Upcoming BDC Ex-Dividend Dates: June 15, 2021

The following information was previously provided to subscribers of Premium BDC Reports along with target prices, dividend coverage and risk profile rankings, earnings/dividend projections, quality of management, fee agreements, and my personal positions for all Business Development Companies (“BDCs”).


Recent & Upcoming Ex-Dividend Dates

  • TPVG, MRCC, NMFC,  and TCPC all have ex-dividend dates of June 15, 2021, which means that their prices will be around 2% lower (shown below) at the open of the markets this morning and could be a buying opportunity.
  • AINV, PFLT, PNNT, GAIN, and GLAD also have ex-dividend dates this week.
  • Please keep in mind tax considerations (income versus capital gains) and it might be a good idea to wait until the morning of the ex-dividend date to make additional purchases.

BDC Ex-Dividend Dates

 


Full BDC Reports

This information was previously made available to subscribers of Premium BDC Reports. BDCs trade within a wide range of multiples driving higher and lower yields mostly related to portfolio credit quality and dividend coverage potential (not necessarily historical coverage). This means investors need to do their due diligence before buying.

MAIN Quick Update: Upcoming Realized Gain

The following information was previously provided to subscribers of Premium BDC Reports along with:

  • MAIN target prices/buying points
  • MAIN risk profile, potential credit issues, and overall rankings
  • MAIN dividend coverage projections and worst-case scenarios


As mentioned earlier this week in the “Updated BDC Dividend Coverage Levels”, most dividend coverage measures for BDCs use net investment income (“NII”) which is basically a measure of earnings. However, some BDCs achieve incremental returns typically with equity investments that are sold for realized gains often used to pay supplemental/special dividends. These BDCs include MAIN, GAIN, CSWC, PNNT, TPVG, HTGC, and TSLX.

Yesterday, MAIN announced that it recently exited its equity investment in American Trailer Rental Group (“ATRG”) which is a leading provider of trailer rental solutions to manufacturing, distribution, and third-party logistics (3PL) customers. MAIN realized a gain of $17.0 million on the exit of its equity investment in ATRG, with this realized value representing an increase of $7.8 million above MAIN’s fair market value for this investment as of March 31, 2021:

On a cumulative basis since Main Street’s initial investment in ATRG in June 2017, Main Street realized an internal rate of return of 60.9% and a 3.0 times money invested return on its equity investments in ATRG. On a cumulative basis including both Main Street’s debt and equity investments, Main Street realized an annual internal rate of return of 28.1% and a 1.7 times money invested return on its aggregate debt and equity investments in ATRG.

There will be around $0.25 per share of realized gains as well as a slight increase in NAV per share of around 0.5% related to the exit of ATRG. Management was expecting distributable net investment income of $0.59 to $0.62 per share for Q2 2021 compared to the regular dividends of $0.615 so this should be considered good news. However, the market did not respond to the news, and MAIN’s stock was down slightly (by 0.4%) yesterday likely due to the previous net realized losses that need to be taken into account including $15.7 million during Q1 2021. Also, the company does not typically does not announce exits that include losses so we need to wait and see the full quarter results. I will be updating the MAIN Projections & Pricing report later this month taking into account all changes to portfolio credit quality and expected dividend coverage which should continue to improve as discussed in the MAIN Q1 2021 Quick Update from last month as well as management on the recent call:

Based upon our results for the first quarter and the positive developments we have seen in our existing portfolio companies, coupled with the future benefits of our growing asset management business, the attractive new investment opportunities we are seeing in our lower middle market and private loan strategies, our efficient operating structure and strong liquidity position, we remain confident with our expectations for continued improvement in our DNII per share in 2021 and our expectation to resume consistently generating DNII in excess of our monthly dividends later this year, followed by the eventual growth of our monthly dividends, consistent with our long-term historical practices prior to the onset of the pandemic.”


Full BDC Reports

This information was previously made available to subscribers of Premium BDC Reports. BDCs trade within a wide range of multiples driving higher and lower yields mostly related to portfolio credit quality and dividend coverage potential (not necessarily historical coverage). This means investors need to do their due diligence before buying.

 

HTGC Distribution Update: Continued Supplementals

The following information was previously provided to subscribers of Premium BDC Reports along with:

  • HTGC target prices/buying points
  • HTGC risk profile, potential credit issues, and overall rankings
  • HTGC dividend coverage projections and worst-case scenarios


HTGC Distribution Update

As predicted in previous updates, HTGC declared additional supplemental cash distributions during 2021 due to the “record level of spillover at $0.94” and “the trajectory of the business for the course of 2021”. HTGC will be distributing $0.28 per share (more than I was expecting) evenly over the next four quarters starting with $0.07 per share for the first quarter of 2021 paid in May 2021.

“I would also like to discuss our supplemental shareholder distribution Program for fiscal year 2021. In addition to our ninth consecutive quarterly cash distribution of $0.32 per share, we are also declaring a supplemental distribution of $0.28 per share for fiscal 2021, which will be distributed equally at $0.07 per quarter for the next four quarters, beginning with the first quarter distribution payable in May 2021. One of our goals was to establish a policy for 2021 that provided a little bit more clarity and continuity to our shareholders with respect to that base distribution. We thought that the $0.28 was an appropriate number given two things. Number one, we are still sitting on a record level of spillover at $0.94. And number two, our competence in the trajectory of the business for the course of 2021. And based on those two things, we thought that it was more appropriate for us to declare the $0.28 give our shareholders sort of consistency and comfort that it would be $0.07 per quarter versus what we’ve done for the last two years, which is in six of the eight quarters declares a supplemental distributions on a quarterly basis. This just provides a little bit more visibility and a little bit more clarity to our shareholders, which we think is an important thing to do. As of Q1, 2021, we have generated undistributed earnings spillover of approximately $109.1 million or $0.94 cents per share, subject to final tax filings. This provides us with additional flexibility with respect to our variable base distribution going forward, and the ability to continue to invest in our team and platform.”


HTGC remains a higher dividend coverage BDC with the potential for supplemental dividends partially due to its internally-managed cost structure and equity investments historically providing realized gains and supporting supplemental dividends:

“Our warrant and equity portfolio is designed to provide potential upside returns to our shareholders above and beyond our net investment income, as well as mitigate potential debt losses that may occur. As of Q4 2020, we have generated undistributed earnings spillover of approximately $107.7 million or $0.94 per share, subject to final tax filings. This provides us with additional flexibility with respect to our variable base distribution going forward and the ability to continue to invest in our team and platform.”

HTGC maintains a “variable distribution policy” with the objective of distributing four quarterly distributions in an amount that approximates 90% to 100% of the company’s taxable quarterly income or potential annual income. In addition, the company pays additional supplemental distributions to distribute approximately all its annual taxable income in the year it was earned, or it can elect to maintain the option to spill over the excess taxable income into the coming year for future distribution payments.

“We have a variable dividend policy, so it’s something that the Board evaluates on a quarterly basis, and we don’t just look short-term, we look long-term when we’re making those decisions. We’ve been very clear in terms of our public guidance on the last several calls that we see absolutely no risk to that $0.32 base distribution, and we would reiterate that guidance on this call now. If you think about what we’ve been able to do in terms of the special distributions, we’ve been able to deliver to our shareholders a supplemental or a special distribution in six of the last seven quarters on top of the $0.32 base distribution. And obviously, subject to market conditions, I think one of the things that we’re going to look at near-term here is trying to find a way to provide a little bit more consistency and continuity to those supplemental distributions. “


Hercules Adviser LLC Update

On March 25, 2021, HTGC announced that Hercules Adviser LLC, a wholly-owned subsidiary of HTGC, had successfully closed its inaugural institutional private credit fund.

Scott Bluestein, CEO and CIO of HTGC: “We are very pleased to announce that Hercules Adviser has successfully raised and closed its first institutional private credit fund. This new private credit fund will allow us to continue to expand and broaden our investment platform while at the same time serving the growing needs of the venture and growth stage companies that we seek to partner with.”

Management has mentioned that this will allow the company to “expand and broaden” its investment platform allowing HTGC to access to “a lot of deals that we’re now able to do at the BDC level”. However, as the fund ramps up it will likely be “taking some investments away” over the short-term and sharing expenses reducing HTGC’s operating costs as well as eventually paying distributions to HTGC as “100% of the benefit from the RIA activities accrues and accretes to the shareholders of the public BDC”.

“After establishing Hercules Advisor as a wholly own registered investment advisor in 2020, we are very pleased to have raised and closed our first institutional private credit fund. Having this first fund and potentially future funds gives us the opportunity to expand and diversify our investment platform while enhancing our level of service and capabilities to our current and future venture growth stage companies. While we anticipate that it will take time to ramp up our activities under our RIA, we do expect that over the short term, Hercules Capital will benefit from being able to share certain expenses with Hercules Advisor and having a more diverse platform for the funding of new investments. Longer term and subject to the ultimate performance and size of the funds managed by Hercules Advisor, we expect Hercules Capital to potentially benefit from distributions from the advisor as that business ramps up.”

“On an initial basis as it ramps up potentially taking some investments away with the two caveats that we mentioned before. Number one, there are a lot of deals that we’re now able to do at the BDC level that we probably could not otherwise have done. If we didn’t have the private vehicle to be investing alongside us. And then no two, this is not an externally managed private fund. This is a private fund that’s managed by a wholly owned RIA. So 100% of the benefit from the RIA activities accrues and accretes to the shareholders of the public BDC. During Q1 we successfully closed our first private fund, and as a result, we allocated a portion of certain commitments and fundings to the initial private fund. This also allowed us to allocate certain expenses to Hercules Advisor, our RIA managing the private fund during the quarter.”


HTGC March 31, 2021, Results

Hercules Capital (HTGC) reported just above its base case projections for Q1 2021 not fully covering its dividend (as expected). However, the company had around $0.94 of undistributed income for temporary shortfalls and has covered its dividend by an average of 110% over the last 8 quarters supporting the previously announced supplemental dividends. Also, as mentioned in the previous report, there were higher expenses related to payroll tax in Q1:

“SG&A expenses increased to $17.6 million from $16 million in the prior quarter. The increase was driven by higher compensation expenses related to the increase in fundings and first quarter payroll taxes which normally run higher in the first quarter. Net of truck costs recharged to the RIA, the SG&A expenses were $16.7 million. For the second quarter, we expect SG&A expenses of $16 million to $17 million slightly below the prior quarter, as Q1 always has higher employer payroll taxes. We expect our second quarter borrowing costs to decrease modestly.”

The effective yield was 13.2% during Q1 2021, down slightly compared to 13.3% for Q4 2020 due to lower early loan repayments (discussed next). Effective yields generally include the effects of fees and income accelerations attributed to early loan repayments and other one-time events. HTGC’s ‘Core Yield’ decreased from 11.8% to 11.6% and over 98% of its debt portfolio is now at its contractual interest rate floor.

“The decline in both total investment income and net investment income was consistent with our guidance, and due to the lower debt portfolio balance attributable to the record Q4 payoffs, and lower fee income as a result of a lower level of prepayments during the first quarter. Core yield, a non-GAAP measure, was 11.6% during Q1 2021, within the Company’s expected range of 11.0% to 12.0%, and decreased slightly compared to 11.8% in Q4 2020. Hercules defines core yield as yields that generally exclude any benefit from income related to early repayments attributed to the acceleration of unamortized income and prepayment fees and includes income from expired commitments. During Q1, we continue to see strength in terms of portfolio company exits, and portfolio company liquidity events. This combined with continued very strong performance across our portfolio, again drove high levels of early pay-offs. Early loan repayments were at the high end of our guidance of $150 million to $200 million at over $191 million, but decreased from $282 million in Q4.”

HTGC ended Q1 2021 with $550 million of available liquidity, including $75 million in unrestricted cash and cash equivalents, and $475 million in available credit facilities. HTGC had pending commitments of $153 million as of April 27, 2021, and since the close of Q1 2021, the company has closed new debt and equity commitments of $135 million and funded $25 million.

“For Q2, we again expect prepayments to be between $150 million and $200 million, although this could change materially as we progress in the quarter.”

In March 2021, the company issued an additional $50 million 4.50% Notes due March 2026 and $50 million 4.55% Notes due March 2026.

“Our leverage includes the March issuance of $50 million five-year notes in a private placement with a fixed coupon of 4.55%. This was the second tranche of the arrangement announced in November 2020, totaling up $100 million in private placement financing.

In October 2020, the company announced that it had received approval for its third SBA license. It should be noted that this was quicker than expected and will provide an additional $175 million of fixed-rate borrowings at very attractive 10-year rates.

“In addition, we have started to utilize our third SBA license drawing down $37.5 million of debentures and has attractive annual interest rate of 0.77%.”


During Q1 2021, the company did not issue additional shares through its At-the-Market (“ATM”) Equity Distribution Agreement. HTGC continues to target a regulatory debt-to-equity ratio between 0.95 to 1.25 and will likely use the ATM program to maintain leverage while growing the portfolio. As of March 31, 2021, approximately 16.2 million shares remain available for issuance and sale

“Moving on to discuss leverage. Our GAAP and regulatory leverage was 94.6% and 89.2%, respectively, which decreased compared to the prior quarter due to the partial repayment of the two securitizations, which are now in runoff. Netting out leverage with the cash on the balance sheet, our GAAP and regulatory leverage was 88.9% and 83.5% respectively, putting us in a very strong position heading into the next quarter.”


Full BDC Reports

This information was previously made available to subscribers of Premium BDC Reports. BDCs trade within a wide range of multiples driving higher and lower yields mostly related to portfolio credit quality and dividend coverage potential (not necessarily historical coverage). This means investors need to do their due diligence before buying.

GSBD Update: Potential July Pullback

The following information was previously provided to subscribers of Premium BDC Reports along with:

  • GSBD target prices/buying points
  • GSBD risk profile, potential credit issues, and overall rankings
  • GSBD dividend coverage projections and worst-case scenarios

This update discusses Goldman Sachs BDC (GSBD) and was previously posted on our new platform with updated target prices, dividend projections, rankings, and recommendations:

 


GSBD will likely experience additional selling pressure during the first and second week of July 2021 potentially driving the stock price closer to its ST target of $18.50 and I will send out reminders before the last lock-up expires.

“….upon the closing of the Merger that generally restricted all stockholders who received shares of our common stock in the Merger from transferring their respective shares of our common stock for at least 90 days following the date of the closing of the Merger (the “Closing Date”), subject to a modified lock-up schedule thereafter (lock-up restrictions on 1/3 of the Affected Stockholders’ shares will lapse after 90 days from the Closing Date, lock-up restrictions on an additional 1/3 of the Affected Stockholders’ shares will lapse after 180 days from the Closing Date, and lock-up restrictions on the remaining 1/3 of the Affected Stockholders’ shares will lapse after 270 days from the Closing Date).


GSBD Dividend Coverage Update

For Q1 2021, GSBD reported slightly above its base-case projections due to higher-than-expected dividend and other income partially offset by lower portfolio growth driving slightly lower interest income. However, leverage (debt-to-equity) declined to a new near-term low giving the company plenty of growth capital for increased earnings potential. GSBD has covered its dividend by an average of 105% over the last 8 quarters growing spillover/undistributed income. Previously, GSAM announced that it will waive a portion of its incentive fee for the four quarters of 2021 (Q1 2021 through and including Q4 2021) for each such quarter in an amount sufficient to ensure that GSBD’s net investment income per weighted average share outstanding for such quarter is at least $0.48 per share.

“The increase quarter-over-quarter was primarily due to the timing of the merger at close in Q4 as well as increased income from GSBD’s historic origination activity during Q4. On a per share basis, GAAP and adjusted net investment income were $0.57 and $0.48 per weighted average share, respectively, as compared to $0.59 and $0.48, respectively, in the fourth quarter of 2020. The per share decrease is the result of an increase in post-merger weighted average shares outstanding.”


Similar to other BDCs, GSBD has been lowering its borrowing rates as well as constructing a flexible balance sheet including the public offering of $500 million of 2.875% unsecured notes due 2026 (CUSIP: 38147UAD9) in November 2020. Previously, the company issued $360 million of unsecured notes due 2025 at 3.750% (CUSIP: 38147UAC1). As of March 31, 2021, 63% of its borrowings were unsecured with $1.1 billion of availability under its credit facility. Fitch’s reaffirmed GSBD’s investment grade rating of BBB- and revised the outlook to stable.

“At quarter end, 63% of the company’s outstanding borrowings were unsecured debt and $1.1 billion of capacity was available under GSBD’s secured revolving credit facility. Given the current debt position and available capacity, we continue to feel we have ample capacity to fund new investment opportunities with borrowings under our credit facility.”

On October 12, 2020, GSBD completed its merger with Goldman Sachs Middle Market Lending (“MMLC”) which doubled the size of the company including significant deleveraging. This deleveraging creates more capacity to deploy capital into today’s attractive investment environment while adding a greater margin of safety to maintain GSBD’s investment-grade credit rating and comply with regulatory and contractual leverage ratio requirements.

The Board reaffirmed its regular dividend of $0.45 per share payable to shareholders of record as of June 30, 2021. Previously, the company paid a special dividend of $0.05 per share in May 2021 which is the second of its three quarterly installments of special dividends aggregating to $0.15 per share in connection with the merger.


Full BDC Reports

This information was previously made available to subscribers of Premium BDC Reports. BDCs trade within a wide range of multiples driving higher and lower yields mostly related to portfolio credit quality and dividend coverage potential (not necessarily historical coverage). This means investors need to do their due diligence before buying.

SUNS Quick Dividend Coverage Update

The following information was previously provided to subscribers of Premium BDC Reports along with:

  • SUNS target prices/buying points
  • SUNS risk profile, potential credit issues, and overall rankings
  • SUNS dividend coverage projections and worst-case scenarios

This update discusses SLR Senior Investment (SUNS) and was previously posted on our new platform with updated target prices, dividend projections, rankings, and recommendations:

 


For Q1 2021, SUNS did not fully cover its dividends due to no fee waivers for the quarter combined with being under-leveraged. However, management has guided for portfolio growth given its extremely low leverage with a current debt-to-equity of 0.43 (0.40 net of cash) which is currently the lowest in the BDC sector. Also, management continues to mention the possibility of additional acquisitions:

“The shortfall for the $0.30 per share earned in the prior quarter is a direct result of SUNS being under-invested. At March 31, SUNS significantly under levered at 0.4x net debt to equity relative to our target range of 1.25x to 1.50x. Importantly, the economic climate has improved considerably, and our pipeline across all 4 business verticals is very attractive. We expect portfolio growth in the coming quarters from both first link cash flow and asset-based loan investment opportunities. In addition, we continue to actively pursue acquisition opportunities of specialty lenders operating in niche markets as well as opportunistic ABL portfolio acquisitions.”

 


Full BDC Reports

This information was previously made available to subscribers of Premium BDC Reports. BDCs trade within a wide range of multiples driving higher and lower yields mostly related to portfolio credit quality and dividend coverage potential (not necessarily historical coverage). This means investors need to do their due diligence before buying.

BDC Leverage Versus Portfolio Mix & Dividend Coverage

The following information was previously provided to subscribers of Premium BDC Reports along with target prices, dividend coverage and risk profile rankings, earnings/dividend projections, quality of management, fee agreements, and my personal positions for all Business Development Companies (“BDCs”).


Each quarter I assess BDC risk rankings that takes into account portfolio credit quality and vintage, quality of management, effective leverage ratios, portfolio mix and diversification, rate sensitivity, historical credit, and NAV performance, and the need to reach for yield to sustain dividends.

Typically BDCs with higher portfolio credit quality can use higher amounts of leverage partially offsetting the lower yields (from safer investments). There is a large difference between a BDC with a higher debt-to-equity ratio and mostly first-lien assets as compared to investments that might be subordinated to other debt or use off-balance-sheet leverage for higher returns. Effective leverage takes this into account.



The following table is an oversimplified view of portfolio investments. BDCs use similar terminology but would likely refer to the “Senior” as “first-lien” and the “Stretch” as “second-lien.” However, many contributors on Seeking Alpha lump first and second-lien together and call it senior because the detail is often hard to find for BDCs as there are very few standardized reporting requirements. It is also important to note that many of the higher-risk BDCs will originate with lower protective covenants and/or security in exchange for higher yields, so not all first-lien is the same. “Mezzanine” is typically referred to as “subordinated debt”. BDCs with higher amounts of first-lien loans and/or lower debt-to-equity ratios have much lower effective leverage.


BDC Leverage Versus Portfolio Mix & Dividend Coverage Update

The following table shows each BDC ranked by its simple (not effective) debt-to-equity ratio net of cash (non-restricted) along with its portfolio mix. The “Other” column includes everything that is not first or second-lien secured debt. A few items to note:

  • AINV and CSWC have not reported March 31, 2021, results and will be updated later this month.
  • PTMNFSKFCRDPSEC, and OXSQ have higher risk portfolios that require lower leverage and I have separated from the others. These companies are discussed below.
  • PNNT previously sold a large amount of first-lien loans to the PSLF as well as markups of some of its equity investments which had a meaningful impact on its portfolio mix. Also, there have been meaningful markups in its equity positions that can fluctuate in value.
  • ARCC and ORCC invest in larger middle market companies that would likely outperform in an extended recession environment. A good portion of ARCC’s ‘Other’ investments is its SDLP.
  • MAINCSWCGAIN, and FDUS prefer to have a lower portion of their portfolio invested in equity positions of their portfolio companies providing them with realized gains and dividend income to support supplemental dividends.
  • NMFC also has higher ‘Other’ investments that include the SLPs and Net Lease program.
  • SUNS has the lowest leverage and the ‘Other’ investments are mostly its equity positions in SLR Business Credit and SLR Healthcare ABL.
  • TPVG likely has the lowest effective leverage due to 91% secured debt combined with lower leverage.

Many of the BDCs with lower leverage also have lower dividend coverage over the last four quarters including SUNS, GAIN, GBDC, MAIN, ORCC, and PFLT. Dividend coverage should improve over the coming quarter especially ORCC that has been actively growing the portfolio each quarter as discussed earlier this month in “ORCC Quick Update: Q1 2021”. It also should be noted that almost every BDC has decreased leverage (not ORCC) over the last few quarters partially due to NAV increases but also due to conservative management carefully selecting new investments as the economy recovers. PNNT had the largest decrease in leverage from a debt-to-equity (net of cash) of 1.71 to the current 0.87.

I am expecting improved dividend coverage for most BDCs as leverage increases as well as higher amounts of first-lien positions (to support higher leverage). So far this year there have been 9 BDCs that have increased dividends and/or announced supplemental dividends.

I do not cover most of the higher-risk BDCs for many reasons but mostly because these are not typically buy-and-hold investments. PTMN, FSK, FCRD, PSEC, and OXSQ have higher risk portfolios due to higher amounts of non-secured debt, joint ventures, senior loan programs, CLOs, and/or equity positions that all carry much higher external leverage. Typically these assets do not qualify for lower cost BDC credit lines and revolvers which is why many of these BDCs have higher cost unsecured notes as well as using less leverage to maintain credit ratings.

PSEC is an excellent example and management often mentions their “conservative leverage” but this is likely due to the quality of assets. PSEC has huge concentration risks with its top four investments accounting for 39% of the portfolio or over 62% of NAV per share as they have been marked up well over cost likely using aggressive valuation methods. If one or two of these investments had serious issues it would have a large impact on its debt-to-equity ratio. Also, 13% of its portfolio is invested in CLOs that typically have around 10 times leverage on top of their equity positions.


Full BDC Reports

This information was previously made available to subscribers of Premium BDC Reports. BDCs trade within a wide range of multiples driving higher and lower yields mostly related to portfolio credit quality and dividend coverage potential (not necessarily historical coverage). This means investors need to do their due diligence before buying.

CGBD Recent Pullback, Updated Projections & Pricing

The following information was previously provided to subscribers of Premium BDC Reports along with:

  • CGBD target prices/buying points
  • CGBD risk profile, potential credit issues, and overall rankings
  • CGBD dividend coverage projections and worst-case scenarios

This update discusses TCG BDC (CGBD) and was previously posted on our new platform with updated target prices, dividend projections, rankings, and recommendations:


Summary

  • We have recently updated the dividend coverage projections and target pricing to take into account March 31, 2021, reported results as well as guidance provided by management on the recent earnings call.
  • Included in the projections are the expected upcoming supplemental dividends.
  • CGBD is currently one of the highest-yielding BDCs even compared to higher-risk companies such as PSEC, AINV, MRCC, and FSK.
  • As shown below there was a recent pullback in the stock price on May 25, 2021, with increased trading volumes (around five times the average daily volume).
  • Non-accruals remain around 3.3% of the portfolio but I am expecting improvements for Direct Travel and Derm Growth which account for a majority.
  • PIK increased during Q1 2021 (now 5.2% of total income) and needs to be watched.

Recent CGBD Pullback

As discussed last week, there was a recent pullback in CGBD’s stock price on May 25, 2021, with increased trading volumes (around five times the average daily volume). The pullback was likely just a selling shareholder followed by profit-taking maybe fear-driven due to the spike in volume.

The recent drop is responsible for CGBD currently having one of the lowest RSIs and highest yields in the sector.


CGBD Distributions Quick Update

On May 4, 2021, the company announced a regular quarterly common dividend of $0.32 plus a supplemental dividend of $0.04, which are payable on July 15, 2021, to common stockholders of record on June 30, 2021. It should be noted that this was slightly below my base projected supplemental of $0.05.

On previous calls, management has mentioned “paying out a majority of the excess income above the $0.32 and we would anticipate doing the same going forward”:

“We generated net investment income of $0.36 per common share and declared a total dividend of $0.36. This includes the base dividend of $0.32 and a $0.04 supplemental dividend. As we have noted before, we expect earnings to continue to be well in excess of our $0.32 base dividend.”

“Similar to last quarter, as we look forward to the rest of 2021, we remain very confident in our ability to comfortably deliver the $0.32 regular dividend, but continue the sizable supplemental dividends. In line with the $0.04 to $0.05 we have been paying the last few quarters.”

Previous reports predicted a reduction in the regular quarterly dividend (from $0.37 to $0.32 per share) due to lower income from its Credit Fund I, declines in portfolio yield and interest income primarily due to the decrease in LIBOR and additional loans placed on non-accrual as well as the need to reduce leverage.


Upcoming CGBD Share Repurchases

On November 2, 2020, the Board authorized an extension as well as the expansion of its $150 million stock repurchase program at prices below NAV per share through November 5, 2021. The company previously repurchased around $86 million worth of shares but “paused” in Q2 2020. CGBD has reduced its debt-to-equity ratio increasing liquidity and management “intends to pursue the appropriate balance of both share repurchases and attractive new investment opportunities”. During Q1 2021, the company repurchased 0.5 million common shares at an average price of $12.03 per share, or $5.6 million, resulting in accretion to net assets per share of $0.03. As of March 31, 2021, there was $47.6 million remaining under the stock repurchase program. Management discussed on the recent call including less share repurchases as the stock price continues higher and I have taken into account with the updated projections:

“Additionally, we repurchased almost $6 million of our common stock at an average discount of 22% of our net asset value. This resulted in $0.03 of accretion to net asset value. We continue to be consistent active repurchasers of our shares. We continue to be consistent re-purchasers of it, but we will obviously scale those who purchases based on how accretive they are overall, and that will fluctuate as our as our stock price fluctuates. So, it shouldn’t be a surprise that we purchased a bit less this quarter. Repurchasing our shares was a bit less accretive this quarter than it had been in prior quarters. But nevertheless, again we continue to see great value in our shares. So, you should continue to see repurchases at least in the near future. And we have just as a side note, we have plenty of room and plenty of time left on our repurchase authorization that the Board gives us each year.”

 


Full BDC Reports

This information was previously made available to subscribers of Premium BDC Reports. BDCs trade within a wide range of multiples driving higher and lower yields mostly related to portfolio credit quality and dividend coverage potential (not necessarily historical coverage). This means investors need to do their due diligence before buying.

CSWC Q1 2021: Another Dividend Increase (As Predicted)

The following information was previously provided to subscribers of Premium BDC Reports along with:

  • CSWC target prices/buying points
  • CSWC risk profile, potential credit issues, and overall rankings
  • CSWC dividend coverage projections and worst-case scenarios

Summary

  • CSWC will likely continue to increase its regular dividend and pay supplementals as predicted in previous reports.
  • I have increased the LT target to take into account additional/continued quarterly increases in addition to the $0.10 supplemental, improved credit quality, and NAV increases.
  • The stock is likely overpriced at these levels and I will not be making changes to this position until after updating the CSWC Projections & Pricing report.
  • My primary concern is the recent increase in non-cash PIK income during the quarter from $1.6 million to $2.8 million which could include some one-time items. AGKings was exited and there are no non-accruals.
  • NAV increased by 1.7% mostly due to accretive share issuances through its ATM program.

CSWC Dividend Coverage Update

As mentioned in the previous projections “there is a good chance of dividend increases over the coming quarters”.

CSWC’s Board declared a total dividend of $0.53 per share for the quarter ended June 30, 2021, including the increased regular quarterly dividend of $0.43 per share (previously $0.42) and a supplemental dividend of $0.10 per share.

“Based on our continued strong performance, the Board of Directors has increased our total dividends to $0.53 per share for the quarter ending June 30, 2021 by increasing our Regular Dividend to $0.43 per share and maintaining our Supplemental Dividend at $0.10 per share.”

  • Ex-Dividend Date: June 14, 2021
  • Record Date: June 15, 2021
  • Payment Date: June 30, 2021

CSWC’s target pricing and dividend yield in the BDC Google Sheets already takes into account $0.10 per share of quarterly supplemental/special distributions that will likely continue beyond 2021. Similar to MAIN, the supplemental dividends are typically covered by realized capital gains and over-earning the regular dividend. As of March 31, 2021, CSWC had $0.92 per share of undistributed taxable income. Management is likely going to maintain its supplemental dividends going forward as they need to distribute UTI over the coming quarters.

For calendar Q1 2021, CSWC beat its base case projections due to higher-than-expected portfolio growth and lower employee expenses partially offset by lower dividend income from its I-45 Senior Loan Fund as well as lower fee and other income. However, total interest income continues to increase to highest level (over $15 million as predicted) which should improve dividend coverage as the company leverages its internal operating cost structure driving continued dividend increases.

“For the quarter ended March 31, 2021, Capital Southwest reported total investment income of $17.2 million, compared to $19.0 million in the prior quarter. The decrease in total investment income was primarily attributable to prepayment fees and a one-time dividend received in the prior quarter, partially offset by an increase in average debt investments outstanding.”

The company remains below its upper targeted leverage (1.20) with a debt-to-equity ratio (net of available cash) of 1.05. On April 20, 2021, the company received approval to form a new SBIC subsidiary with access to an additional $175 million of low-cost capital excluded from certain BDC lending ratios.


My primary concern is the recent increase in non-cash payment-in-kind (“PIK”) income during the quarter from $1.6 million to $2.8 million which could include some one-time items. The company has not released the updated 10-K filing with necessary details and this may be discussed on the upcoming earnings call. I will include a full update in the CSWC Projections & Pricing report.


As of March 31, 2021, CSWC had almost $32 million in unrestricted cash and almost $217 million in available borrowings under its credit facility for upcoming portfolio growth. Previously, management was targeting a debt-to-equity ratio between 1.00 and 1.20 but will likely use higher amounts of leverage over the coming quarters due to improved portfolio mix (safer investments) and access to SBA leverage:

“From an economic leverage perspective, we really have targeted between 1.20 and 1.30, even getting the SBA money when that does happen, we don’t plan on levering up economic leverage beyond there. We probably will show up with 1.00 to 1.15 on regulatory leverage and stick to 1.20 to 1.30 on our total economic leverage.”

Dividend coverage will likely improve due to reduced borrowing expenses including the recent issuance of $65 million of notes at 4.00% and the redemption of its 5.95% Baby Bond “CSWCL” and continued portfolio growth. As mentioned later, there was slightl negative imact to its NAV per share due to writing off the unamortized debt issuance costs during the quarter:

“On January 21, 2021, the Company redeemed the remaining $37,136,175 in aggregate principal amount of issued and outstanding December 2022 Notes. Accordingly, during the three months ended March 31, 2021, the Company recognized realized losses on the extinguishment of debt of $0.5 million, equal to the write-off of the related unamortized debt issuance costs during the quarter ended March 31, 2021.

In March 2019, CSWC established its equity “At-The-Market” (“ATM”) program of slowly issuing small amounts of shares at a premium to book value/NAV and accretive to shareholders. As CSWC’s stock price continues higher, management will likely use the ATM program for raising equity capital, rather than larger equity offerings. This approach is beneficial for many reasons including being more efficient, delivering higher net proceeds to the company, and less disruptive to market pricing.

During Q1 2021, the company sold 1,137,476 shares at a weighted-average price of $21.21 per share (35% premium to previous NAV per share), raising $23.6 million of net proceeds through its “At-The-Market” (“ATM”) equity program.

In February 2021, the company issued an additional $65 million of its January 2026 Notes at a price of 102.11% resulting in a yield-to-maturity of approximately 4.0%.

Its I-45 Senior Loan Fund accounts for around 8% (previously 10%) of the total portfolio and is a joint venture with MAIN created in September 2015. The portfolio is 95% invested in first-lien assets with CSWC receiving over 75% of the profits providing 10.2% annualized yield (previously 10.6%) paying a quarterly dividend of $1.5 million (previously $1.7 million).


CSWC Quick Risk Profile Update

There was an improvement in overall credit quality mostly due to exiting its only non-accrual investment in AG Kings Holdings that was purchased by Albertsons as discussed in previous reports driving a slight realized loss for the quarter:

Similar to other BDCs, my primary concern is the 9.2% (previously 12.5% in calendar Q1 2020) of the portfolio considered ‘Investment Rating 3’ which implies that the “investment may be out of compliance with financial covenants and interest payments may be impaired, however, principal payments are generally not past due.”

Investment Rating 3 involves an investment performing below underwriting expectations and the trends and risk factors are generally neutral to negative. The portfolio company or investment may be out of compliance with financial covenants and interest payments may be impaired, however principal payments are generally not past due.

For calendar Q1 2021, CSWC’s NAV per share increased by $0.27 or 1.7% (from $15.74 to $16.01) mostly due to the previously discussed shares issued at a 35% premium to NAV adding around $0.27 per share. The company overearned the regular dividend and there was portfolio appreciation but mostly offset by the supplemental dividend of $0.10 per share and the early redemption of CSWCL. Again, CSWC has not released its updated 10-K SEC filing with details to properly assess changes to NAV.


Full BDC Reports

This information was previously made available to subscribers of Premium BDC Reports. BDCs trade within a wide range of multiples driving higher and lower yields mostly related to portfolio credit quality and dividend coverage potential (not necessarily historical coverage). This means investors need to do their due diligence before buying.

ORCC Update: Q2 2021 Improvements Coming

The following information was previously provided to subscribers of Premium BDC Reports along with:

  • ORCC target prices/buying points
  • ORCC risk profile, potential credit issues, and overall rankings
  • ORCC dividend coverage projections and worst-case scenarios

Summary

  • ORCC is slowly increasing leverage to fully cover the dividend later this year. Management provided guidance for a much stronger Q2 2021 taken into account with the updated projections.
  • There will likely be a meaningful increase in income related to prepayment fees, accelerated OID, a full quarter of benefit from Q1 investments, increased leverage, and portfolio growth.
  • These repayments will likely be mostly offset by new investments including the recently announced $2.3 billion loan to finance Thoma Bravo’s acquisition of online trading services provider Calypso Technology.
  • ORCC is for risk-averse investors as the portfolio is mostly larger middle market companies that would likely outperform an extended recession environment. Credit quality remains solid with no new non-accruals that remain at 0.2% of fair value.
  • As discussed in previous reports/updates there has been some technical selling pressure related to Regents that continued through April/May 2021.

This update discusses Owl Rock Capital Corporation (ORCC) which remains one of the best-priced BDCs especially for lower-risk investors that do not mind lower yields.

ORCC is for risk-averse investors as the portfolio is mostly larger middle market companies that would likely outperform in an extended recession environment. Also, the company has relatively low leverage with ample growth capital available for increased earnings over the coming quarters.

ORCC is the third-largest publicly traded BDC (much larger than MAIN, PSEC, GBDC, GSBD, NMFC, and AINV) with investments in 120 portfolio companies valued at over $11 billion that are mostly first-lien secured debt positions. ORCC is one of the few BDCs rated by all of the major credit agencies.



ORCC 10% Owner Sales

As discussed in previous reports/updates and the public article “Technical Pressure Driving 12% Yield For Owl Rock” (from July 2020), the Regents of the University of California (ORCC’s largest shareholder) was previously selling its pre-IPO shares each time the stock was above ~$12.50 but had not sold shares since September 2020. However, there have been additional sales and could be the start of another round of selling. I would suggest holding off on purchases for now. There is a chance that the stock could dip below $14.00 (again) and I will update subscribers on additional sales and provide updates as needed.



ORCC Dividend Coverage Update

ORCC remains a ‘Level 2’ dividend coverage BDC implying that the regular quarterly dividend is stable. The company was not expected to fully cover its Q1 2021 dividend and was discussed on the previous call:

“We continue to make good progress toward earning our dividend and are on track to achieve our target leverage by the second half of 2021. We expect to continue to pay our regular dividend of $0.31 per share and would anticipate returning a modest amount of capital in the interim. ”

ORCC’s longer-term (“LT”) target price takes into account improved dividend over the coming quarters mostly due to:

  • Increased use of leverage to grow the overall portfolio
  • Prepayments fees and accelerate OID
  • Higher portfolio yield from rotating into higher yield assets
  • Continued lower cost of borrowings

ORCC remains underleveraged and is targeting a debt-to-equity ratio up to 1.25 (currently 0.93 net of cash) giving the company plenty of growth capital.

“Thinking ahead to the rest of this year, we expect interest income to continue to increase each quarter over the coming quarters, as we modestly increase our leverage within our target range. We’ve made steady progress to get to the low end of our targeted range of 0.90 to 1.00 in a quarter and expect to modestly increase our leverage within that range in the coming quarters.”

“As we expected first quarter NII was temporarily down. Our originations were largely first lien investments, which once again were weighted toward the end of the quarter and as a result, the net one penny per share of growth in NII is not reflective of the full benefit of Q1 originations. In addition, dividend income was lower this quarter, which also impacted NII by approximately one penny per share. However, we expect that we will make meaningful progress in the second quarter towards earning our dividends. We believe we are still on track to fully cover our dividend from NII in the second half of the year. We don’t typically provide forward guidance, but I can say that sitting here today as we are expecting a very active second quarter and originations in excess of the first quarter and more in line with the fourth quarter.”

Management is expecting a much stronger Q2 2021 partially due to higher prepayment-related income which has been taken into account with the updated financial projections and was discussed on the recent earnings call:

“So we only had about $250 million of actual repayments. And we expect that number to go up materially in the second quarter. That obviously is very impactful for earnings. Because as we get through repayments, we are able to recognize the OID that remains on those investments and oftentimes, pre-payment penalties. So we’re calling attention to that because it generates earnings. For the second quarter, we also have visibility on increased pre-payments, which will generate additional fees from accelerated OID and call protection. Based on the net effect of the pipeline borrowing something unexpected, we believe we will continue to modestly increase our leverage level as well as improve earnings in second quarter. As a result, we expect Q2 earnings to grow and then make solid progress towards covering our $0.31 per share dividend, which we ultimately expect to occur in the second half of this year. We do expect repayments to pick up later this year based on the continued seasoning of our portfolio. I would also note that we had some higher yielding repayments early on in the quarter.”

These repayments will likely be mostly offset by new investments including the recently announced $2.3 billion loan to finance Thoma Bravo’s acquisition of online trading services provider Calypso Technology:

“We are pleased that we continue to be successful in winning the deals that we want to win. In names in situations where we have high conviction around the asset and the sponsor are able to demonstrate the value of our platform and often take a sole or lead position in these deals. As a great example of this, it was recently announced that Owl Rock is leading the $2.3 billion unitranche loan to finance Thoma Bravo’s acquisition of Calypso, which is expected to close later this year. We believe this will be the largest unitranche facility ever we done in the U.S. and is a reflection of our ability to provide attractive sizeable financing commitments for top tier investment opportunities. It also highlights our expertise in the software space. Calypso reflects the continued growth of the private credit space as increasingly larger borrowers are choosing direct lending solutions over the syndicated market. Given our large capital base, Owl Rock is very well positioned for this trend. We’re very excited about the continued growth of the platform and the sourcing opportunities that we expect to generate as a result of the Blue Owl transaction closing. We look forward to discussing the Blue Owl platform in more detail in the quarters to come.”

Similar to other BDCs, ORCC has been improving or at least maintaining its net interest margin which is the difference between the yield on investments in the portfolio and the rate of borrowings. During the most recently reported quarter, ORCC maintained its portfolio yield but is expecting “modestly higher” in Q2 2021:

“The visibility we have on second quarter, I would expect spreads to be a bit wider than we’d gotten the first quarter. But I think we’re continuing to find investments that have a spread consistent with today’s weighted average spread in our portfolio, in some cases, higher, some cases slightly lower. But our visibility in the second quarter I would say it’s modestly higher.”

ORCC’s average borrowing rate has declined from 4.6% to 3.2% over the last five quarters due to continued issuances of notes and CLOs at lower rates including another $398 million on May 5, 2021. On April 26, 2021, the company issues $500 million of 2.625% notes due 2027.

“We continue to focus on optimizing our funding costs. In that regard, we had two notable transactions we did that helped further us in reducing costs on the right side of our balance sheet. We priced our sixth CLO this one for $260 million of incremental financing at a blended spread of 149 basis points a great print and very cost efficient for us. And we issued our seventh bonds, this one for $500 million of incremental financing at a fixed coupon of 2.158% or tightest print ever.”

As of March 31, 2021, ORCC had around $2.5 billion of liquidity consisting of $244 million of cash and almost $1.24 billion of undrawn debt capacity (including upsizes).


Full BDC Reports

This information was previously made available to subscribers of Premium BDC Reports. BDCs trade within a wide range of multiples driving higher and lower yields mostly related to portfolio credit quality and dividend coverage potential (not necessarily historical coverage). This means investors need to do their due diligence before buying.

AINV Projections: Potential Downgrade

The following information was previously provided to subscribers of Premium BDC Reports along with:

  • AINV target prices/buying points
  • AINV risk profile, potential credit issues, and overall rankings
  • AINV dividend coverage projections and worst-case scenarios

Summary

  • I have updated the projections for AINV to take into account the recently reported results and guidance from management on the earnings call yesterday (see below).
  • AINV’s recurring interest income declined to its lowest level over the last 15 years and the company would have only covered around 87% of dividends if incentive fees were paid.
  • Management guided for earnings to “fluctuate” over the coming quarters due to upcoming incentive fees hopefully offset by increasing leverage, portfolio rotation, and Merx Aviation.
  • There is a chance of a downgrade to ‘Level 3’ (implying the potential for a reduction) depending on the progress of rotating out of “non-earning and lower-yielding assets” and improved results/income from its investment in Merx.
  • AINV is likely fully priced at these levels and continues to have among the highest leverage (1.37) in the sector combined with exposure to Merx (13%) and “non-core” investments (8%).

AINV Distribution Update

On May 20, 2021, the Board of Directors declared a distribution of $0.31 per share payable on July 7, 2021 to shareholders of record as of June 17, 2021. On May 20, 2021, the Company’s Board also declared a supplemental distribution of $0.05 per share payable on July 7, 2021 to shareholders of record as of June 17, 2021.

Since 2018, the distributions to shareholders have been covered only through fee waivers and not paying the full incentive fees. However, the company will likely start paying incentive fees during the September 30, 2021, quarter which will have a meaningful impact on dividend coverage and was discussed on the recent call:

“Given the total hurdle feature in our fee structure and the net losses recorded during the look-back period, we have not paid an incentive fee since the quarter ended December 2019. Given the significant recovery in the portfolio over the past several quarters, we wanted to make sure everyone is aware that we may begin paying a partial incentive fee in the quarter ending September 2021. The exact timing and amount may vary based upon future gains and losses as well as the level of the net investment income.”

Management is working to improve dividend coverage through the “redeployment of non-earning and lower-yielding assets from non-core and legacy assets, as well as an increase in yield we received from our Merx investment”:

“We said that we believe a $0.31 base distribution reflects a conservative estimate of the long-term earnings power of our core portfolio, and that the supplemental distribution would be a function of the redeployment of non-earning and lower yielding assets from noncore and legacy assets, as well as an increase in yield we received from our Merx investment. We remain constructive on each of these drivers, although we expect some of the benefits of these drivers will occur after we start accruing incentive fees. As a result, net investment income may fluctuate over the next few quarters as we continue to reposition out of noncore and legacy assets and grow the portfolio to within our target leverage range.”

As discussed later, AINV’s recurring interest income has recently declined to its lowest level over the last 15 years and the company would have only covered around 87% of the quarterly dividends if the full incentive fees had been paid. Investors should expect dividend coverage to “fluctuate” over the coming quarters but management seems committed to paying the regular quarterly distribution of $0.31 plus the supplemental distribution of $0.05 through March 31, 2022, as discussed on the call:

“That said, we currently intend to declare a quarterly distribution of $0.31 and a quarterly supplemental distribution of $0.05 for the next four quarters.”

Q. “On the maintaining the $0.05 per quarter for the next four quarters, does that include the one that you announced today? So, it’s three after this, or it’s four into the future?”

A. “No, it’s four, including the one that we announced today.”

There is a chance that AINV could be downgraded to ‘Level 3’ dividend coverage (implying the potential for a reduction in the amount of total dividends paid) depending on the progress of rotating out of “non-earning and lower-yielding assets” and improved results/income from its investment in Merx Aviation (discussed later). Management is also actively growing the portfolio with the use of higher leverage which is already among the highest in the sector which is currently averaging around 0.94 debt-to-equity (net of cash).

I have updated the projections for AINV to take into account the recently reported results as well as guidance from management on the recent call.

“Looking ahead to fiscal year 2022, we will continue to seek to optimize and de-risk our portfolio and rotate out of our remaining noncore and second lien assets into core assets. The noncore assets are generating about a 4% or 5% return. So, as we generate cash off those assets and redeploy them into our current yield and we get Merx back to a level of producing income, not to where it was before, but to sort of a new moderated level, we can generate enough income after the incentive fee to cover that dividend.”

“As we look ahead, we are confident in our ability to grow our portfolio and operate within our target leverage range, given the tremendous need for creative and flexible private capital, and the unique and robust nature of the Apollo and MidCap platform.”

“From April 1st to May 18th, we’ve made new commitments of approximately $193 million, all of which were first lien corporate loans. Gross fundings have totaled $157 million; sales and repayments have totaled $149 million, including $57 million of second lien corporate lending positions.”

AINV was previously upgraded to ‘Level 2’ due to the expected dividend reduction and the strong likelihood that the company would not be paying incentive fees over the coming quarters. Previously, AINV was considered a ‘Level 4’ dividend coverage BDC implying that a dividend reduction was imminent and on August 6, 2020, the company announced a decrease in the regular quarterly dividend per share from $0.45 to $0.31.

From previous call: “Turning to our distribution, in light of the challenges and uncertainty created by the COVID-19 pandemic and our plans to further reduce the funds leverage, we have reassessed the long-term earning power of the portfolio and included that as a prudent to adjust the distribution at this time. We believe that distribution level should reflect the prevailing market environment and be aligned with the long-term earnings power of the portfolio. Going forward in addition to a quarterly based distribution, the company’s Board expects to also declare supplemental distribution and an amount to be determined each quarter. We believe a $0.31 distribution reflects the long-term earning power of the core portfolio including Merx.”


Full BDC Reports

This information was previously made available to subscribers of Premium BDC Reports. BDCs trade within a wide range of multiples driving higher and lower yields mostly related to portfolio credit quality and dividend coverage potential (not necessarily historical coverage). This means investors need to do their due diligence before buying.