF peers, DSU is in the middle of the cohort, both on a short term and long term basis. The fund has benefited from its collateral being floating rate, with the credit spread widening being offset by the increasing levels in SOFR/LIBOR. If the markets are correct, higher rates are still to come. DSU is well set-up to take advantage of floating rates via its collateral and middle of the road credit risk composition.

Good leveraged loan funds have held up quite well in the past year, and are an appropriate vehicle to generate yield in today's environment. DSU is not overly risky, with an average 30% leverage ratio, and a collateral composition which is overweight single 'B' credits. We are on Hold for this name at this juncture.

Holdings

The fund holds leveraged loans, with a small sleeve for high yield bonds:

We can see that over 80% of the collateral is composed of leverage loans, with a small 13% sleeve for high yield bonds. There are some investment grade bonds as well in the holdings, but the allocation is extremely small.

Most of the credits are single 'B' names:

The fund has a middle of the road allocation profile, not taking any excessive risk here.

Performance

The fund is in the middle of the cohort from a performance standpoint in the past year:

We are looking at total returns here, meaning that dividends are included in the total return figures. We can see [[VVR]] as a clear outperformer, a fund where we have a Buy rating. DSU comes in second, with the widening in credit spreads and higher rates offset by the floating rate aspect of the underlying collateral.

Longer term the fund does an equally good job at delivering decent returns:

When looking on a 5-year time frame we can see the CEF again in the middle of the cohort from a returns perspective. To note however that the fund did outperform its peers during certain historical periods.

Distribution

The fund currently sports an 8.5% dividend yield which is fully supported by the underlying assets cash-flows:

We like CEFs which fully cover their distributions because they are well run and well managed funds which use leverage wisely. A fully covered distribution means that the NAV will have stability in the future, rather than decline due to overdistributions.

Premium/Discount to NAV

The fund tends to trade at a discount to NAV, and we have seen it revert to its historic -12% level in 2022:

There are small ranges for the discount here, but do not expect the CEF to move back to being flat to NAV anytime soon.

Conclusion

DSU is a leveraged loan CEF from the Blackrock family of funds. The vehicle has an average composition, being overweight single 'B' credits and exposing a 30% leverage ratio. The fund is down only marginally in the past year, namely -4%. The vehicle compares favorably with a cohort of peers, displaying a mid-cohort result. Although it trades at a -8% discount to NAV, do not expect that to narrow very soon. The fund has historically traded below net asset value, at levels wider than the current discount. With a fully covered 8.5% dividend yield, the vehicle passes on to shareholders the entire cash flows the underlying collateral currently generates. With the markets now pricing rates higher for longer, expect this dividend yield to persist for the next year. DSU is a solid, robust fund that compares favorably with peers in the leveraged loan CEF space. Given the recent run-up in risk across both equity and credit, we are on the prudent side here, so we will assign the CEF a Hold rating for now.

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