Source Capital: Navigating Discounts and Private Credit Opportunities

Source Capital, a closed-end investment company managed by First Pacific Advisors, LP, recently provided an update on its Discount Management Program and private credit investments, as well as announcing a Q4 webcast. The Fund's shares are listed on the New York Stock Exchange under the symbol "SOR," and its investment objective is to seek maximum total return for shareholders from both capital appreciation and investment income, while protecting invested capital.

Discount Management Program Evolution

The Fund's Discount Management Program has evolved over time, with changes in the average discount to net asset value (NAV) and the extension of the program's measurement period. In 2022, the Fund traded at an average discount to NAV of less than 10%, with a discount of 4.0% at the end of the year, one of its lowest discounts in the past 10 years. As a result, the tender offer for calendar year 2022 did not occur. Similarly, in 2023, the Fund traded at an average discount to NAV of less than 10%, leading to no tender offer for calendar year 2023. In 2024, the Fund traded at an average discount to NAV of less than 1%, its smallest discount since 2008, which also resulted in no tender offer for calendar year 2024.

The Board of Directors extended the Program through the year ending December 31, 2024, with a contingent tender offer for calendar year 2024. The Board further extended the Program through the year ending December 31, 2025, with a contingent tender offer for calendar year 2025. If the shares trade at an average discount to NAV of more than 10% during the measurement period from January 1, 2025, through December 31, 2025, the Fund will conduct a tender offer for 10% of the Fund's outstanding shares of common stock at a price equal to 98% of NAV per share.

Private Credit Investments

The Fund has been increasing its allocation to private credit investments, with approximately 15.5% of NAV invested in private credit as of January 14, 2025, and combined invested and committed capital totaling approximately 23.4% of NAV. This growing allocation aligns with the Fund's investment objective, as private credit offers attractive yields, lower loss rates, and diversification opportunities.

Private credit has grown significantly in recent years, with the size of the market estimated to reach $2.3 trillion by 2027. This growth is driven by factors such as the retrenchment of banks from leveraged lending and the expansion of private equity. Additionally, private credit offers investors the opportunity to create highly customized portfolios of strategies, blending risk-adjusted returns across various private-credit strategies.

Stock Repurchase Program

The Fund's strategy of repurchasing stock at accretive prices can have a positive impact on its discount to NAV and provide long-term benefits for shareholders. By repurchasing shares, the outstanding share count decreases, which can increase earnings per share (EPS) for the remaining shares and make them more valuable. This can lead to a smaller discount to NAV, as the market recognizes the increased value of each share. Additionally, repurchasing shares at accretive prices can lead to an increase in the Fund's NAV, as the repurchased shares are removed from the market and the Fund's assets remain unchanged or even increase.

Potential long-term benefits for shareholders include increased shareholder value, higher dividend payments, improved liquidity, and potential tax benefits. For example, in the press release from January 2, 2024, the Fund announced that it would continue to implement its Stock Repurchase Program to repurchase stock at prices that are accretive to shareholders.

Q4 Webcast

The Fund will host an investor call on February 25, 2025, at 1pm PST. Details of the call and how to submit questions will be posted at fpa.com. This webcast provides an opportunity for investors to learn more about the Fund's recent performance, strategies, and future prospects.

In conclusion, Source Capital's Discount Management Program has evolved over time, with changes in the average discount to NAV and the extension of the program's measurement period. The Fund's increasing allocation to private credit investments aligns with its investment objective, and its strategy of repurchasing stock at accretive prices can have a positive impact on its discount to NAV and provide long-term benefits for shareholders. The Fund's Q4 webcast offers investors an opportunity to learn more about the Fund's recent performance and future prospects.