AINV: 10.6% Dividend Yield With Potential Book Value Upside From Oil Hedges

Summary

  • As predicted in the previous article, AINV’s NAV per share declined due to $23 million in realized losses including its hedges as oil prices headed higher and ‘legacy’ investments.
  • However, 80% of the total portfolio is now considered to be invested in its “core strategies” with 55% in first-lien and no new non-accruals.
  • Recent investments were at lower yields and likely to support “the increase in our regulatory leverage which will become effective April 2019”.
  • Management is already working with and positioning borrowers for increased leverage and will likely be in place well-before April 2019.
  • The company repurchased another 1.4 million shares during the recent quarter.

You can read the full article at the following link:

Current BDC Dividend Yields

Business development companies (“BDCs”) are currently paying dividend yields between 7% and 13% with a handful of companies that increased dividends so far this year including Ares Capital (ARCC) and Main Street Capital (MAIN) as predicted in “This High-Yielding, Sleep-Well Investment Is About To Announce A Dividend Increase“.

MRCC: Credit Issues Need To Be Watched

Summary

  • MRCC reports Q2 2018 results this week and this article discusses what investors should be looking for, including signs of improvement in two of its portfolio investments.
  • MRCC is my smallest positions as I have not been purchasing additional shares.
  • In June 2018, MRCC held its annual meeting and shareholders approved the company becoming subject to a minimum asset coverage ratio of 150%, permitting the company to double its leverage.
  • MRCC’s portfolio remains primarily of first-lien loans, representing around 86% of the portfolio as of March 31, 2018, which is generally favorable when considering higher use of leverage.

You can read the full article at the following link:

Recent MRCC Stock Performance

Monroe Capital (MRCC) is my smallest positions as I will not be purchasing additional shares “until there are signs of improvement or at least stabilization of its investments in Rockdale Blackhawk, LLC and TPP Operating, Inc.” as discussed in this article.

MRCC’s stock rallied from $12.80 to $14.50 after my previous public article (linked below) as shown in the following chart and its relative strength index (“RSI”) is currently at 30 indicating ‘oversold’ conditions:

NMFC: Stable 9.5% Yield And Shareholder Approval To Increase Leverage

Summary

  • In June 2018, NMFC held a special meeting and shareholders approved the company becoming subject to a minimum asset coverage ratio of 150%, permitting the company to double its leverage.
  • In July 2018, NMFC amended its credit facility and issued $50 million in unsecured notes that included a requirement that the company “not exceed a debt-to-equity ratio of 1.65 to 1.00.”
  • Earlier this year, I purchased additional shares of NMFC along with insiders and the stock is up almost 10% from recent lows.
  • There is the potential for increased earnings over the coming quarters with additional leverage, its recently established third SLP and the continued ramp of the previously formed real-estate entity “Net Lease” structured as a REIT.

You can read the full article at the following link:

I recently purchased additional shares of New Mountain Finance (NMFC) along with various insiders as shown in the following chart and table below:

Shareholders Approve Reduced Asset Coverage Ratio

On June 8, 2018, NMFC held a special meeting and shareholders approved the company becoming subject to a minimum asset coverage ratio of 150%, permitting NMFC to double its leverage based on the following votes:

Source: SEC Filing 8-K

As a result of the stockholder approval, effective June 9, 2018, the asset coverage ratio under the 1940 Act applicable to NMFC was decreased from 200% to 150%, permitting NMFC to incur additional leverage.

We believe the modified asset coverage requirement will give us another powerful tool to enable us to earn our dividend in the safest possible manner,” said Robert Hamwee, Chief Executive Officer of NMFC. “We will continue to stay focused on defensive growth companies, but with the passing of this proposal, we would expand our ability to invest in a wider range of positions in the capital structure of those companies.”

John Kline, President and Chief Operating Officer of NMFC added, “If this proposal passes, we expect our investment mix to shift somewhat towards more senior assets. Coupled with the current fee waiver mechanics that we have had in place regarding management fees paid on these senior assets, we expect that the overall management fee percentage would be lower, on average.”

Management continues to waive a portion of its 1.75% base management fee for a current effective rate of 1.46% that will likely be lower over the coming quarters. This is due to new investments mostly consisting of “senior assets” at lower rates as discussed recently by management:

As incremental assets added through increased leverage will be predominately senior, the management fee burden on these assets will be significantly less than our headline 1.75%. Specifically, as discussed many times over the years, on senior assets we charge a management fee only on the implied equity utilized to purchase those assets, which in most cases range from 30% to 50%, therefore we would expect management fees on the vast majority of these incremental assets to generally range from 60 to 80 basis points.”

Source: NMFC Q2 2018 Earnings Call Transcript

In July 2018, NMFC amended its credit facility and issued $50 million in unsecured notes that included a requirement that the company “not exceed a debt-to-equity ratio of 1.65 to 1.00 at the time of incurring additional indebtedness and a requirement that the Company not exceed a secured debt ratio of 0.70 to 1.00.”

Due to the recent portfolio growth, the company was at the higher end of its target leverage as discussed and shown below.

As of March 31 our statutory debt to equity ratio was 0.81 at the high end our target range. Slide 24, we show historical leverage ratios which are broadly consistent with our current target statutory leverage of between 0.7 and 0.81.”

Q. “Leverage is probably about as high as its been in the BDC. I am just kind of curious, is that an anticipation for the increased leverage that you guys have done. I think the shareholder vote in June or is that more just kind of a timing issue on the strong originations for the quarter?”

A. “Yeah, it’s really more of a timing issue. You know the – I mean we didn’t – I don’t think we found out about the change in legislation from late March and you know a lot of it will be too late to influence our behavior in terms of you know what would have been closed by the end of March. So it’s really more idiosyncratic around timing of originations and repayments. You know obviously as we navigate this quarter you know depending on how the process goes around the proxy, that may have an influence on exactly where we wind up at 6/30.”

Source: NMFC Q2 2018 Earnings Call Transcript

Previously, I was expecting an equity offering in Q3 2018 which is likely not needed given the recent shareholder vote.

Source: NMFC Q2 2018 Earnings Call Slides

HTGC: Upcoming 3% To 4% Book Value Growth For This 9.2% Yielding BDC Positioned For Rising Rates

Summary

  • HTGC has recently announced plenty of good news and will likely be reporting strong results for Q3 and Q4 2018.
  • In Q2 2018, NAV per share will likely increase by around 3% to 4% due to accretive share issuances, net realized/unrealized gains in companies including DocuSign, ForeScout, FanDuel and Tricida.
  • However, I am not expecting HTGC to fully cover its dividend in Q2 2018 due to additional shares from the recent equity offering and higher prepayments in Q1 2018.
  • Over the coming quarters, the company will easily cover its dividend due to the impacts from rising LIBOR, recently announced portfolio growth and lower amounts of prepayments in Q2 2018.
  • HTGC currently pays a quarterly dividend of $0.31 per share that will likely be increased as its portfolio grows given its scalable internally managed cost structure and access to SBA leverage.

You can read the full article at the following link:

Reasons to Buy HTGC:

  • Superior positioning for rising interest rates
  • Scalable internally managed cost structure
  • Higher credit quality portfolio with potential NAV improvement/growth
  • Portfolio diversification for VC-backed technology exposure
  • Potential for strong dividend coverage supported by access to growth capital, including SBA leverage and issuing shares at a premium to NAV

I purchased shares of HTGC on March 26, 2018, at an average price of $12.03 as shown below:

TCRD: 13.2% Yield At Risk Of Upcoming Dividend Cut

Summary

  • BDCs will begin reporting calendar Q2 2018 results next and I will be focusing on potential issues including expected dividend cuts as discussed in this article.
  • I have correctly predicted many of the previous dividend cuts for the companies that I follow using my ‘Leverage Analysis & Dividend Potential’ as shown in this article.
  • TCRD is working on many initiatives to improve dividend coverage including growing its Logan JV, rotating out of non-income producing assets and improving portfolio credit quality.
  • TCRD insiders have recently been purchasing additional shares at prices between $7.81 and $8.33 compared to the current price of around $8.18.
  • Investors need to pay close attention to upcoming results looking for potential credit issues and changes to expected dividend coverage.

You can read the full article at the following link:

Recent TCRD Insider Purchases

As shown below, THL Credit (TCRD) insiders have recently been purchasing additional shares at prices between $7.81 and $8.33 compared to the current price of around $8.18:

Source: GuruFocus

Upcoming Dividend Cut

There is a good chance of a ~20% dividend reduction in late 2018 as the fee waivers expire as shown in the Leverage Analysis at the end of this article. Previously, I downgraded TCRD due to continued credit issues, declining net asset value (“NAV”) and portfolio yield as well as being above target leverage with expected declines in the overall size of the portfolio and investments restructured into non-income producing equity assets. However, the company is working to create value in those positions and eventually reinvest into income producing assets that should help to offset additional yield compression in the coming quarters.

“We are focused on improving the diversification across the portfolio, monetizing our non-income-producing equity securities and growing the Logan joint venture, which provided roughly a 14% ROE to our shareholders in the first quarter. While this strategy is being executed, we and our adviser have sought to ensure alignment among ourselves and our shareholders. As we’ve mentioned on our previous call, our adviser has agreed to waive all incentive fees for 2018.”

Source: TCRD Earnings Call Transcript

Management is waiving 100% of its incentive fees through 2018 and undistributed taxable remains around $0.34 per share and the board previously declared a dividend of $0.27 per share paid on June 29, 2018. It should be noted that the last time TCRD reduced its dividend, there was undistributed taxable income but management aligned the dividend closer to expected NII over the coming quarters.

Christopher Flynn, CEO: “We are focused on our stated strategy to invest in first lien loans of sponsor-backed companies and increase diversity across the portfolio, to monetize non-income producing equity securities, and to grow the Logan joint venture. We have continued to support our dividend over the course of this on-going transition and benefit from the strong support of our Advisor.”

Source: TCRD Earnings Call Transcript

 

 

ARCC: 9% Dividend Yield Positioned For Rising Rates And Upcoming Special Dividend

Summary

  • I purchased additional shares of ARCC after reporting Q1 2018 results, taking advantage of lower morning prices before others were able to digest the favorable results discussed in this article.
  • The company will likely exit its investment in Alcami Holdings marked $254 million over cost, resulting in $0.60 per share of realized gains driving a potential special dividend.
  • On June 25, 2018, ARCC announced approval to reduce its asset coverage ratio effective on June 21, 2019. The management fee is reduced to 1.00% on assets over 1.00x debt-to-equity.
  • Dividend coverage should continue to improve due to utilizing its 30% non-qualified bucket (through SDLP and IHAM), rotation out of non-core assets and increased LIBOR/portfolio yield, leverage/portfolio growth.
  • ARCC and other BDCs will begin reporting Q2 results next week.

You can read the full article at the following link:

I recently purchased additional shares of Ares Capital (ARCC) on May 2, 2018, due to the company reporting favorable Q1 2018 results as discussed in this article. After the company reported, not all investors agreed that the results were ‘favorable’ and the price dropped in morning trading which is where I purchased shares at an average price of $15.87 as shown below:

ARCC released its 10-Q SEC filing before the markets open which does not give investors much time to digest before trading begins. Throughout the day, the price rebounded and has continued higher as shown below:

MAIN: This High-Yielding, Sleep-Well Investment Is About To Announce A Dividend Increase

Summary

  • I am predicting another monthly dividend increase to $0.195 per month to be announced before the company reports earnings on August 2, 2018, for the reasons discussed in this article.
  • MAIN is the top-rated BDC by S&P Global Ratings that continues to grow its “per share” economics, including earnings and book value driving higher total returns to shareholders.
  • This article also discusses increased NAV per share in Q2 2018 and when to purchase additional shares of this best-of-breed “sleep well at night” high-yield investment.
  • Semiannual dividends continue to be supported with realized gains including the recent exits of Hydratec, Inc. and Soft Touch Medical Holdings for realized gains of $7.9 million and $5.2 million, respectively.

You can read the full article at the following link:

Reasons to Buy MAIN:

MAIN is clearly one of the best-managed BDCs for many reasons (some are discussed in this article) as the company continues to deliver higher total returns to investors through:

  • Maintaining a much lower operational cost structure to maximize distributions to shareholders.
  • Managing an efficient lower cost capital structure with conservative leverage.
  • Well-timed highly accretive equity offerings.
  • Conservative valuation and dividend policy with consistent coverage from NII and semiannual supplemental dividends.
  • Quality of the origination/credit platform to build a portfolio to deliver consistent returns to shareholders while protecting the capital invested.
  • No plans to seek “externalization” or higher leverage through reduced asset coverage ratio.
  • Management is an active purchaser of shares each quarter, currently holding over $115 million.
  • Continued involvement in regulatory aspects of the sector: “we’ve been much more focused on our legislative agenda with respect to BDC modernization, getting an SBIC bill passed in the House and Appropriations Bill has some really good language in it. The House Appropriations Bill that cleared the committee, real good in it language on the AFFE issue, which could reinstate us back into the indices.”

Purchasing Additional Shares of MAIN

As mentioned earlier this week in “Another Big Win Driving Special Dividends And 9% To 10% Yield,” I have been buying additional shares of higher quality business development companies (“BDCs”), especially given the oversold conditions driving higher yields. Many BDCs have been rallying over the last three to four months, likely for the reasons discussed in previous articles including:

Once I have selected a BDC that fits my personal risk profile (there are over 50 publicly traded BDCs, please be selective), I use momentum indicators such as Relative Strength Index or (“RSI”) from my BDC Google Sheets to help determine if a stock is ‘oversold’ or ‘undervalued.’ Most of my previous purchases of MAIN were when the stock had an RSI of 30 or below. The following definition of RSI is from Investopedia:

Traditional interpretation and usage of the RSI is that RSI values of 70 or above indicate that a security is becoming overbought or overvalued, and therefore may be primed for a trend reversal or corrective pullback in price. On the other side of RSI values, an RSI reading of 30 or below is commonly interpreted as indicating an oversold or undervalued condition that may signal a trend change or corrective price reversal to the upside.”

Over the last two years, MAIN has been near or below 30 multiple times and typically a good buying point:

 

TSLX: Another Big Win Driving Special Dividends And 9% To 10% Yield

Summary

  • I recently purchased shares of TSLX (along with insiders) for many reasons, including excellent credit quality and dividend coverage, driving higher total returns and likely special dividends to shareholders.
  • TSLX has paid special dividends each quarter over the last five quarters for a total of $0.28 per share.
  • I am expecting higher amounts paid in 2018 for the reasons discussed in this article, including higher portfolio yield from rising interest rates and recent portfolio growth.
  • TSLX’s largest investment (iHeart Communications) debtors filed for bankruptcy on April 28, 2018, eventually repaying its $117.5 million ABL and providing around $0.07/$0.08 in NII for upcoming special dividends.
  • Two weeks from now, management will discuss another home run for Q2 2018 with its “opportunistic” investment in Ferrellgas Partners that will likely drive another large special dividend.

You can read the full article at the following link:

My Recent Purchase And Insider Buying:

I recently purchased shares of TPG Specialty Lending (TSLX) as discussed at the end of this article along with insiders earlier this year:

Source: GuruFocus

Continued And Upcoming Special Dividends

TSLX recently announced a special/supplemental dividend of $0.06 per share paid in June which was just below my ‘best case’ projected special dividend of $0.07. The company has paid special dividends each quarter over the last five quarters for a total of $0.28 per share:

“Consistent with our objective of maximizing distribution to shareholders while preserving the stability of our net asset value, we have declared a total of $0.28 per share in incremental dividends over the past five quarters based on our formulaic supplemental dividend framework. While increasing net asset value from $15.95 to $16.21 per share at the end of March after giving effect to the impact of the $0.06 Q1 supplemental dividend to be paid in Q2. Over the last 12 months we have increased dividend payment to shareholders over our base dividend by 15.4%, while generating a 1.3% increase in net asset value per share over the same period.”

Source: TSLX Earnings Call Transcript

The company has covered its regular dividend by an average of 134% over the last four quarters, with undistributed taxable income and capital gains of around $65 million or $1.01 per share after taking into account supplemental dividends. As discussed in previous articles, TSLX management continues to produce higher returns by investing in distressed companies through excellent underwriting standards that protect shareholders during worst-case scenarios including call protection, prepayment fees and amendment fees backed by first-lien collateral of the assets.

I am expecting higher amounts of supplemental dividends paid in 2018, given the likelihood of “other fees” associated with the upcoming repayment of its recent $117.5 million asset-based loan (“ABL”) with iHeart Communicationsat LIBOR+4.75. The fees are typically amortized over three years unless paid off early which will likely be in Q2/Q3 2018. iHeartMedia Inc. is the largest radio broadcaster and filed for bankruptcy on March 14, 2018, and the debtors filed Chapter 11 on April 28, 2018:

“On March 14, the company filed for Chapter 11 with a restructuring support agreement or RSA from a majority of its senior and junior creditors. We note that as part of the filing we negotiate a cash collateral order with the company where among other things we receive current interest, reserve default rate interest and received replacement liens on our collateral. In addition, the company must remain in compliance with our borrowing base. Last week on April 28 the iHeart debtors filed a joint Chapter 11 planned the reorganization, specifically as it relates to our investment the plan provides that ABL credit agreement claims are unimpaired other than the plan and the holders of the ABL credibly agreement claims shall receive payment in full in cash or reinstatement of those claims. As we indicated during our last earnings call, we expect repayment on our principal investment in iHeart to occur during the course of this year.”

Source: TSLX Earnings Call Transcript

GSBD: 8.6% Yield With Dividend Growth Potential Through Reduced Fees And Increased Leverage

Summary

  • On June 15, 2018, GSBD shareholders overwhelmingly approved the application of the reduced asset coverage requirements allowing the company to double its leverage.
  • 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.
  • As shown in this article, the increased leverage and reduced fees will likely result in higher earnings (and dividends) over the coming quarter even with lower yielding and ‘safer’ investments.
  • I consider GSBD to a higher quality BDC for the reasons mentioned in this article and I purchased shares near the recent lows.

You can read the full article at the following link:

Recently Reduced Asset Coverage Ratio:

On June 15, 2018, Goldman Sachs BDC (GSBD) held its 2018 Annual Meeting of Stockholders and shareholders overwhelmingly approved the application of the reduced asset coverage requirements as disclosed in the recent 8-K filing:

Proposal 3: By the vote shown below, the stockholders approved the application of the reduced asset coverage requirements in Section 61(a)(2) of the Investment Company Act of 1940, as amended, to the Company, which permits the Company to double the maximum amount of leverage that it is permitted to incur by reducing the asset coverage requirement applicable to the Company from 200% to 150%. Approval of Proposal 3 required a majority of the votes cast by all stockholders present, in person or by proxy, at the Annual Meeting.

Borrowings & Fitch Credit Rating

On June 28, 2018, GSBD announced that it had priced an offering of $40 million of 4.50% convertible notes due 2022. Also, the company recently upsized its revolving credit facility to $695 million and extended the maturity date to February 2023.

Source: GSBD Earnings Call Slides

On June 18, 2018, GSBD announced that Fitch Ratings (“Fitch”) has assigned the company an investment grade rating of BBB-; the rating outlook is stable.

“We are pleased to receive an investment grade rating from Fitch, which we believe reflects both the quality of GSBD’s investment portfolio and the strength of Goldman Sachs Asset Management’s (“GSAM’s”) platform. We are particularly gratified by Fitch’s acknowledgment of GSAM’s differentiated risk management and proprietary loan sourcing capabilities in its assessment.” said Brendan McGovern, CEO of the Company.

Reduced Fee Structure & Lower Risk Portfolio

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/or increased borrowing expenses as discussed on the May 4, 2018 earnings call:

“the company’s investment advisor will reduce its base management fee from 1.5% of gross assets to 1% of gross assets beginning immediately following shareholder approval. In addition the Board and GSAM considered that borrowing cost may increase as additional leverage incurred while asset yields may decline as the company pursues lower risk first lien assets. In an effort to support the increased returns on equity, that are the objectives of the proposed increasing leverage, both the Board and GSAM believe reduction in the base management fee is appropriate.”

Also discussed, was the ability to invest in a higher amount of first-lien loans with lower risk:

“we believe that the added balance sheet flexibility will allow us to pursue increased returns on shareholder equity, while also allowing us to invest in lower risk, lower yielding loans. Based on our existing maximum permitted debt-to-equity ratio of just these lower risk, low yielding loans are currently dilutive to our targeted shareholder returns. We expect that over time, our asset mix will shift toward a higher percentage of first lien loans that may have lower yields, but which we believe also carry a lower risk. Finally a lower asset coverage requirement gives the company an enhanced ability to make distributions to shareholders that are required under tax regulations”

Increased Leverage & Dividend Coverage Potential

I have recently used this analysis for Medley Capital (MCC), Oaktree Specialty Lending (OCSL) and Prospect Capital Corp. (PSEC) in the following articles:

The following table shows six different scenarios with various amounts of leverage, using the current portfolio yield of 11.1% and a lower yield of 10.5%to determine the impacts on dividend coverage. Each of these scenarios assumes a full quarter of benefits from interest income but also a full quarter of interest expenses, incentive and 1.00% management fees. However, I have used conservative debt-to-equity ratios of 1.00 to 1.20 for the lower yield analysis compared to the potential 2.00 allowed with the reduced asset coverage ratio.

TCPC: I Recently Purchased This 10% Yielding BDC

Summary

  • TCPC is likely under-priced for the reasons discussed in this article, trading under book value, RSI of 38, and offering a well-supported 10% dividend yield.
  • The recent combination with BlackRock will create one of the strongest credit platforms in the sector with improved scale, relationships and analytics while retaining the current higher quality management team.
  • TCPC is well-positioned for rising interest rates and has already experienced higher portfolio yields and improved net interest margin driving higher dividend coverage in the coming quarters.
  • Earlier this year, there were insider purchases and if the stock continues lower, there will likely be additional accretive share repurchases.
  • 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).

You can read the full article at the following link:

Current BDC Dividend Yields

The average yield for business development companies (“BDCs”) is currently 10.1% which is near its average over the last six years as shown below. However, there are currently a handful of higher quality BDCs that typically have lower yields due to safer portfolios that are more likely to outperform during an economic slowdown, stable to growing book values, excellent dividend coverage and management that is willing to do the right thing including shareholder-friendly fee agreements.

For the reasons discussed in this article, TCP Capital (TCPC) is clearly a higher quality BDC that deserves to trade above book value with a yield that is usually much lower than the average. However, TCPC’s yield is now 10% which is near the average BDC and its historical highs implying that the stock is relatively under-priced.

I recently purchased additional shares of TCPC at a price of $14.22 before the March 2018 ex-dividend date as shown below 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.

This is the definition of RSI from Investopedia:

“Traditional interpretation and usage of the RSI is that RSI values of 70 or above indicate that a security is becoming overbought or overvalued, and therefore may be primed for a trend reversal or corrective pullback in price. On the other side of RSI values, an RSI reading of 30 or below is commonly interpreted as indicating an oversold or undervalued condition that may signal a trend change or corrective price reversal to the upside.”