Recent Volatility for BDCs

 

Readers may have noticed the recent volatility in pricing for business development companies (“BDCs”). Please see “BDC Market Update: October 9, 2018” that briefly discussed current yield spreads, sector oversold/overbought measures, and recently improved BDC fundamentals including higher portfolio yields, improved net interest margins, improvements in underlying general economic fundamentals including unemployment rate, labor force participation, consumer consumption and corporate earnings.

However, I am expecting temporarily lower BDC prices for the reasons discussed in the update including the widening of rate spreads and general market volatility driving ‘flight to safety’.

As mentioned in 14.5% Yielding ETN: Time To Buy Or Take Profits?:

“The UBS ETRACS Business Development Company ETN (BDCS) and UBS ETRACS 2X Leveraged Business Development Company ETN (BDCL) are exchange traded notes that continue to under-perform the average BDC for a few reasons but mostly related to index allocations and “tracking fees.”

BDCL has declined by over 12% since the article as shown below:

However, BDC pricing has been pulling back and likely for the reasons discussed in the update linked above.

It should be noted that many of the BDCs that I consider to be ‘higher quality’ have outperformed the others during this pullback including TriplePoint Venture Growth (TPVG) discussed last month in “Stable 11% Yield With Pre-IPO VC Tech Exposure For Higher Returns“.

Many of the BDCs that I have warned investors about have been under-performing such as Oaktree Specialty Lending (OCSL) in “High-Yield BDC Sector Return And Expense Ratios” that discussed why the company was overpriced, THL Credit (TCRD) in “13.2% Yield At Risk Of Upcoming Dividend Cut” and FS Investment Corp. (FSIC) discussed last week in “Why I Sold This 11.1% Yielding BDC“.

Q3 2018 BDC Reporting

Obviously, timing is important when investing, but especially with BDCs for many reasons, including opaque reporting standards, general sector volatility, and being largely retailed owned. The opaque and inconsistent reporting for BDCs often results in retail investors making poor decisions. Focusing on simple coverage of the dividend with the previous quarter net investment income (“NII”) or changes in net asset value (“NAV”) are not enough.

BDCs will begin reporting calendar Q3 2018 results later this month. Please sign up for Premium Report to receive real-time notifications of changes in risk profile and dividend coverage potential for each company as they report results.

 

TSLX Article Follow-Up:

 

 

As shown in the following chart, TSLX’s stock price rebounded after my public article “Another Big Win Driving Special Dividends And 9% To 10% Yield” that discussed my reasons for purchasing shares at $17.46, after the March 2018 ex-dividend and as the Relative Strength Index or RSI dipped near 30.

There has been plenty of ‘good news’ for TSLX shareholders since my previous article (and personal purchase of additional shares) which is likely responsible for the rise continued stock price and out-performance compared to the other BDCs.

 

PSEC: Improved Dividend Coverage With Increased Risk

Summary

  • The following is a quick update that was previously provided to subscribers of Premium Reports on August  28, 2018.
  • The good news is that I have upgraded PSEC and increased its ST target price. However, portfolio mix and credit quality continue to decline.
  • As predicted, there were large markdowns in Pacific World and InterDent offset by larger markups in the riskier portions of the portfolio including “real estate, CLO, consumer finance”.
  • During calendar Q2 2018, PSEC’s NAV per share increased by $0.12 primarily due to over ever-earning the dividend by $0.04 and continued markups in NPRC and First Tower. NPRC is marked $312 million over cost.
  • Dividend coverage improved mostly due to the expected increase in yields from its CLOs related to the resets/refinancings, driving higher net interest margins. Also, CLOs now account for almost 17% of the portfolio.
  • Non-accruals increased to 5.4% of the portfolio cost (2.5% at FV) mostly due to adding a portion of Pacific World which needs to be watched along with InterDent as these account for $1.00 or 11% of NAV per share.

The following is a quick update that was previously provided to subscribers of Premium Reports on August  28, 2018. For target prices, dividend coverage and risk profile rankings, credit issues, earnings/dividend projections, quality of management, fee agreements, and my personal positions on all BDCs  (including this one) please see Deep Dive Reports.

For Q2 2018, PSEC reported between my base and best case projections with quarterly NII of $0.219 covering 121% of its monthly dividends for the quarter. There was lower-than-expected net portfolio growth of only $7 million with an expected decline in its portfolio yield from 10.8% to 10.5%. However, there was a meaningful increase in interest income mostly due to higher yields from its CLOs:

As shown in the following table and discussed below, there was an increase in the yields from its collateralized loan obligation (“CLO”) residual interests mostly due to the expected resets/refinancings driving higher net interest margins:

“Since June 30, 2017 through today, one of our structured credit investments [CLOs] has completed a refinancing to reduce liability spreads, and 19 additional structured credit investments have completed multi-year extensions of their reinvestment periods (with most resulting in reduced liability spreads as well as higher asset spread possibilities from longer weighted average life tests). We believe further upside exists in our structured credit portfolio through additional refinancings and reinvestment period extensions, and are actively working on such transactions.”

It should be noted that the rate of defaults for PSEC’s CLO investments continue to increase but are still below the average:

Net asset value (“NAV”) per share increased by 1.3% or $0.12 per share (from $9.23 to $9.35) due to over-earning the dividend by $0.04 and net unrealized gains of almost $41 million. A majority of the markups (over $37 million) during the quarter were related to the riskier portions of the portfolio including “real estate, CLO, consumer finance” offset by expected markdowns in Pacific World Corporation and InterDent, Inc. as discussed later:

“For the June 2018 quarter, our net increase in net assets resulting from operations was $114.3 million, or $0.31 per share, an increase of $0.17 from the March 2018 quarter as a result of an increased NII and a net increase in the fair value of our portfolio, including investments in the real estate, CLO, consumer finance, and other sectors.”

 

As mentioned in the recently updated BDC Risk Profiles report, changes in NAV per share are not always a clear indicator of credit issues because there are many items that impact NAV. Also, it is important to recognize the difference between “realized” and “unrealized” gains and losses. PSEC continues to have net realized losses each year offset by unrealized gains, historically from control investments as shown below:

 

As shown in the following table, control investments on average are marked well above cost compared to the rest of the portfolio:

 

As predicted in the previous report, PSEC had meaningful markdowns in its investments of Pacific World Corporation and InterDent, Inc. during the recent quarter and were among the few control investments were meaningful unrealized losses for the year. However, these investments still account for around $363 million or $1.00 of the current NAV per share.

 

Also predicted, PSEC marked down its Term Loan B with Pacific World Corporation by another $21 million and added it to non-accrual status. However, the revolving credit line and Term A loan are still accruing and contributing to dividend coverage and need to be watched. Previously, PSEC marked down its Term A and B loans to Pacific World and on June 15, 2018, made a $15 million convertible preferred equity investment (marked to zero fair value) in the company which is now considered a “controlled investment”.

“As of June 30, 2018, Prospect’s investment in Pacific World is classified as a control investment. As a result, the valuation methodology for the TLA changed to remove the income method approach and incorporate the waterfall approach. The fair value of our investment in Pacific World decreased to $165,020 as of June 30, 2018, a discount of $63,555 to its amortized cost, compared to a discount of $30,216 to its amortized cost as of June 30, 2017. Our investment in Pacific World declined in value due to a decrease in revenues and profitability, as well as a decrease in comparable company trading multiples.”

It should be noted that PSEC recognized $4.8 million of interest income through June 30, 2018, and on August 1, 2018, purchased from a third party $14 million of “First Lien Senior Secured Term Loan A and Term Loan B Notes issued by InterDent, Inc.” at par.

“Following our assumption of assuming control, Prospect exercised its rights and remedies under its loan documents to exercise the shareholder voting rights in respect of the stock of InterDent, Inc. and to appoint a new Board of Directors of InterDent, all the members of which are our Investment Adviser’s professionals. As a result, as of June 30, 2018, Prospect’s investment in InterDent is classified as a control investment.”

As mentioned in the previous report, PSEC recently extended its loans to InterDent which were past due as well as being marked down during the previous quarter “but still marked near cost and likely overvalued”. During calendar Q2 2018, PSEC assumed control of Interdent and marked it down an additional $11 million.

“As of June 30, 2018, Prospect’s investment in InterDent is classified as a control investment. As a result, the valuation methodology changed to remove the income method approach and incorporate the waterfall approach. The fair value of our investment in InterDent decreased to $197,621 as of June 30, 2018, a discount of $15,080 to its amortized cost, compared to a discount of $1,268 to its amortized cost as of June 30, 2017. The decline in fair value was due to lower projected future earnings as a result of customer attrition.”

Non-accruals increased to 5.4% of the portfolio at cost and 2.5% at fair value mostly due to adding a portion of its investment in Pacific World as discussed earlier as well as recent markups in United Sporting Companies, Edmentum Ultimate Holdings and USES Corp. as shown below.

PSEC has portfolio concentration issues including its top 10 investments accounting for around 42% of the portfolio. However, this is an improvement from the recent quarter due to the sale of $180 million of its senior notes with Broder Bros., Co. during the recent quarter but still accounts for 4.7% of the portfolio:

One of my primary concerns is the amount of equity investments that continues to increase accounting for almost 17% of the portfolio:

 

PSEC continues to grow its REIT portfolio, National Property REIT Corp.(“NPRC”), and currently has a fair value of $312 million or 162% over cost basis which has helped to offset previous losses from other portfolio investments.

 

I consider PSEC to have a higher risk portfolio due to the previous rotation into higher yield assets during a period of potentially higher defaults and later stage credit cycle concerns, CLO exposure to 16.8% combined with real-estate 14.2%, online consumer loans of 4.2%, consumer finance of 10.2% and energy, oil & gas exposure of 3.0%. As mentioned in previous reports, S&P Ratings also considers the CLO, real-estate and online lending to be riskier allocations that currently account for over 35% of the portfolio.

 

 

On August 1, 2018, PSEC extended its secured credit facility and slightly reduced the pricing from LIBOR+2.25% to LIBOR+2.20%. However, the company does not typically use its lower cost facility with only $37 million outstanding as of June 30, 2018.

 

 

“On August 1, 2018, we completed an extension of the Revolving Credit Facility (the “New Facility”) for PCF, extending the term 5.7 years from such date and reducing the interest rate on drawn amounts to one-month Libor plus 2.20%. The New Facility, for which $770 million of commitments have been closed to date, includes an accordion feature that allows the Facility, at Prospect’s discretion, to accept up to a total of $1.5 billion of commitments. The New Facility matures on March 27, 2024. It includes a revolving period that extends through March 27, 2022, followed by an additional two-year amortization period, with distributions allowed to Prospect after the completion of the revolving period. Pricing for amounts drawn under the Facility is one-month Libor plus 2.20%, which achieves a 5 basis point reduction in the interest rate from the previous facility rate of Libor plus 2.25%. Additionally, the lenders charge a fee on the unused portion of the credit facility equal to either 50 basis points if more than 60% of the credit facility is drawn, or 100 basis points if more than 35% and an amount less than or equal to 60% of the credit facility is drawn, or 150 basis points if an amount less than or equal to 35% of the credit facility is drawn.”

Other Subsequent Events:

“During the period from July 13, 2018 to July 16, 2018, we made follow-on first lien term loan investments of $105,000 in Town & Country Holdings, Inc., to support acquisitions.”

BDC Market Update: October 9, 2018

Summary

  • BDC fundamentals continue to improve including higher portfolio yields, improved net interest margins, improvements in underlying general economic fundamentals including unemployment rate, labor force participation, consumer consumption and corporate earnings.
  • However, I am expecting temporarily lower BDC prices for the reasons discussed in this update including widening of rate spreads and general market volatility driving ‘flight to safety’.
  • The current yield spread with Corp B is around 3.7% and could go higher, similar to Q1 2018 closer to 4.5%. I will likely be waiting to make BDC purchases.
  • I have recently updated the Deep Dive reports for most of the BDCs considered a ‘Strong Buy’. I suggest reading these reports and being ready to make purchases of BDCs that fit your risk profile.
  • As shown in the BDC Google Sheets, the average RSI for BDC’s is almost 32 implying BDCs are oversold.

Interest Rate Spreads:

Please read Investopedia discussion of net interest rate spreads:

“In simple terms, the net interest spread is like a profit margin. The greater the spread, the more profitable the financial institution is likely to be; the lower the spread, the less profitable the institution is likely to be. While the federal funds rate plays a large role in determining the rate at which an institution lends immediate funds, open market activities ultimately shape the rate spread.”

BDC pricing is often volatile which can be a good thing for investors that know what and when to buy. We are finally starting to experience wider interest rate spreads which drives counter-intuitive pricing for BDCs. Management for most BDCs have been patiently waiting for higher yields on new investments which is often driven by wider interest rate spreads. However, the market is now expecting higher yields from investments such as BDCs during a period when the fundamentals are improving.

We have previously experienced windows of wider spreads and higher quality BDCs typically have much higher portfolio growth during these periods as they take advantage of higher market yields. The counter-intuitive pricing refers to: this is usually the time when investors are discounting pricing for BDC stocks. Higher quality BDCs only invest in lower leveraged companies that are able to support debt payments and have strong covenants to protect shareholders during worst-case scenarios.

Also, there have been continued improvements in the underlying economic fundamentals including unemployment rate, labor force participation, consumer consumption and corporate earnings.

Are BDCs Overbought or Oversold?

I closely watch the yield spreads between BDCs and other investments including the ‘BofA Merrill Lynch US Corporate B Index’ (Corp B). Yield spreads are important to monitor as they can indicate when a basket of investments is overbought or oversold compared to other yield-related investments. However, general market yields can change at any time. Also, spreads change depending on perception of risk and these are only averages that then need to be assigned a range for assessing individual investments/BDCs. BDCs can be volatile and timing is everything for investors that want to get the “biggest bang for their buck” but still have a higher quality portfolio that will deliver consistent returns over the long-term.

As you can see, the average BDC yield is currently trending higher:

 

The following chart uses the information from the previous chart showing the average yield spread between BDCs and Corp B. I consider BDCs oversold when the yield spread approaches 4.5% higher and overbought when it is closer to 2.5%.

The average BDC is currently yielding around 10.2% compared to Corp B closer to 6.5% for a current yield spread of 3.7%. However, there is a chance that this spread could increase over the coming weeks implying lower prices for the average BDC.

 

 

As shown below, the yield spread between junk bonds and safer investment grade corporate bonds is currently lower than previous months but currently headed higher.

“While this spread is historically high, it is low compared to recent history and suggests that investors are pursuing higher risk strategies.”

Improved economic conditions have meant that junk bonds are being perceived as less risky.

 

U.S. Treasury Yields:

As shown below, the 10-year U.S. treasury yield is now above 3.2% and headed higher in pre-market:

The spread between 10 and 2-year treasuries has finally started to increase:

Fear & Greed Index:

The market seems to be headed into ‘fear’ territory:

 

The S&P Volatility Index (“VIX”) futures are headed higher in pre-market:

 

 

GSBD: Q2 2018 Results – Beats Best Case & Reduced Management Fees

Summary

  • For Q2 2018, GSBD beat best case projections covering its dividend by 112% (average coverage of 113% over the last 8 quarters).
  • Its $9 million first-lien position in Kawa Solar Holdings was added to non-accrual and marked down by $0.7 million during Q2 2018 and is the only investment with ‘Rating 4’.
  • Conergy Asia Holdings was also marked down by around $5.3 million in Q2 2018 “due to its capital condition” contributing to the slight decline in NAV per share.
  • On June 15, 2018, shareholders approved the reduced asset coverage ratio of at least 150% potentially allowing a debt-to-equity of 2.00.
  • Management has agreed to reduce its base management fee from 1.50% to 1.00% which would be among the lowest in the sector and I will include in the updated projections.

The following is a quick update that was previously provided to subscribers of Premium Reports on August  2, 2018. For target prices, dividend coverage and risk profile rankings, credit issues, earnings/dividend projections, quality of management, fee agreements, and my personal positions on all BDCs  (including this one) please see Deep Dive Reports.

For Q2 2018, Goldman Sachs BDC (GSBD) beat my best case projections covering its dividend by 112% with a slight decline in portfolio investments and yield (from 11.1% to 10.9%). GSBD has covered its dividend by an average of 113% over the last 8 quarters and is now below its previous target leverage of 0.75. On June 15, 2018, shareholders approved the reduced asset coverage ratio of at least 150% potentially allowing a debt-to-equity of 2.00.

Management has agreed to reduce its base management fee from 1.50% to 1.00% which would be among the lowest in the sector to help offset potentially lower yielding assets and I will include in the updated projections.

Is Senior Credit Fund (“SCF”) return on investment declined to 11% (previously 12%) and the overall size of the SCF portfolio remained mostly stable and continues to be the company’s largest investment at 7.5% of total investments at fair value.

Credit quality remained stable and non-accruals remain low at 0.7% and 0.8% of the portfolio fair value and cost, respectively. Its $9 million first-lien position in Kawa Solar Holdings was added to non-accrual and marked down by $0.7 million during Q2 2018 and is the only investment with a ‘Rating 4’ in the following table:

Conergy Asia Holdings was also marked down by around $5.3 million in Q2 2018 “due to its capital condition” contributing to the slight decline in net asset value (“NAV”) per share from $18.10 to $18.08. However, this investment has now been mostly written off with a current fair value of $0.5 million as shown in the table below.

From 10-Q: “Net change in unrealized appreciation (depreciation) in our investments for the three and six months ended June 30, 2018 was primarily driven by the unrealized depreciation in Conergy Asia Holdings, Ltd. due to its capital condition.”

The portfolio remains heavily invested in first-lien debt including its SCF as shown below:

For target prices, dividend coverage and risk profile rankings, credit issues, earnings/dividend projections, quality of management, fee agreements, and my personal positions on all BDCs  (including this one) please see Deep Dive Reports.

TCPC: This Stable 10.1% Yielding BDC Is A Strong Buy At These Levels

Summary

  • TCPC is a higher quality BDC and is currently trading lower (below book value) for the reasons discussed in this article.
  • There is a very good chance that the stock price for TCPC will rally especially after the company reports Q3 2018 results 5 weeks from now.
  • Lower stock prices will likely drive additional share repurchases limiting downside for investors.

You can read the full article at the following link:

Please read the full article at the link provided above or sign up for Premium Reports that includes updated Deep Dive Reports on each BDC including this one.

I consider to BlackRock TCP Capital (TCPC) to be one of the most undervalued business development companies (“BDCs”) given its history and potential dividend coverage, supported by a higher quality portfolio and management as discussed in this article.

TCPC Article Follow-Up:

As mentioned in “I Recently Purchased This 10% Yielding BDC“:

“I recently purchased additional shares of TCPC at a price of $14.22 before the March 2018 ex-dividend date and have already earned $0.72 per share in dividends (including $0.36 paid tomorrow). The Relative Strength Index or RSI is an indicator that I use after selecting a BDC that I would like to purchase, but waiting for a good entry point. Currently, TCPC has an RSI of 38 as shown below and in my BDC Google Sheets indicating that the stock is becoming ‘oversold’ or ‘undervalued’ as discussed below. However, it should be noted that there are currently quite a few BDCs with RSI’s below 40.”

The following is the chart from the previous TCPC article linked above:

After the article, TCPC’s share price increased closer to $15 as shown below:

However, the stock price has fallen back to $14.25 with an RSI of 38:

What Happened?

As shown above, TCPC reported Q2 2018 results on August 8, 2018, with its net asset value (“NAV”) per share declining by $0.29 per share or 1.9% (from $14.90 to $14.61) due to net unrealized losses of $20.5 million (or $0.35 per share) from:

  • $7.3 million on its investment in Kawa Solar Holdings
  • $4.5 million on its investment in Real Mex
  • $3.3 million on its investment in AGY Holdings
  • $3.0 million on its investment in Green Biologics

It should be noted that the recent NAV decline from was from unrealizedlosses and these investments have been discussed in my previous TCPC articles and on the recent earnings call…….

Please read the full article at the link provided above or sign up for Premium Reports that includes updated Deep Dive Reports on each BDC including this one.

 

CCT: June 2018 Results – Lowered Borrowing Rates

Summary

  • For Q2 2018, CCT hit my base case projections with dividend and fee income of $15 million (compared to projected $11 million) and covered its dividend and repurchased almost 2.5 million shares.
  • FS/KKR Advisor announced a new $3.435 billion credit facility L+1.75% to 2.00% that should add $0.02 per share of quarterly NII for CCT.
  • NAV per share declined by $0.14 or 0.7% (from $19.72 to $19.58) mostly due to the special dividend of $0.10125 per share and of “one-time listing/merger expenses”.
  • Non-accruals have been mostly retail/energy and recently decreased to 1.5% of portfolio FV due to exits/restructuring. ZGallerie, LLC was added to non-accrual status during the quarter.
  • Portfolio credit metrics continue to decline from the previous quarters, including cash flow leverage and coverage ratios,and need to be watched.

 

The following is a quick update that was previously provided to subscribers of Premium Reports on August  9, 2018. For target prices, dividend coverage and risk profile rankings, credit issues, earnings/dividend projections, quality of management, fee agreements, and my personal positions on all BDCs  (including this one) please see Deep Dive Reports.

For the quarter ended June 30, 2018, Corporate Capital Trust (CCT) hit my base case projections with dividend and fee income of $15 million (compared to projected $11 million) and covered its dividend by 100% after excluding $1 million of “one-time listing/merger expenses”. Its portfolio yield increased from 9.6% to 10.5% partially due to increased “annual amortization of the purchase or original issue discount” as calculated by the company. Portfolio growth was lower-than-expected but its debt-to-equity is now 0.74 and closer to its targeted leverage not taking into account almost $90 million in cash.

The board of directors declared a regular quarterly cash distribution in the amount of $0.402 per share, which will be paid on October 9, 2018, to shareholders of record as of September 28, 2018. Previously, the board declared a special cash dividend of $0.10125 per share payable on May 21, 2018, to stockholders of record as of the close of business on May 14, 2018.

On August 9, 2018, FS/KKR Advisor announced the closing of a new $3.435 billion, five-year senior secured omnibus revolving credit facility priced at LIBOR plus an applicable spread of 1.75% or 2.00%, depending on collateral levels. CCT has been allocated $1.45 billion of the new facility that will be used to payoff its current credit facilities at higher rates and improve CCT’s net interest margins over the coming quarters. The company has estimated a total annual saving of $7 million to $8 million or around $0.02 per share per quarter.

As of June 30, 2018, CCT had around $383 million of borrowing capacity plus $90 million cash:

Net asset value (“NAV”) per share declined by $0.14 or 0.7% (from $19.72 to $19.58) mostly due to the previously discussed special dividend of $0.10125 per share and of “one-time listing/merger expenses”. Markdowns for the quarter included the Home Partners of America, Inc,. Z Gallerie, LLC and Hilding Anders as well as restructuring of its investment in Proserv Acquisition, LLC.

Non-accruals decreased from 2.4% to 1.5% of the portfolio fair value due to exiting its investment in Willbros Group and converting its investment in Proserv Acquisition, LLC to equity. Z Gallerie, LLC was added to non-accrual status during the quarter, which is another retail-related investments. Hilding Anders, Rockport (Relay), Petroplex Acidizing, Inc., and AltEn, LLC also remain on non-accrual. It should be noted that most of the previous and current investments on non-accrual are related to exposure to the energy and retail sectors that I have taken into account when assessing its risk ranking and pricing.

Also, CCT’s portfolio credit metrics continue to decline from the previous quarters, including cash flow leverage and coverage ratios, and need to be watched:

CCT has around 39% of its portfolio is first-lien debt and another 31% in second-lien and ‘other senior secured’ debt for a total of almost 70% in senior secured debt.

In May 2016, Strategic Credit Opportunities Partners (“SCJV”), a joint venture with Conway Capital, was formed to invest in middle market companies. As of June 30, 2018, the SCJV accounted for around $307 million or 7.5% of CCT’s total portfolio and paid a dividend of $8.7 million during the quarter (up from $6.8 million the previous quarter). It should be noted that the SCJV had one holding on non-accrual status representing 8.0% and 7.8% of total investments on an amortized cost basis and fair value basis, respectively.

In March 2018, CCT’s board of directors authorized a $50 million stock repurchase program and through June 30, 2018, CCT repurchased 2,467,458 shares for $41.07 million and an average price per share of $16.64 (16% discount to previous NAV of $19.72).

As mentioned in previous posts, the base management fee was reduced from 2.0% to 1.5% of assets and the incentive fee of 20% includes a lookback feature.

TPVG: Stable 11% Yield With Pre-IPO VC Tech Exposure For Higher Returns

Summary

  • TPVG has rallied 13% since my previous article “11.7% Yield Positioned For Rising Rates And Ready To Rally” partially due to the expected earnings beat for Q2.
  • TPVG recently completed an equity offering, and this article discusses some of the pros and cons as well as reasons to purchase the stock depending on pricing.
  • Also predicted, TPVG recently obtained shareholder approval to reduce its asset coverage requirement from 200% to 150%, effective June 22, 2018.
  • This article also discusses the potential impact from rising interest rates and the recent total returns from my previously announced purchases of higher quality BDC stocks, including TPVG.

You can read the full article at the following link:

Please read the full article at the link provided above or sign up for Premium Reports that includes updated Deep Dive Reports on each BDC including this one.

TPVG Article Follow-Up:

This article is a followup to “11.7% Yield Positioned For Rising Rates And Ready To Rally“:

As predicted in the article linked above, the stock price for TriplePoint Venture Growth (TPVG) rallied 13% shortly after the article and the company easily beat analyst expected EPS by $0.10 per share. As mentioned in the previous article, TPVG was expected to easily cover its dividend due to prepayment-related income from its $50 million loan to Ring, Inc. driving an effective yield of 17.2% as shown below.

PFLT: PSSL Growth & Higher Leverage

Summary

  • PFLT reported between my base/best cases covering 98% of its dividend. Portfolio growth was higher-than-expected and there was another increase in portfolio yield driving interest income to its highest level.
  • The portfolio remains predominantly invested in first-lien debt at around 81% portfolio and the PSSL now accounts for 13% (previously 9%) and is 100% invested in first-lien debt.
  • There were no investments on non-accrual as Sunshine Oilsands was exited and responsible for most of the realized losses. NAV per share declined by 1.1% due to various markdowns.
  • I am expecting improved dividend coverage through growth of its PSSL and slowly increasing leverage and eventually utilizing its Board approved reduced asset coverage ratio, effective as of April 5, 2019.

The following is a quick update that was previously provided to subscribers of Premium Reports on August  8, 2018. For target prices, dividend coverage and risk profile rankings, credit issues, earnings/dividend projections, quality of management, fee agreements, and my personal positions on all BDCs  (including this one) please see Deep Dive Reports.

PennantPark Floating Rate Capital (PFLT) reported between my base and best case projections covering 98% of its dividend and was not expected to fully cover due to being underleveraged. However, there was higher-than-expected portfolio growth and an increase in its portfolio yield (as predicted in the previous report) driving interest income to its highest level as shown below and likely adequate dividend coverage over the coming quarters. I am expecting the company to slowly increase its leverage and eventually utilize its Board approved reduced asset coverage ratio, effective as of April 5, 2019.

“Due to the activity level year to date as well as this quarter, the increase in LIBOR and the growth of PSSL, we are pleased that our current run rate net investment income covers our dividend,” said Arthur H. Penn, Chairman and CEO. “Our earnings stream should have a nice tailwind based on a continuation of these factors. Adding people to our platform has resulted in a significantly enhanced deal flow which puts us in a position to be both more active and selective.”

Please note that ‘Core NII’ excludes “$1.0 million on unrealized gains accrued but not payable”.

Also, there was previously around $0.45 per share of spillover to cover dividend shortfalls:

“We have significant spillover income that we can use as cushion to protect our dividend while we ramp the portfolio. As of September 30, our spillover was $0.45 per share.

There was another increase in its overall portfolio yield (from 8.6% to 8.7%).

As discussed in my previous reports, PFLT’s portfolio yield has started to increase partially due to additional returns from the PennantPark Senior Secured Loan Fund (“PSSL”) and I am expecting higher portfolio yield and dividend coverage in the upcoming quarters. In May 2018, the company doubled the capacity of the PSSL to a total of $630 million.

“As of June 30, 2018, PSSL’s portfolio totaled $346.9 million, consisted of 38 companies with an average investment size of $9.1 million and had a weighted average yield on debt investments of 7.7%. For the three months ended June 30, 2018, PSSL invested $142.7 million (of which $27.1 million was purchased from the Company) in 10 new and three existing portfolio companies with a weighted average yield on debt investments of 7.4%. PSSL’s sales and repayments of investments for the three months ended June 30, 2018 totaled $16.1 million.”

As of June 30, 2018, there were no investments on non-accrual status as Sunshine Oilsands Ltd. (previously on non-accrual) was exited and primarily responsible for realized losses of around $1.8 million during the quarter. Net asset value (“NAV”) per share decreased by 1.1% (from $13.98 to $13.82) due to markdowns in various investments including LifeCare Holdings, Quick Weight Loss Centers, Affinion Group Holdings, Chicken Soup for the Soul Publishing, and GCOM as well as restructuring its investment in New Trident HoldCorp, Inc.

The portfolio remains predominantly invested in first-lien debt at around 81% portfolio and the PSSL now accounts for 13% compared to 9% the previous quarter. It is important to note that PSSL is 100% invested in first-lien debt.

SUNS: Fee Waivers & Shareholder Vote To Increase Leverage

Summary

  • For the quarter ended June 30, 2018, SUNS hit my base case projections covering its dividend thanks to continued fee waivers which have increased over the last two quarters.
  • The Board approved a reduction in the minimum asset coverage ratio to 150% effective as of August 2, 2019, unless approved earlier by shareholders at its 2018 Annual Meeting.
  • NAV remained stable, portfolio growth was higher-than-expected increasing leverage to 0.69 and portfolio yield increased mostly due to North Mill Capital.
  • Its first-lien investment in PPT Management Holdings, was added to non-accrual status with a cost of $7.8 million and fair value of $7.1 million (1.5% of the portfolio FV).

 

 

The following is a quick update that was previously provided to subscribers of Premium Reports on August 6, 2018. For target prices, dividend coverage and risk profile rankings, credit issues, earnings/dividend projections, quality of management, fee agreements, and my personal positions on all BDCs  (including this one) please see Deep Dive Reports.

For the quarter ended June 30, 2018, Solar Senior Capital (SUNS) hit my base case projections covering its dividend thanks to continued fee waivers which increased from $0.308 million to $0.437 million as shown in the following table. The portfolio yield increased mostly due to North Mill Capital (“NMC”) that now accounts for 13% of the total portfolio and its weighted average yield increased from 12.9% to 13.3%. Portfolio growth was higher-than-expected and its debt-to-equity increased to 0.69 mostly due to new investments in its first-lien portion of the portfolio.

“We are pleased with Solar Senior Capital’s portfolio growth and operating performance in Q2 2018. Overall, the financial health of our portfolio companies remains sound,” said Michael Gross, Chairman and CEO of Solar Senior Capital Ltd. “Solar Senior’s comprehensive portfolio is predominantly comprised of first lien senior secured loans with floating rate coupons. We believe the Company is well positioned for the current environment and has the sourcing engines across cash flow and asset-based lending niches to drive additional portfolio growth and generate increased investment income.”

 

On August 2, 2018, the Board approved a reduction in the minimum asset coverage ratio from 200% to 150% effective as of August 2, 2019, unless approved earlier by the shareholders at its 2018 Annual Meeting. On June 1, 2018, its revolving credit facility was refinanced by way of amendment, allowing for an asset coverage ratio of 150%. On July 13, 2018, the credit facility was expanded by $25 million to $225 million. The company will target a range of 1.25x to 1.50x debt-to-equity, operating at a substantial cushion to the regulatory limit. Once the 150% coverage ratio becomes effective, the Company expects to use a modest amount of incremental leverage to continue to invest in its current mix of investments, including senior secured first lien cash flow and senior secured first lien specialty finance asset-based loans.

“Solar Senior Capital’s investment strategy is conducive to operating under the modified asset coverage ratio,” said Michael Gross, Chairman and CEO of Solar Senior Capital. “We believe that the senior secured first lien middle market loan asset class—Solar Senior Capital’s investment focus since inception—can prudently be levered above the previous BDC limits. We view this change as a significant opportunity to generate a greater return on equity for Solar Senior Capital.”

“The increased leverage flexibility will enable us to grow our senior secured first lien asset-based lending businesses and build and/or acquire other commercial finance platforms. We will finance the First Lien Loan Program’s loans directly on balance sheet, which will increase efficiencies and create new investment capacity for non-qualifying assets that, among other things, enables us to expand our specialty finance verticals,” said Bruce Spohler, Chief Operating Officer of Solar Senior Capital. “In summary, the asset coverage modification will enable us to do more of what we’ve been doing: investing in first lien, senior secured cash flow and asset-based loans.”

Its first-lien investment in PPT Management Holdings, LLC was added to non-accrual status during the quarter with a cost of $7.8 million and fair value of $7.1 million (1.5% of the portfolio FV). During the previous quarter, its first-lien investment in Metamorph US 3, LLC was added to non-accrual but was recently exited and responsible for most of the realized losses. However, its net asset value (“NAV”) per share has remained stable over the last two quarters due to markups including North Mill Capital and Gemino. The exit of Metamorph resulted in a decrease of investments with ‘rating 4’ as shown below:

 

As mentioned in previous reports, there is the potential for an upgrade as the company integrates and grows its recent acquisition/investment in North Mill Capital (“NMC”) as well as ramping its Solar Life Science Program LLC(“LSJV”) and First Lien Loan Program (“FLLP”) providing continued higher returns and overall portfolio yield growth. However, the company remains reliant on fee waivers to cover its dividend and as of June 30, 2018, the LSJV has not commenced operations.

 

 

NorthMill LLC

NorthMill currently manages a highly diverse portfolio of directly-originated and underwritten senior-secured commitments. As of June 30, 2018, the portfolio totaled approximately $322,813 of commitments, of which $162,983 were funded, on total assets of $188,189. At June 30, 2018, the portfolio consisted of 91 issuers with an average balance of approximately $1,791 versus 92 issuers with an average balance of approximately $1,600 at December 31, 2017. NMC has a senior credit facility with a bank lending group for $160,000 which expires on October 20, 2020. Borrowings are secured by substantially all of NMC’s assets. For the three months ended June 30, 2018, NMC had net income of $591 on gross income of $5,361. For the six months ended June 30, 2018, NMC had net income of $1,531 on gross income of $10,253.

Solar Life Science Lending

On February 22, 2017, Solar Senior Capital and its affiliates announced the formation of the Solar Life Science Program LLC (“LSJV”). LSJV is expected to invest the majority of its assets in first lien loans to publicly-traded companies in the U.S. life science industry. Solar Senior Capital has committed $75 million of equity to the joint venture. The joint venture has established a pipeline of investment opportunities to effectuate the ramping of LSJV’s investment portfolio. As of June 30, 2018, LSJV has not commenced operations.

Gemino Healthcare Finance LLC

As of June 30, 2018, the portfolio totaled approximately $173,588 of commitments, of which $111,334 were funded, on total assets of $106,357. At June 30, 2018, the portfolio consisted of 29 issuers with an average balance of approximately $3,839 versus 29 issuers with an average balance of approximately $3,677 at December 31, 2017. All of the commitments in Gemino’s portfolio are floating-rate, senior-secured, cash-pay loans. Gemino’s credit facility, which is non-recourse to us, had approximately $73,000 and $75,000 of borrowings outstanding at June 30, 2018 and December 31, 2017, respectively. For the three months ended June 30, 2018 and 2017, Gemino had net income of $668 and $655, respectively, on gross income of $2,745 and $2,760, respectively. For the six months ended June 30, 2018 and 2017, Gemino had net income of $1,380 and $1,423, respectively, on gross income of $5,464 and $5,611, respectively.

First Lien Loan Program LLC

As of June 30, 2018 and December 31, 2017, FLLP had total assets of $106,312 and $121,791, respectively. For the same periods, FLLP’s portfolio consisted of first lien floating rate senior secured loans to 19 and 23 different borrowers, respectively. For the three months ended June 30, 2018, FLLP invested $2,685 across 3 portfolio companies. For the three months ended June 30, 2017, FLLP invested $3,744 across 6 portfolio companies. Investments sold or prepaid totaled $19,870 for the three months ended June 30, 2018 and $8,626 for the three months ended June 30, 2017. At June 30, 2018 and December 31, 2017, the weighted average yield of FLLP’s portfolio was 7.4% and 7.3%, respectively, measured at fair value and 7.5% and 7.2%, respectively, measured at cost.

 

 

GAIN: Initiating Coverage of Potentially Oversold Best Of Breed BDC

Summary

  • Earlier this year, I initiated active coverage of GAIN (8.2% yield) and its preferred stocks GAINM (6.2% yield) and now its newly issued GAINL (6.3% yield).
  • GAIN continues to focus on equity participation primarily responsible for growing its NAV per share and “recurring non-recurring” dividend income, that contribute to the growing amount of undistributed NII.
  • Monthly dividends are mostly supported by interest and fee income from debt investments while semiannual dividends are generally supported by capital gains and dividend income from equity investments.
  • As of today, GAIN is likely “oversold”, and I have recently purchased shares of GAINL for many reasons, including some discussed in this article.

You can read the full article at the following link:

Gladstone Investment

Earlier this year, I initiated active coverage of Gladstone Investment (GAIN) and its preferred stocks (GAINM) and the recently issued (NASDAQ:GAINL). As shown below, GAIN continues to outperform the S&P 500, UBS ETRACS Business Development Company ETN (NYSEARCA:BDCS) and UBS ETRACS 2X Leveraged Business Development Company ETN (NYSEARCA:BDCL). However, as mentioned in “14.5% Yielding ETN: Time To Buy Or Take Profits?” BDCL and BDCS should not be used as a longer-term investment for the BDC sector as they continually underperform the sector even after including distributions.

Please see the end of the is article for reasons to buy GAIN, including recently approached “oversold” conditions.

Reasons to Purchase GAIN

GAIN continues to focus on equity participation which is primarily responsible for growing its NAV per share and “recurring non-recurring” dividend income that contribute to the growing amount of undistributed spillover income used to support continued semiannual dividends. Currently, around 11% of GAIN’s distributions for 2018 are considered capital gains and will likely have favorable tax treatment.

GAIN will likely earn at least $0.20 per share each quarter covering 101% of its monthly dividend driven by its an annual hurdle rate of 7% on equity before paying incentive fees to management.

The company recently reduced its borrowing rates and is positioning the balance sheet to support higher leverage and hopefully returns to shareholders.

However, given the recent increase in non-accruals, I will likely be waiting until after the company reports calendar Q3 2018 earnings (est. November 1, 2018) before making additional purchases.

GAIN’s relative strength index (“RSI”) has dipped under 30 today (currently 27) indicating potentially oversold conditions and historically a buying point as shown in the following chart: