TPVG Update: Additional Credit Issues, As Expected

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

  • TPVG target prices, buying points, and suggested limit orders (used during market volatility).
  • TPVG risk profile, potential credit issues, changes in NAV, and overall rankings. Please see BDC Risk Profiles for additional details.
  • TPVG dividend coverage projections (base, best, worst-case scenarios). Please see BDC Dividend Coverage Levels for additional details.


As discussed in previous updates, I sold my position in TriplePoint Venture Growth (TPVG) in December 2022 at $12.70, mostly related to having a higher amount of investments considered ‘watch list’. After taking into account the recent and previous markdowns, the amount of watch list investments remains higher than most BDCs (as shown below).

The following chart shows the potential impact on NAV per share for each BDC, assuming that 100% of watch list investments (including non-accruals) defaulted with 0% recovery. This is the worst-case scenario for this group of investments. It is important to note that the chart only takes into account watch list investments and any changes to other positions will also have an impact (positive or negative), especially equity positions which are not included in the watch lists. The largest NAV declines have mostly been BDCs with larger amounts of watch list investments including PSEC, MRCC, TPVG, TCPC, and PNNT. Also, many of the BDCs not covered by this service including OXSQ, PTMN, and HRZN had declines of 14% to 17% over the last four quarters.

So far, TPVG, PSEC, FSK, HRZN, SAR, OCSL, WHF, and TCPC have had the largest NAV declines for Q4 2023 (between 2% and 11%). Please note that the NAV decline for GAIN was mostly due to paying a very large amount of special dividends during the quarter.


TPVG Quick Quarterly Update (December 31, 2023)

  • This information will be discussed in the updated TPVG Deep Dive Projection report.
  • Target Prices: Its previous ST target price accounted for continued credit issues but also assumed that the dividend was stable (Level 2 dividend coverage). However, dividend coverage would have been 95% if the company paid the full incentive fee (as shown later) and management mentioned reducing leverage which could put downward pressure on dividend coverage especially if there are continued credit issues so we have reduced the target prices to take into account. I will reassess after updating the projections and risk profile using guidance from management including from the recent earnings call (see call notes at the end).
  • Earnings: Reported just above its base case projections due to prepayment-related income combined with the ‘Core yield’ increasing to 14.4% and no incentive fees paid (due to continued portfolio credit issues) mostly offset by increased non-accrual investments. If the company paid the full incentive fee, dividend coverage would have been closer to 95% (NII of $0.379 per share).
  • Realized Losses: Another $50 million or $1.43 per share mostly due to mostly due to writing off its non-accrual investments in Demain (Luko) which contributed around $0.46 per share, VanMoof Global Holding which contributed around $0.45 per share, Untitled LabsMystery Tackle Box (Catch Co.), and Roli (restructured).
  • Non-Cash/PIK Income: Increased from 9.1% to 11.2% of total income (among the highest in the BDC sector) partially due to converting Nakdcom One World.
  • Leverage: Debt-to-equity ratio of 1.32 (after excluding $153 million of cash) which exceeds its targeted range between 1.00 to 1.25. Please note that the company “drew down on our credit facility to enhance our investment flexibility pursuant to the certain 1940 Act requirements” but subsequently used excess cash to pay down its facility.
  • Dividends: Maintained its regular quarterly distribution of $0.40 per share for Q1 2024 (as expected in the base case projections) with estimated undistributed taxable income (“UTI”) of $42 million or $1.10 per share (previously $1.03 per share). Please note that many of the BDCs that previously reduced their regular dividends had plenty of UTI which is only used for ‘temporary’ dividend coverage issues. Please do not rely on UTI as an indicator of a ‘safe’ dividend.
  • NAV Per Share: Declined by $1.16 or 11.2% (from $10.37 to $9.21) mostly due to its watch list investments and equity positions including Demain (Luko) which contributed $0.30 per share, Untitled LabsMystery Tackle Box (Catch Co.), VanMoof Global Holding, and $0.66 per share related to equity/warrant positions. NAV has declined by over 22% over the last four quarters.
  • Credit Quality: Non-accruals decreased from 4.5% to 3.6% of the portfolio fair value due to exiting/restructuring Demain (Luko)Untitled LabsMystery Tackle Box (Catch Co.), VanMoof Global Holding, and Luminary Roli Limited partially offset by adding TFG Holding and Outdoor Voices.

 

As shown below, the amount of investments that are considered performing “below expectations” increased from 13.7% to 21.7% as of Q4 2023. Please keep in mind that this information is provided by the company.

 

 

Since December 31, 2023, and through March 5, 2024:

  • Entered into $93.6 million of additional non-binding signed term sheets
  • Closed $10.0 million of additional debt commitments
  • Funded $12.4 million in new investments

“Due to the shareholder-friendly total return requirement under the incentive fee structure, there were no incentive fees this quarter. Based on our success over earning the dividend, we have undistributed spillover income of $41.5 million or $1.10 per share as of year-end. Given the ongoing elevated yields and size of the income producing loan portfolio, dividend coverage remains strong throughout all of 2023. We believe that given the historically strong level of over-earned dividends and substantial level of spillover income, the current level of regular quarterly dividends are expected to be stable.”

Please note that the historical dividend coverage and excess earnings over the last six quarters is partially from no incentive fees paid due to continued credit issues and its total return hurdle:

If the company paid the full incentive fee for Q4 2023, dividend coverage would have been closer to 95%, which is one of the reasons it remains a ‘Level 2’ dividend coverage BDC.


The following are some of the notes from the recent call which will be discussed in the updated TPVG Deep Dive Projection report later this month:

Q. “How can it be appropriate to sell 1.5 million shares into the market through the ATM program with the knowledge that significant material losses are on the way and a significantly lower NAV is going to be presented to shareholders when you report this quarter.”

A. “So again the ATM is a program that acts on its own, so it’s set and it operates on our……”

Q. “Do you have the ability to shut it down?”

A. “Yes, And then as we said, as developments are learned or known, then we adjust and act according.”

Q. “And then last question for me on dividend. At this point on this quarter’s NAV, it’s about a 17% yield on NAV where the current dividend rate is at. You can talk about you’re probably going to be deleveraging at least in the first half of this year. I guess what can you say kind of thoughts around that payout level and your confidence to generate that level of earnings?”

A. “Yes. So I would say two things. One is, when you think about the elevation of the yields in –60% of our portfolio is floating rate, 40% is fixed. There’s also a substantial portion of our leverage that is fixed rate. So the net interest margin is pretty well protected for at least some period of time in a declining rate environment, so we’re pretty comfortable with that. Also with the declining leverage, there is some room. So one of the things to think about is when –in 2022 2023, when yields were going up, the dividend was increased, but it was not excessively increased during those periods. And as a result, you’ve seen that the spillover income continue for almost two years to increase. So I think there’s substantial ordinary income that’s stored to maintain a stable dividend. But the ordinary income or NII is expected to be pretty stable as well, given the strength of the income-producing portfolio.”

Q. “So you had well over $1 per share of net realized and unrealized losses in the quarter. And that drove an 11% decline in NAV, bringing the year-over-year decline at 23%. So I guess, is there a way to think about future losses across the portfolio moving forward? Are we getting near the end of these write downs and losses? And I’m just trying to think through the trajectory of NAV from here and ultimately when you think it will start to inflect higher.”

A. “The reduction in NAV, if you look through it, there is also $0.66 of that is related to fair value marks on our warrant and equity position. So if you look right again, the cost basis and the fair value of our worn and equity investment portfolio are basically equal. And if you look over the years, historically, that’s –fair value is traded significantly higher. So we believe there is room for that to come back and for us to have gains in excess on an unrealized basis and realized basis on a fair value basis as market conditions improve. With regards to credit, again, I think our credit scores reflect our current view on our existing based on current market conditions. And so, again, we’re seeing some good data points with the increase in equity raising activity of our existing portfolio companies. We discussed some of the specifics for some of the companies in each of the credit ratings and signed term sheets and positive developments. And so again, the market is challenging. We continue to remain proactive and diligent and manage this environment. But again, as conditions improve, we expect both credit profile and fair values to improve as well.”

Q. “I look at it quarter-over-quarter, investments rated yellow or below. Last quarter with 13.7% this quarter was 21.7% of the total portfolio. So big jump there. It’s obviously on fair values accounting for the write downs as well. I guess given that change and the stuff that you’ve mentioned, I mean, how can get comfortable and get the market confident that you guys have stabilized the situations you identified as troubled and that there’s a plan forward here.”

A. “The way I think we look at it is it’s multifactored, right? So the first element is that, as Jim described in detail the market condition. So we are in the winter of all things venture capital. So I think a critical element is in particular, the technology subsector of venture capital and the venture growth stage in particular of these companies that raise large rounds at a high valuation during peak periods. So we’re seeing these companies are getting more impacted than companies at other stages of the venture capital lifespan. So I’d say a significant amount is related to the venture capital, the equity investment activity. And so if we see data points of promising activity of capital raises and increasing capital raises that gives us confidence in terms of the overall outlook for the industry, the sector, and the portfolio. I think the second element of what we talked about is, one of the reasons why we’ve seen a fair amount of challenge too has been this — the weak IPO and M&A markets, in particular the M&A markets, and we described a number of scenarios of transactions essentially collapsing because of the dynamics of these acquisitions where [indiscernible] more robust times, these transactions would have closed, it would have closed at higher values. I think the last piece as we look at the watch list itself. We look at it on a specific name basis and facts and circumstances from our perspective. So very much it’s hard to generalize for a category to say if it’s in a certain category it naturally implies where directly it’s going to end up. I would say very much we look at for each of our reds, oranges, and yellows is each specific name, what the outlook is for those companies market appropriately from a credit rating and from a fair value perspective, and then make sure our teams are as proactive as they can be to manage those situations. I think as I described during the call, I think the good news or some positive outlook is that some positive events are happening within those companies, in those ratings, term sheets and events happening, but until they happen and close, given this environment, we need to remain cautious and optimistic — proactive, and then when those events close, then move them up and upgrade them.”

“Given the challenging capital raising environment for venture growth companies, for some companies we believe we will see continued pressure on valuations and the potential for inside rounds. Some companies are further reducing burn and executing on a path to profitability.”


What Can I Expect Each Week With a Paid Subscription?

Each week we provide a balance between easy-to-digest general information to make timely trading decisions supported by the detail in the Deep Dive Projection reports (for each BDC) for subscribers that are building larger BDC portfolios.

  • Monday Morning Update – Before the markets open each Monday morning, we provide quick updates for the sector, including significant events for each BDC along with upcoming earnings, reporting, and ex-dividend dates. Also, we provide a list of the best-priced opportunities along with oversold/overbought conditions, and what to look for in the coming week.
  • Deep Dive Projection Reports – Detailed reports on individual BDCs each week prioritized by focusing on buying opportunities and potential issues such as changes in portfolio credit quality and/or dividend coverage (usually related). This should help subscribers put together a shopping list ready for the next general market pullback.
  • Weekly General Updates or Comparison Reports – A series of updates discussing ‘Building a BDC Portfolio’, suggested pricing and limit orders, expense/return ratios, interest rates, leverage, BDC Investment Grade Notes/Baby Bonds, portfolio mix, and potential impacts on dividend coverage and risk.

TCPC Update: NAV Decline, As Expected

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

  • TCPC target prices, buying points, and suggested limit orders (used during market volatility).
  • TCPC risk profile, potential credit issues, changes in NAV, and overall rankings. Please see BDC Risk Profiles for additional details.
  • TCPC dividend coverage projections (base, best, worst-case scenarios). Please see BDC Dividend Coverage Levels for additional details.


On September 29, 2023, I sold my position in BlackRock TCP Capital Corp (TCPC) at $11.93 mostly related to having a higher amount of investments considered ‘watch list’. As mentioned in many previous reports, one of my primary concerns includes its portfolio companies that sell products through Amazon, including ThrasioWhele (Perch), and Razor Group. These investments remain on its watch list which is among the highest in the sector. Also, the upcoming merger with BKCC is likely a negative for TCPC shareholders.

TCPC Quick Quarterly Update (December 31, 2023)

  • Earnings: Reported between its worst and base case projections due to increased non-accruals and higher ‘Other G & A’. TCPC has covered its regular dividends by around 138% over the last four quarters.
  • Non-Cash/PIK Income: Decreased from 6.5% to 2.7% of total income.
  • Dividends: Maintained its regular quarterly dividend of $0.34 per share for Q1 2024 which was the previous worst-case projection.
  • NAV Per Share: Decreased by $0.82 or 6.4% (from $12.72 to $11.90) due to the special dividend of $0.25 per share and another markdown of Edmentum, Inc. (by $13.8 million or $0.24 per share) and some of its watch list investments including Thras.io (by $8.6 million or $0.15 per share), Aventiv/Securus (by $5.4 million or $0.09 per share), KhorosWhele (Perch)CIBTAstra Acquisition and Magenta (McAfee) partially offset by overearning the regular dividends. It is important to note that NAV would have declined by 2.6% excluding the impact of the special dividend and Edmentum (equity position) but has declined by 17% over the last two years.
  • Credit Quality: Non-accruals increased from 1.1% to 2.0% of the portfolio at fair value (3.7% at cost) due to adding Thras.io as predicted in the previous report.
  • Pricing: Its ST target price of $12.50 already takes into account additional credit issues. I will reassess after updating the projections and risk profile using guidance from management including from the recent earnings call.
  • Merger Update: The merger is currently anticipated to close during the first quarter of 2024, subject to stockholder approval, customary regulatory approvals, and other closing conditions.
  • Share Repurchases: During Q4 2023, there were no shares were repurchased.
  • This information will be discussed in the updated TCPC Deep Dive Projection report.

“We generated solid net investment income in the fourth quarter, culminating a strong year in which we grew NII 20% and delivered a 14.5% net investment income return on equity. Our proven track record of delivering consistent results across market cycles has enabled us to consistently out-earn our dividend and drive outstanding long-term results on behalf of our shareholders. We also are confident in our ability to close our proposed merger with BlackRock Capital Investment Corporation this year as planned. This is a transformational combination that we believe will create substantial scale, operational cost synergies, and better access to capital on improved terms. We also anticipate that the transaction will be accretive to NII and further bolster the earnings power of the combined company.”

As discussed in previous reports, Edmentum, Inc. is a provider of online learning programs that was acquired by Vistria Group. TCPC chose to re-invest a meaningful portion of the proceeds and “remain a significant shareholder of Edmentum, due to strong conviction in the continued growth”. As shown below, TCPC’s investment in Edmentum declined again but remains around $49 million and still accounts for over 3% of the portfolio.

“During the fourth quarter, we did report a decline in NAV, the largest driver of which was unrealized losses on three positions in our portfolio. It’s important to emphasize that these companies’ challenges are idiosyncratic in nature and not indicative of broader issues in our portfolio. Our overall credit quality is solid, and we are well-positioned to further execute our strategy of selectively investing in compelling, new opportunities.”


What Can I Expect Each Week With a Paid Subscription?

Each week we provide a balance between easy-to-digest general information to make timely trading decisions supported by the detail in the Deep Dive Projection reports (for each BDC) for subscribers that are building larger BDC portfolios.

  • Monday Morning Update – Before the markets open each Monday morning, we provide quick updates for the sector, including significant events for each BDC along with upcoming earnings, reporting, and ex-dividend dates. Also, we provide a list of the best-priced opportunities along with oversold/overbought conditions, and what to look for in the coming week.
  • Deep Dive Projection Reports – Detailed reports on individual BDCs each week prioritized by focusing on buying opportunities and potential issues such as changes in portfolio credit quality and/or dividend coverage (usually related). This should help subscribers put together a shopping list ready for the next general market pullback.
  • Weekly General Updates or Comparison Reports – A series of updates discussing ‘Building a BDC Portfolio’, suggested pricing and limit orders, expense/return ratios, interest rates, leverage, BDC Investment Grade Notes/Baby Bonds, portfolio mix, and potential impacts on dividend coverage and risk.

Carlyle Secured Lending (CGBD): Target Price Increase, Higher Dividends

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

  • CGBD target prices, buying points, and suggested limit orders (used during market volatility).
  • CGBD risk profile, potential credit issues, changes in NAV, and overall rankings. Please see BDC Risk Profiles for additional details.
  • CGBD dividend coverage projections (base, best, worst-case scenarios). Please see BDC Dividend Coverage Levels for additional details.


CGBD Quick Quarterly Update (December 31, 2023)

  • Earnings: Hit its best-case projections covering its regular and supplemental dividends by 126% due to higher-than-expected other income combined with lower-than-expected ‘Other G&A’. The company maintained its portfolio yield of 12.7% with another decline in leverage (debt-to-equity, net of cash) from 1.17 to 1.13.
  • Dividends: Increased its quarterly base dividend from $0.37 to $0.40 plus a supplemental of $0.08 for a total of $0.48 per share for Q1 2024 (above best-case projections).
  • NAV Per Share: Increased by $0.13 or 0.8% (from $16.86 to $16.99) due to overearning the dividends by $0.12 per share and unrealized portfolio appreciation.
  • Credit Quality: Non-accruals increased slightly from 2.0% to 2.1% of the portfolio fair value due to marking up Bayside Parent (Professional Physical Therapy) and Dermatology Associates (same as previous quarter). Investments with a risk rating of 3 and 4 (implies downgraded) increased from 19.4% to 20.7% of total debt investments.
  • This information will be discussed in the updated CGBD Deep Dive Projection report, along with its overall risk profile, full dividend and financial projections, taking into account discussions with management on the upcoming earnings call.

As discussed in the previous report, there is a good chance that the company will continue to pay additional supplemental dividends each quarter partially supported by previous increases in the underlying rates. The Board increased its quarterly base dividend from $0.37 to $0.40 plus a supplemental of $0.08 for a total of $0.48 per share for Q1 2024, which was above the previous best-case projections, as shown below.

“We are very pleased with our fourth quarter and fiscal year 2023 results, which we believe were due to our ability to capitalize on the breadth and depth of the OneCarlyle platform and drive performance throughout an evolving market environment. Despite the market’s complexity, we remained steadfast in our disciplined approach to deliver steady income and solid credit performance by sourcing transactions during 2023 with pricing, terms and structures that were attractive relative to historical originations. As a result of our continued execution of this strategy, the quality of our portfolio, and confidence in the future, we are increasing our base dividend by $0.03 to $0.40 per share.”

 


 

As shown below, non-accruals increased slightly from 2.0% to 2.1% of the portfolio fair value due to marking up (typically a good sign) Bayside Parent (Professional Physical Therapy) and Dermatology Associates (same as the previous quarter).

Investments with a risk rating of 3 and 4 (implies downgraded) increased from 19.4% to 20.7% of total debt investments. Most of the investments previously considered ‘watch list’ are likely investments with risk rating 3, which will be discussed in the updated CGBD Deep Dive Projection report.

On November 2, 2023, the Board approved the extension of its stock repurchase program through November 5, 2024, which was previously increased to $200 million, providing an incremental $50 million of repurchasing capacity. During Q3 2023, there were no shares repurchased likely due to the stock price trading closer to NAV:

From previous call: “On the share repurchases, we take a close look at where our current trading price is and that’s certainly a big factor in evaluating the level of repurchases. You can see this last quarter, we’re trading up in the 90%, 95% of NAV territory. We’ve stated in the past that if we got that level, we’d certainly look to curtail the buybacks, and that’s certainly what you saw this past quarter. We’ll continue to evaluate where the stock is trading as well as looking importantly at our overall flow, that’s something we keep a close eye on and we want to be mindful of. When we talk to investors, some of them say, hey, get those buybacks. Yes, depending on level accretion, but we also want to make sure we’ve got good float in that stock. So historically, we’ve purchased over $150 million. We’ve been very supportive over the years. I think based on the current level of trading, we’re certainly going to look to mitigate that a little — maybe go over a little bit smaller just based on the current trading levels.”

 



Dividends-to-NAV/Book Value Ratios

The following table shows the current annual dividends divided by NAV per share as a simple proxy for current returns on equity (“ROE”) to shareholders. BDCs with higher-risk portfolios should be able to deliver higher returns through higher portfolio yields. Conversely, lower-risk BDCs have lower portfolio yields due to safer assets/investments responsible for their lower return ratios. However, many of the other BDCs with lower return ratios are due to higher operating costs (including PSEC and MRCC), and/or credit issues driving lower prices paid by investors.

We do not cover most of the lower return and/or lower quality BDCs including PFX, LRFC, CCAP, SLRC, BKCC, and BBDC mostly due to historically providing lower returns to shareholders driving lower price multiples to NAV (current average of 0.74) and less access to additional equity capital to deleverage and/or for opportunistic portfolio growth.


What Can I Expect Each Week With a Paid Subscription?

Each week we provide a balance between easy-to-digest general information to make timely trading decisions supported by the detail in the Deep Dive Projection reports (for each BDC) for subscribers that are building larger BDC portfolios.

  • Monday Morning Update – Before the markets open each Monday morning, we provide quick updates for the sector, including significant events for each BDC along with upcoming earnings, reporting, and ex-dividend dates. Also, we provide a list of the best-priced opportunities along with oversold/overbought conditions, and what to look for in the coming week.
  • Deep Dive Projection Reports – Detailed reports on individual BDCs each week prioritized by focusing on buying opportunities and potential issues such as changes in portfolio credit quality and/or dividend coverage (usually related). This should help subscribers put together a shopping list ready for the next general market pullback.
  • Weekly General Updates or Comparison Reports – A series of updates discussing ‘Building a BDC Portfolio’, suggested pricing and limit orders, expense/return ratios, interest rates, leverage, BDC Investment Grade Notes/Baby Bonds, portfolio mix, and potential impacts on dividend coverage and risk.

Main Street Capital (MAIN): Strong Quarter But Overpriced

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

  • MAIN target prices, buying points, and suggested limit orders (used during market volatility).
  • MAIN risk profile, potential credit issues, changes in NAV, and overall rankings. Please see BDC Risk Profiles for additional details.
  • MAIN dividend coverage projections (base, best, worst-case scenarios). Please see BDC Dividend Coverage Levels for additional details.


MAIN Quick Quarterly Update (December 31, 2023)

  • Earnings: Reported between its base and best-case projections covering its regular dividends by 151% with continued strong dividend income (mostly from its LMM portfolio) and lower-than-expected interest expense (due to lower borrowings on its credit facility, lower portfolio growth, and equity issuances). Recurring interest income has increased by around 17% over the last four quarters.Core NII per share was $1.07 and distributable net investment income (“DNII”) was $1.12 per share, easily covering its Q4 2023 regular and supplemental dividends of $0.98 per share.
  • Dividends: Announced a supplemental dividend of $0.30 per share for Q1 2024 (at the high end of my previous estimates) and reaffirmed its regular monthly dividends of $0.24 per share for April, May, and June 2024 for $0.72 per share for Q2 2024.
  • Credit Quality: Non-accruals decreased from 1.0% to 0.6% of the investment portfolio at fair value and from 3.1% to 2.3% at cost. The company has not released the updated 10-K with the detail needed to assess changes in the portfolio risk profile (including its watch list investments) which will be discussed in the updated projections.
  • NAV Per Share: Increased by 3.1% (from $28.33 to $29.20) due to overearning the dividends, accretive share issuances, and net unrealized appreciation which will be discussed after going through the updated 10-K SEC filing.
  • Pricing & Recommendations: No change. I will reassess after updating the financial projections assessing portfolio credit quality taking into account management guidance on the earnings call, including dividend potential.
  • This information will be discussed in the updated MAIN Deep Dive Projection report.


MAIN remains a ‘Level 1’ dividend coverage BDC, implying the potential for additional dividend increases and/or supplemental dividends, mostly due to continued improvement in net interest margins as well as NAV per share increases and realized gains. As mentioned in previous reports, I am expecting additional dividend increases over the coming quarters due to:

  • Continued dividend income from portfolio companies.
  • Previous increases in portfolio yield.
  • Portfolio growth (increased interest income).
  • Higher returns from its asset management business (MSC Income Fund).

MAIN reaffirmed its regular monthly cash dividends of $0.24 per share for April, May, and June 2024 for $0.72 per share for Q2 2024. Also, the company announced a supplemental dividend of $0.30 per share for Q1 2024 which was at the high end of my previous estimates (between $0.25 and $0.30 per share). I was expecting only $0.60 per share of supplemental dividends in the base-case projections and $1.00 in the best-case projections for 2024. However, I was also expecting a dividend increase for Q2 2024 (base and best cases) but the company is likely taking a conservative approach to regular dividend increases, similar to other BDCs.

“The continued positive momentum across our platform in 2023 allowed us to deliver significantly increased value to our shareholders, with a 25% increase in the total dividends paid to our shareholders in 2023. Despite this significant increase, our distributable net investment income exceeded the total dividends paid to our shareholders by over 13% for the fourth quarter and over 17% for the full year. Based upon the continued strength of our performance in the fourth quarter, we recently declared a $0.30 per share supplemental dividend to be paid in March 2024. This represents our tenth consecutive quarterly supplemental dividend, to go with the seven increases to our regular monthly dividends in the same time period, allowing us to deliver significant value to our shareholders, while continuing to maintain a conservative dividend policy and retaining a portion of our income for the future benefit of our stakeholders.”

In January 2024, MAIN issued $350 million of 6.95% unsecured notes due March 1, 2029, which have been added to the BDC Google Sheets.

“With the continued support from our long-term lender relationships, and the benefits of our recent investment grade debt offering in January 2024, we enter 2024 with very strong liquidity and a conservative leverage profile and are excited about the prospects for significant growth in both our lower middle market and private loan investment strategies. We appreciate the hard work and efforts of the management teams and employees at our portfolio companies and continue to be encouraged by the favorable performance of the companies in our diversified lower middle market and private loan investment portfolios and remain confident that these strategies, together with the benefits of our asset management business and our cost efficient operating structure, will allow us to continue to deliver superior results for our shareholders.”

The increase in NAV per share was due to the net fair value increases from the unrealized appreciation especially in the LMM, Private Loan, and other portfolios, the accretive impact from equity issuances, and higher earnings which exceeded the dividends.

“We are extremely pleased with our performance in the fourth quarter, which closed another record year for Main Street across several key financial metrics. Our fourth quarter performance resulted in a new quarterly record for net investment income per share, distributable net investment income per share equal to our existing quarterly record that was set earlier this year, a new record for net asset value per share for the sixth consecutive quarter and a return on equity of approximately 23% for the fourth quarter. Our strong performance in the fourth quarter continued our positive performance from the first three quarters of 2023 and resulted in new annual records for net investment income per share and distributable net investment income per share and a return on equity of approximately 19% for the full year. These results demonstrate the continued and sustainable strength of our overall platform, the benefits of our differentiated and diversified investment strategies, the unique contributions of our asset management business and the continued underlying strength and quality of our portfolio companies. We are further pleased to be able to generate these returns while intentionally maintaining a very conservative capital structure and liquidity position during 2023.”

Please keep in mind that the “% of debt investments at cost secured by first priority lien” shown below is only for debt investments (excludes equity positions):


Dividends-to-NAV/Book Value Ratios

The following table shows the current annual dividends divided by NAV per share as a simple proxy for current returns on equity (“ROE”) to shareholders. BDCs with higher-risk portfolios should be able to deliver higher returns through higher portfolio yields. Conversely, lower-risk BDCs have lower portfolio yields due to safer assets/investments responsible for their lower return ratios. However, many of the other BDCs with lower return ratios are due to higher operating costs (including PSEC and MRCC), and/or credit issues driving lower prices paid by investors.

We do not cover most of the lower return and/or lower quality BDCs including PFX, LRFC, CCAP, SLRC, BKCC, and BBDC mostly due to historically providing lower returns to shareholders driving lower price multiples to NAV (current average of 0.75) and less access to additional equity capital to deleverage and/or for opportunistic portfolio growth.


What Can I Expect Each Week With a Paid Subscription?

Each week we provide a balance between easy-to-digest general information to make timely trading decisions supported by the detail in the Deep Dive Projection reports (for each BDC) for subscribers that are building larger BDC portfolios.

  • Monday Morning Update – Before the markets open each Monday morning, we provide quick updates for the sector, including significant events for each BDC along with upcoming earnings, reporting, and ex-dividend dates. Also, we provide a list of the best-priced opportunities along with oversold/overbought conditions, and what to look for in the coming week.
  • Deep Dive Projection Reports – Detailed reports on individual BDCs each week prioritized by focusing on buying opportunities and potential issues such as changes in portfolio credit quality and/or dividend coverage (usually related). This should help subscribers put together a shopping list ready for the next general market pullback.
  • Weekly General Updates or Comparison Reports – A series of updates discussing ‘Building a BDC Portfolio’, suggested pricing and limit orders, expense/return ratios, interest rates, leverage, BDC Investment Grade Notes/Baby Bonds, portfolio mix, and potential impacts on dividend coverage and risk.

Blue Owl Capital (OBDC): Dividend Increase Above Best-Case

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

  • OBDC target prices, buying points, and suggested limit orders (used during market volatility).
  • OBDC risk profile, potential credit issues, changes in NAV, and overall rankings. Please see BDC Risk Profiles for additional details.
  • OBDC dividend coverage projections (base, best, worst-case scenarios). Please see BDC Dividend Coverage Levels for additional details.


OBDC Quick Quarterly Update (December 31, 2023)

  • This information will be discussed in the updated OBDC Deep Dive Projection report.
  • Earnings: Beat its best-case projections covering its regular dividend by 149% mostly due to continued prepayment-related income (prepayment fees and accelerated amortization of upfront fees) with $1.1 billion of repayments/sales during the quarter plus higher than expected dividend income and increased portfolio yield.
  • PIK Income: Declined slightly from 10.5% to 10.2% of total income, most of which is not related to restructured investments and/or credit issues.
  • Dividends: Increased its regular quarterly dividend from $0.35 to $0.37 per share plus a supplemental dividend of $0.08 per share for a total of $0.45 per share for Q1 2024, which was above the previous best-case projections, as shown below.
  • NAV Per Share: Increased by $0.05 per share or 0.3% (from $15.40 to $15.45) due to over-earning the dividends by $0.08 per share (after tax) partially offset by net unrealized losses of $0.03 per share mostly related to watch list investments including Hearthside Food Solutions, Ideal Image Development, and Walker Edison Furniture. The largest decline was Hearthside (listed as H-Food) with its second-lien position marked lower by another $11 million (impact of $0.03 per share) likely for the reasons discussed in previous reports and currently valued at 66% of cost but remains on accrual status.
  • Credit Quality: The fair value of non-accruals increased slightly from 0.8% to 0.9% of the total portfolio due to adding its watch list investment in Ideal Image Development (a relatively smaller investment). Also, its first-lien positions in Tall Tree FoodsWalker Edison Furniture, and CIBT Global, Inc. remain on non-accrual but mostly marked near or above cost (a good sign). Investments Rating 3 through 5 which are borrowers performing below expectations decreased slightly from 11.2% to 10.9%.

Craig W. Packer, CEO: “OBDC achieved record NII for the fourth consecutive quarter and its highest NAV per share since inception in the fourth quarter. As a result of our strong earnings, OBDC earned a record 13.2%2 ROE in the fourth quarter, translating to an annual ROE of 12.7%.”

As shown below, I was/am expecting additional supplemental dividends and/or dividend increases over the coming quarters (supplemental dividends are paid in the following quarters):

As discussed in previous reports, OBDC has higher-than-average amounts of PIK interest income, currently around 10.2% of total income, which includes The Better BeingAssociations FinanceMavis Tire ExpressOB Hospitalist, and Tall Tree Foods which were partially/fully converted to PIK. Management discussed on the previous call and mentioned that most of the PIK is not related to restructured investments and/or credit issues. OBDC has a better-than-average history of credit quality and continues to invest in larger companies that would likely outperform, so a higher amount of PIK is acceptable, but I will continue to watch over the coming quarters.

Please note that the ‘Core NII’ shown below excludes excise tax and one-time fees related to capital gains or borrowing facilities.


Investments Rating 3 through 5 which are borrowers performing below expectations decreased slightly from 11.2% to 10.9%.



What Can I Expect Each Week With a Paid Subscription?

Each week we provide a balance between easy-to-digest general information to make timely trading decisions supported by the detail in the Deep Dive Projection reports (for each BDC) for subscribers that are building larger BDC portfolios.

  • Monday Morning Update – Before the markets open each Monday morning, we provide quick updates for the sector, including significant events for each BDC along with upcoming earnings, reporting, and ex-dividend dates. Also, we provide a list of the best-priced opportunities along with oversold/overbought conditions, and what to look for in the coming week.
  • Deep Dive Projection Reports – Detailed reports on individual BDCs each week prioritized by focusing on buying opportunities and potential issues such as changes in portfolio credit quality and/or dividend coverage (usually related). This should help subscribers put together a shopping list ready for the next general market pullback.
  • Weekly General Updates or Comparison Reports – A series of updates discussing ‘Building a BDC Portfolio’, suggested pricing and limit orders, expense/return ratios, interest rates, leverage, BDC Investment Grade Notes/Baby Bonds, portfolio mix, and potential impacts on dividend coverage and risk.

Hercules Capital (HTGC) Update: Another Rock Star Quarter (All Accounts)

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

  • HTGC target prices, buying points, and suggested limit orders (used during market volatility).
  • HTGC risk profile, potential credit issues, changes in NAV, and overall rankings. Please see BDC Risk Profiles for additional details.
  • HTGC dividend coverage projections (base, best, worst-case scenarios). Please see BDC Dividend Coverage Levels for additional details.


HTGC Quick Quarterly Update (December 31, 2023)

  • Earnings: Beat its best-case projected NII covering its regular dividend by 141% mostly due to higher prepayment-related income from $278 million of early loan repayments (compared to $148 million the previous quarter) combined with lower expenses including employee compensation and ‘Other G & A’. Also, there was another quarter of higher-than-expected fee income of over $7 million and increased portfolio yield. HTGC has undistributed earnings of $0.80 per share (previously $1.03 per share) for additional supplemental dividends.
  • Subsequent Events: Q1 2024 is off to a strong start as the company has closed new gross debt and equity commitments of $552 million and funded $384 million through February 13, 2024, with pending commitments of $507 million.
  • Dividends: Maintained its regular/base dividend of $0.40 per share plus another supplemental of $0.08 per share which was the previous base case projections. The company expects to pay a total of $0.32 per share in supplemental dividends for 2024 which was already taken into account with its ST target price and included in the total yield in the BDC Google Sheets
  • Recent Share Issuances: During Q4 2023, the company sold 6.5 million shares under its equity ATM program for net proceeds of $100 million. As of December 31, 2023, approximately 17.3 million shares remain available for issuance and sale.
  • NAV Per Share: Increased by $0.50 or 4.6% (from $10.93 to $11.43) due to $0.08 per share related to the valuation on publicly traded equity/warrant positions, accretive share issuances adding $0.16 per share, overearning its regular and supplemental dividends by $0.08 per share, and appreciation of other equity and watch list positions.
  • Credit Quality: Non-accruals declined from 0.8% to 0.0% of the portfolio fair value due to partial repayment of its first-lien position in Convoy, Inc. which remains the only investment on non-accrual but management is expecting to resolve the issue with no further impact to NAV per share (see notes below). The non-accrual PIK portion of its debt position in Tectura Corporation was restructured into a preferred equity position and the non-PIK loan was marked to full value. There was a decrease in the average credit grade of debt investments (from 2.28 to 2.24) and credit quality remains strong with “100% of our debt portfolio companies remain current on contractual payments”.
  • This information will be discussed in the updated HTGC Deep Dive Projection report.

“As of our most recent reporting, 100% of our debt portfolio companies remain current on contractual payments to Hercules. Our workout efforts with regards to Convoy remain ongoing and our recovery efforts will likely wrap up early this year, although that situation remains ongoing and fluid.”

“Early loan repayments increased in Q4 to approximately $278 million, which came in above our guidance of $150 million to $250 million. We expect 2024 to be another year with higher-than-normal volatility and a higher-for-longer rate environment, but as we discussed on our last call, we expect the market environment for new originations to improve throughout 2024. We are already seeing this come to fruition in Q1.

Q. “It’s clearly a record quarter of results, and as you noted, dividend coverage on a core basis totaled 140%. So, it would seem like the starting point for earnings in 2024 is quite a bit higher than the base dividend you announced yesterday. So, could you just walk us through the rationale about maintaining and not increasing the current base dividend?”

A. “I think we’ve been pretty consistent over the course of the last several years in terms of how we manage the base distribution. We never want to set the base distribution at a number that we think would jeopardize our ability to maintain it irrespective of market and rate environment conditions. We set the base distribution based on our outlook for core income, where we essentially back out the benefit of any prepayments and accelerations. We want to continue to take a conservative position. That was the choice that we made with respect to Q4. We are continuing to deliver that out-performance to our shareholders via the supplemental distributions. This is the fourth consecutive year where we’ve been able to enhance the quarterly base distribution with an additional supplemental distribution. And we think that that’s the right way to operate the business in the current environment. It certainly does not mean that that’s not going to change on a go-forward basis. But that was the rationale for the decision to maintain $0.40 and declare a $0.32 supplemental distribution payable $0.08 per quarter in 2024.”



“Our Grade 1 and 2 credits improved to 62.6% compared to 62.1% in Q3. Grade 3 credits were slightly lower at 34% in Q3 versus 34.5% in Q3. Our rated four credits increased moderately to 3.4% from 2.6% in Q3, and we had no rated five credits in Q4. In Q4, the number of loans on nonaccrual decreased by one.”

 



Portfolio Company IPO and M&A Activity in Q4 2023 and Q1 2024

As of February 13, 2024, Hercules held debt, warrant or equity positions in six (6) portfolio companies that have completed or announced an IPO or M&A event, including:

In November 2023, portfolio company enGene Holdings Inc. (ENGN), a clinical stage biotechnology company pioneering novel non-viral gene therapies for local administration into mucosal tissues, completed its SPAC merger initial listing with Forbion European Acquisition Corp. (FRBN), a special purpose acquisition company. Hercules cumulatively committed $20.0 million in venture debt financing beginning in December 2021 and currently holds warrants for 43,689 shares of common stock as of December 31, 2023.

In November 2023, portfolio company Tact.ai Technologies, Inc., a developer of field engagement and conversational AI technology, announced it has completed the sale of its technology assets to Aktana, Inc., a leader in intelligent customer engagement for the global life sciences industry. Terms of the technology acquisition were not disclosed. Hercules committed $5.0 million in venture debt financing in February 2020.

In November 2023, portfolio company Faction, a multi-cloud data services provider, announced it had been acquired by Tahosa Capital, an investment firm. Terms of the acquisition were not disclosed. Hercules committed $12.5 million in venture debt financing beginning in November 2017.

In February 2024, portfolio company ZeroFox, Inc. (ZFOXan enterprise software-as-a-service leader in external cybersecurity, announced it has signed a definitive agreement to be acquired by Haveli Investments, a private equity firm that seeks to invest in companies in the technology sector with a focus on software, data, gaming and adjacent industries, for $350 million. The acquisition is subject to customary closing conditions including shareholder approval. Upon completion, ZeroFox’s common stock will no longer be publicly listed on the Nasdaq Global Market and will become a privately held company. Hercules committed $30.0 million in venture debt financing beginning in June 2019 and currently holds 289,992 shares of common stock as of December 31, 2023.


What Can I Expect Each Week With a Paid Subscription?

Each week we provide a balance between easy-to-digest general information to make timely trading decisions supported by the detail in the Deep Dive Projection reports (for each BDC) for subscribers that are building larger BDC portfolios.

  • Monday Morning Update – Before the markets open each Monday morning, we provide quick updates for the sector, including significant events for each BDC along with upcoming earnings, reporting, and ex-dividend dates. Also, we provide a list of the best-priced opportunities along with oversold/overbought conditions, and what to look for in the coming week.
  • Deep Dive Projection Reports – Detailed reports on individual BDCs each week prioritized by focusing on buying opportunities and potential issues such as changes in portfolio credit quality and/or dividend coverage (usually related). This should help subscribers put together a shopping list ready for the next general market pullback.
  • Weekly General Updates or Comparison Reports – A series of updates discussing ‘Building a BDC Portfolio’, suggested pricing and limit orders, expense/return ratios, interest rates, leverage, BDC Investment Grade Notes/Baby Bonds, portfolio mix, and potential impacts on dividend coverage and risk.

Sixth Street Specialty Lending (TSLX): Another Solid Quarter

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

  • TSLX target prices, buying points, and suggested limit orders (used during market volatility).
  • TSLX risk profile, potential credit issues, changes in NAV, and overall rankings. Please see BDC Risk Profiles for additional details.
  • TSLX dividend coverage projections (base, best, worst-case scenarios). Please see BDC Dividend Coverage Levels for additional details.


This update discusses Sixth Street Specialty Lending (TSLX) which remains one of the highest-quality BDCs that perform well during distressed environments. Management is very skilled at finding value in the worst-case scenarios, including distressed retail and energy investments.

TSLX often lends to companies with an exit strategy of being paid back even through bankruptcy/restructuring and is proficient at stress testing every investment with proper coverage and covenants. Management has prepared for the worst as a general philosophy and historically used it to make superior returns (as shown next). Out of 25 transactions, 9 have gone through the bankruptcy process with no capital losses, with an unlevered return of almost 21%. TSLX’s portfolio is 91% first-lien with an average of 1.9 financial covenants for each debt position, 82% with call protection, and 88% effective voting control.

Comparison of Return on Equity (“ROE”)

  • This information will be updated to take into account December 31, 2023, results.

The following table shows the changes in NAV per share and dividends paid between December 31, 2017, and September 30, 2023, as a simple proxy for return on equity (“ROE”) to shareholders. It is important to note that many BDCs prefer not to pay special or supplemental dividends unless necessary because they directly reduce NAV per share. Also, some BDCs purposely pay lower dividends relative to their earnings, which contribute to higher NAV per share. However, this table takes these into account along with the current price-to-NAV ratios, showing that investors pay higher multiples for BDCs that deliver higher returns to shareholders.

Most BDCs with higher ROEs have historically held higher amounts of equity investments, especially HTGC, GAIN, MAIN, FDUS, ARCC, GLAD, and CSWC. However, TSLX has relatively lower amount amounts of equity positions and a much higher first-lien currently around 91% but has still delivered higher returns to investors as shown below.


TSLX Quick Quarterly Update (December 31, 2023)

  • Earnings: Beat its best-case projections covering its regular dividend by 137% (excluding tax accrual) due to higher than expected portfolio growth and higher fee and prepayment-related income, including accelerated original issue discount (“OID”) accretion partially offset by a slight decline in the overall portfolio yield from 14.3% to 14.2%. Leverage increased due to portfolio growth and no shares issued through its ATM with a current debt-to-equity of 1.21 (net of cash).
  • Dividends: Maintained its base dividend of $0.46 plus another supplemental dividend of $0.08 for a total of $0.54 per share paid in Q1 2024, which was above the previous best-case projections of $0.53 per share.
  • Credit Quality: Only American Achievement remains on non-accrual status at 0.6% of the portfolio fair value with almost 96% of the portfolio fair value rated 1 or 2 (strongest credit quality). It should be noted that its debt position in Bed Bath and Beyond remains almost fully valued, implying confidence from management,as discussed in the previous report. TSLX management is very skilled at finding value in the worst-case scenarios, including distressed retail ABL and energy investments.
  • NAV Per Share: Increased by another 0.4% (from $16.97 to $17.04) due to overearning the dividends and accretive share issuances through the DRIP.
  • Other: Recently issued $350 million of 6.125% unsecured notes due March 2029, as the company is continuing to strengthen its balance sheet with more unsecured borrowings.
  • This information will be discussed in the updated TSLX Deep Dive Projection report.




 


What Can I Expect Each Week With a Paid Subscription?

Each week we provide a balance between easy-to-digest general information to make timely trading decisions supported by the detail in the Deep Dive Projection reports (for each BDC) for subscribers that are building larger BDC portfolios.

  • Monday Morning Update – Before the markets open each Monday morning, we provide quick updates for the sector, including significant events for each BDC along with upcoming earnings, reporting, and ex-dividend dates. Also, we provide a list of the best-priced opportunities along with oversold/overbought conditions, and what to look for in the coming week.
  • Deep Dive Projection Reports – Detailed reports on individual BDCs each week prioritized by focusing on buying opportunities and potential issues such as changes in portfolio credit quality and/or dividend coverage (usually related). This should help subscribers put together a shopping list ready for the next general market pullback.
  • Weekly General Updates or Comparison Reports – A series of updates discussing ‘Building a BDC Portfolio’, suggested pricing and limit orders, expense/return ratios, interest rates, leverage, BDC Investment Grade Notes/Baby Bonds, portfolio mix, and potential impacts on dividend coverage and risk.

Golub Capital (GBDC) Update: Lower Fee Structure Delivers

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

  • GBDC target prices, buying points, and suggested limit orders (used during market volatility).
  • GBDC risk profile, potential credit issues, changes in NAV, and overall rankings. Please see BDC Risk Profiles for additional details.
  • GBDC dividend coverage projections (base, best, worst-case scenarios). Please see BDC Dividend Coverage Levels for additional details.


Golub Capital (GBDC) is considered a lower-risk BDC  for many reasons, including its higher credit quality portfolio of mostly lower yield first-lien and one-stop loans with strong covenant and security protections in mostly non-cyclical sectors. The portfolio is lower-yielding 94% first-lien, highly diversified with very low concentration risk, an average investment size of 0.3% of the portfolio fair value, and the top 25 accounting for around 31%.

“GBDC’s portfolio remained highly diversified by obligor with an average investment size of approximately 30 basis points with 95% of our investment portfolio was comprised of first lien, senior secured floating rate loans and defensively positioned in what we believe to be resilient industries.”





GBDC Quick Quarterly Update (December 31, 2023)

  • Earnings: Reported between its base and best-case projections due to a higher-than-expected portfolio yield (increased from 11.9% to 12.2%) combined with higher dividend income and lower ‘Other G & A’. It should be noted that quarterly interest income has increased from $89 million to $162 million or 82%, increasing NII per share from $0.30 to almost $0.51 per share (excluding tax accrual) over the last 7 quarters.
  • PIK Interest Income: Decreased from 8% (during the previous quarter) to 7% of total income but remains higher than previous levels (around 5% to 6%).
  • Dividends: Recently its regular quarterly distribution from $0.37 to $0.39 per share plus a supplemental dividend of $0.07 per share for Q4 2023 (paid in Q1 2024), as expected in the previous best-case projections (shown below). Similar to other BDCs, GBDC has adopted a variable portion of its dividend policy to pay out the excess earnings as portfolio yields remain higher.
  • Share Repurchases: None likely due to trading closer to NAV and maintaining leverage.
  • NAV per Share: Increased by $0.01 (from $15.02 to $15.03) due to overearning the dividends (regular and supplemental) mostly offset by unrealized losses related to Oliver StreetElite Dental, and Rubio’s Restaurants
  • Credit Quality: Non-accruals decreased from 1.1% to 1.0% of the portfolio fair value mostly due to marking down Oliver Street (dba U.S. Dermatology Partners) and Elite Dental as well as completely writing off Rubio’s Restaurants. However, Bayside and Opening Day remain fully valued implying likely temporary and could be added back to accrual. The amount of investments rated Category 2 and 3 decreased from 14.9% to 14.1% (implies improved portfolio credit quality).
  • This information will be discussed in the updated GBDC Deep Dive Projection report.

As shown below, I was expecting $0.07 per share of supplemental dividends in the best-case projections as well as additional supplemental dividends over the coming quarters partially supported by the lower fee structure:



 


Non-accruals decreased slightly from 1.1% to 1.0% of the portfolio fair value mostly due to marking down Oliver Street (dba U.S. Dermatology Partners) and Elite Dental as well as completely writing off Rubio’s Restaurants. This will be discussed in the updated GBDC Deep Dive report along with the other non-accruals. GBDC has around 357 portfolio company investments, so a certain amount on non-accrual status is to be expected.

 


GBDC maintains a credit watch list with portfolio companies placed into one of five categories, with Category 5 being the highest rating and Category 1 being the lowest. The amount of Category 2 and 3 decreased from 14.9% to 14.1%.


Changes to GBDC Fee Structure & Financial Analysis

As mentioned later, GBDC’s investment adviser has agreed to reduce the income incentive fee and capital gain incentive fee rate from 20.0% to 15.0% effective as of January 1, 2024, and was taken into account with the previously updated projections. Also, in August 2023, GBDC announced the reduction of its base management fee from 1.375% to 1.000%.

GBDC now has one of the best fee agreements in the sector with the lowest base management fee (similar to BXSL, GSBD, and PFLT) combined with the highest hurdle rate at 8.00%, and a cumulative ‘total return’ hurdle or ‘look back’ provision when calculating income incentive fees to protect shareholders from capital losses. I would like to see other BDCs join this group of lower fee structures that would encourage larger institutional investors to sector driving higher multiples and returns for current shareholders. After taking into account the reduced fees, GBDC’s expense ratio declines from 33.5% to 26.8% which is among the lowest in the sector, especially compared to other externally managed BDCs (as shown later).

The following table shows the pro-forma changes and impact to earnings and dividend coverage. Please note that the reduced base management fee was already included in calendar Q3 and Q4 2023 results so the change in pro-forma earnings was around $0.03 per share compared to $0.05 per share for the previous quarters. Basically, GBDC is able to pay at least $0.20 per share annually taking into account the reduced fees. Also, given the previous increases in portfolio yield and maintaining credit quality, the company can easily support dividends of $0.50 per share per quarter (or $2.00 annually) which is taken into account with the GBDC’s target prices.


What Can I Expect Each Week With a Paid Subscription?

Each week we provide a balance between easy-to-digest general information to make timely trading decisions supported by the detail in the Deep Dive Projection reports (for each BDC) for subscribers that are building larger BDC portfolios.

  • Monday Morning Update – Before the markets open each Monday morning, we provide quick updates for the sector, including significant events for each BDC along with upcoming earnings, reporting, and ex-dividend dates. Also, we provide a list of the best-priced opportunities along with oversold/overbought conditions, and what to look for in the coming week.
  • Deep Dive Projection Reports – Detailed reports on individual BDCs each week prioritized by focusing on buying opportunities and potential issues such as changes in portfolio credit quality and/or dividend coverage (usually related). This should help subscribers put together a shopping list ready for the next general market pullback.
  • Weekly General Updates or Comparison Reports – A series of updates discussing ‘Building a BDC Portfolio’, suggested pricing and limit orders, expense/return ratios, interest rates, leverage, BDC Investment Grade Notes/Baby Bonds, portfolio mix, and potential impacts on dividend coverage and risk.

Ares Capital (ARCC): Another Solid Quarter!

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

  • ARCC target prices, buying points, and suggested limit orders (used during market volatility).
  • ARCC risk profile, potential credit issues, changes in NAV, and overall rankings. Please see BDC Risk Profiles for additional details.
  • ARCC dividend coverage projections (base, best, worst-case scenarios). Please see BDC Dividend Coverage Levels for additional details.


ARCC December 31, 2023, Quick Update

For Q4 2023, ARCC easily beat its best-case projections, mostly due to much higher-than-expected portfolio growth and continued higher amounts of dividend income (of $129 million), covering its regular dividend by 134% (excluding excise tax of $9 million). The company reaffirmed its regular dividend of $0.48 per share, as expected in the previous base case projections. The amount of payment-in-kind (“PIK”) interest income increased to 6.6% of total income with an average of around 6.4% for 2023. There was a slight decline in leverage with its debt-to-equity ratio declining from 1.02 to 1.01 (net of cash) due to the issuance of 12.0 million shares (accretive to NAV) through its “at the market” ATM equity program raising a total of $236 million in net proceeds.

Kipp deVeer, CEO: “Our record fourth quarter Core EPS and net asset value per share concluded another successful year for our company. We continue to drive strong credit and financial results using our extensive sourcing, underwriting and portfolio management capabilities. We believe we are heading into 2024 from a position of strength and will seek to build upon our 14-year track record of paying a stable regular quarterly dividend for our shareholders.”

It is important to point out that its regular dividend of $0.48 per share is adequately covered, especially given that the company has earned an average of almost $0.61 per share over the last five quarters. As mentioned in the weekly BDC sector updates, I am expecting fewer (and smaller) increases in the regular dividends, as BDCs prepare for potentially lower rates.

As expected, ARCC had a busy Q4 2023 with almost $2.4 billion of new commitments and almost $2.0 billion of total fundings. So far in Q1 2024, the company made new commitments of $705 million, of which $478 million were funded. However, there have already been $695 million of exits driving around $19 million or $0.03 per share of realized gains.

During Q4 2023, ARCC sold another $351 million of loans to IHAM that should continue to drive higher dividend income over the coming quarters and the overall portfolio yield has increased from 10.5% to 11.3% over the last four quarters:

In January 2024, the Board authorized an amendment to its existing $1.0 billion stock repurchase program to extend the expiration date from February 15, 2024 to February 15, 2025.

Non-accrual investments remain 0.6% of the total portfolio due to adding its watch list investment in Kellermeyer Bergensons (provider of janitorial and facilities management services) mostly offset by additional markdowns for Singer SewingSHO Holding (Shoes for Crews), and Supply Source Enterprises. Also, there was a very small position in Aventiv (Securus Technologies) added to non-accrual which is held by TCPC and PSEC. These investments have been discussed in previous reports and already included in ARCC’s watch list investments which will be discussed in the updated ARCC Deep Dive Projection report. Please note that ARCC has a very large portfolio with 505 portfolio companies valued at around $22 billion, so there will always be a certain amount of non-accruals.


There amount of higher-risk Grade 1 and Grade 2 credit-rated investments decreased slightly from 6.5% to 6.4% of the portfolio fair value and likely includes many of the previously discussed watch list investments. The weighted average grade of the portfolio at fair decreased from 3.2 to 3.1 (will also be discussed in the updated ARCC Deep Dive Projection report).


What Can I Expect Each Week With a Paid Subscription?

Each week we provide a balance between easy-to-digest general information to make timely trading decisions supported by the detail in the Deep Dive Projection reports (for each BDC) for subscribers that are building larger BDC portfolios.

  • Monday Morning Update – Before the markets open each Monday morning, we provide quick updates for the sector, including significant events for each BDC along with upcoming earnings, reporting, and ex-dividend dates. Also, we provide a list of the best-priced opportunities along with oversold/overbought conditions, and what to look for in the coming week.
  • Deep Dive Projection Reports – Detailed reports on individual BDCs each week prioritized by focusing on buying opportunities and potential issues such as changes in portfolio credit quality and/or dividend coverage (usually related). This should help subscribers put together a shopping list ready for the next general market pullback.
  • Weekly General Updates or Comparison Reports – A series of updates discussing ‘Building a BDC Portfolio’, suggested pricing and limit orders, expense/return ratios, interest rates, leverage, BDC Investment Grade Notes/Baby Bonds, portfolio mix, and potential impacts on dividend coverage and risk.

Prospect Capital (PSEC): Case Study For A Poorly Managed BDC

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

  • PSEC target prices, buying points, and suggested limit orders (used during market volatility).
  • PSEC risk profile, potential credit issues, changes in NAV, and overall rankings. Please see BDC Risk Profiles for additional details.
  • PSEC dividend coverage projections (base, best, worst-case scenarios). Please see BDC Dividend Coverage Levels for additional details.


Coverage of Lower-Performing BDCs

There are a handful of reasons to cover/follow the lower-performing BDCs including:

  • Establishing a range for key measures of quality in the sector which are used to assign price targets for each BDC. Also, it is helpful to see where how the other BDCs rank compared to others and then be able to tie to performance.
  • Identifying signs of lower quality management so that we know what to look for in other BDCs before there is a ‘real problem’. This is similar to watching the car in front of you drive off the road so that you do not make the same mistake.
  • There is always a chance that management will be able to improve performance as they are responsible for almost every aspect including credit quality, fee structure/waivers, dividend policy, marking the portfolio with appropriate valuations, timing of changes in the capital structure (equity and bond offerings), operating and borrowing expenses, etc.
  • Also, many investors will hold their investment-grade bonds rather than the common shares (including myself but not with PSEC).

I believe that Prospect Capital (PSEC) is an excellent ‘case study’ of a poorly managed BDC that we can all learn from.

Its “Operating Cost as a Percentage of Available Income” which measures operating, management, and incentive fees compared to available income has recently increased to over 50% (as shown later). “Available Income” is total income less interest expense and is the amount of income that is available to pay operating expenses and shareholder distributions. This means that over 50% is going to management rather than paying shareholders.

Also, the amount of PIK interest income for PSEC recently increased from 11.4% to 20.2% of interest income (from 9.8% to 18.6% of total income), which is now higher than FS KKR Capital (FSK) and Monroe Capital (MRCC) which is around 13% to 16 of total income.

As shown later, its top five investments account for $3.0 billion, or almost 40% of the total portfolio, and over 80% of NAV per share. If these investments were marked back down to cost, the current NAV per share would decline from $8.92 to $6.62.


 

PSEC Quick Quarterly Update (December 31, 2023)

  • Pricing: No change. I will reassess after updating the projections.
  • Earnings: Reported below its worst-case projections due to lower-than-expected income from its CLO investments and zero structuring fee income from National Property REIT combined with much higher ‘Other G & A expenses’.
  • Payment-in-Kind (“PIK”) Income: Increased from 11.4% to 20.2% of interest income (from 9.8% to 18.6% of total income), which is now higher than FSK and MRCC.
  • Dividends: Maintained its regular monthly dividend of $0.06 per share through April 2024 and expects to declare subsequent distributions in May 2024.
  • Credit Quality: Non-accrual investments remain 0.2% of the total portfolio at fair value and include only two of its loans to Uses Corp as the other remain fully valued and on accrual status. Other investments on non-accrual include Engine GroupStrategic Materials, and United Sporting Companies. Please note that Aventiv (Securus Technologies) remains on accrual status even though ARCC placed its second-lien position on non-accrual in Q4 2023.
  • NAV Per Share: Decreased by $0.33 or 3.6% (from $9.25 to $8.92) due to marking down its watch list investments in Securus TechnologiesNational Property REITFirst Tower FinanceCP Energy, and InterDent as well as issuing shares through its DRIP and conversion of its preferred stock (shown below). The markdowns in these five investments accounted for over $131 million of portfolio losses (as shown later) or around $0.32 per share but were partially offset by gains in Valley Electric.

As shown below, there were almost 4.2 million additional shares issued during Q4 2023 mostly through conversion of its preferred stock plus the dividend reinvestment plan (“DRIP”) at a 5% discount to the market price. The weighted average price of the newly issued shares was around $6.77 or a 24% discount to NAV per share:

As shown below, there was no restructuring fee income from National Property REIT during Q4 2023 compared to $15.5 million the previous quarter. Also,

PSEC’s total revenues have declined to levels before the recent rise in interest rates even though leverage has increased due to additional credit issues, declining income from CLOs, and lower amounts of non-interest income. Also, the “Operating Cost as a Percentage of Available Income” which measures operating, management, and incentive fees compared to available income increased to over 50%. “Available Income” is total income less interest expense and is the amount of income that is available to pay operating expenses and shareholder distributions.

Its NAV per share declined by $0.33 or 3.6% due to marking down its watch list investments in Securus TechnologiesNational Property REITFirst Tower FinanceCP Energy, and InterDent accounted for over $131 million of losses partially offset by gains in Valley Electric:

National Property REITFirst Tower Finance, InterDent, Valley Electric, and Credit.com/PGX, still account for $3.0 billion, or almost 40% of the total portfolio, and over 80% of NAV per share (as shown below). This is a very high-concentration risk, especially if management uses aggressive valuation measures. The following table shows the total amount of unrealized gains remains around $1 billion, which has added $2.30 to its NAV per share even after taking into account the continued markdowns. If these investments were marked back down to cost, the current NAV per share would decline from $8.92 to $6.62.

During an economic recession, this is a possibility for some of these investments, and investors should be prepared for a certain amount of markdowns. On September 28, 2023, PGX underwent a corporate restructuring with the new borrower being Credit.com Holdings. As part of the transaction, the first-lien term loan was restructured into new debt, resulting in a realized loss of $1.5 million, and the second-lien term loan was written off resulting in a realized loss of $180.0 million. In connection with a Chapter 11 process, PGX sold the majority of its assets to Credit.com Holdings, and PSEC was issued equity at Credit.com, through its Class B non-voting equity investment in PGX Topco.

There are many factors to take into account when assessing dividend coverage for BDCs including portfolio credit quality, realized losses, fee structures including ‘total return hurdles’ taking into account capital losses, changes to portfolio yields, borrowing rates, the amount of non-recurring and non-cash sources of income including payment-in-kind (“PIK”). Higher amounts of PIK for lower-quality BDCs are typically a sign that portfolio companies are not able to pay interest expense in cash and could imply potential credit issues over the coming quarters.

Most BDCs have around 2% to 8% PIK income and I pay close attention once it is over ~5% of total interest income. The amount of PIK interest income for PSEC recently increased from 11.4% to 20.2% of interest income (from 9.8% to 18.6% of total income), which is now higher than FSK and MRCC which are around 13% to 16 of total income.

The following table shows many of the larger PIK positions for PSEC with the following notes:

  • PIK was due January 2, 2024 for Valley Electric Company, Inc. loans. The Maximum PIK rate that was capitalized into the balance of the First Lien Term Loan and First Lien Term Loan B was 10.00% and 8.00%, respectively.
  • On December 29, 2023, the Aventiv Technologies First Lien and Second Lien Term Loan were amended to allow a portion of interest accruing in cash to be payable in kind.
  • PIK was due October 2, 2023 for CP Energy Services loans. The Maximum PIK rate that was capitalized into the balance of the loans was 14.65%.
  • On September 28, 2023, the Credit.com First Lien Term Loan A and First Lien Term Loan B were amended to allow a portion of interest accruing in cash to be payable in kind.
  • On September 12, 2023, the Rising Tide Holdings, Inc. Exit Facility Term loan was amended to allow a portion of interest accruing in cash to be payable in kind.
  • On March 28, 2023, the USES Corp. First Lien Equipment Term loan was amended to allow interest accruing in cash to be payable in kind resulting in a maximum current PIK rate of 14.61%.
  • On January 6, 2023, the CP Energy Services Amendment No. 16 to Loan Agreement was amended to allow interest accruing in cash to be payable in kind resulting in a maximum current PIK rate of 14.65%.
  • On August 22, 2022, the Spartan Energy Services Amended and Restated Senior Secured Loan Agreement was amended to allow interest accruing in cash to be payable in kind resulting in a maximum current PIK rate of 13.61%.
  • On September 30, 2022, the Credit Central Senior Subordinated Loan Agreement was amended to allow interest accruing in cash to be payable in kind resulting in a maximum current PIK rate of 10.00%.
  • On December 30, 2022, the First Tower Finance Amendment No. 15 was amended to reduce the PIK rate to 5.00% and allow the interest accruing in cash to be payable in kind resulting in a maximum current PIK rate of 15.00%.

As of December 31, 2023, around 18% of the portfolio was equity positions in a small group of investments, and 8% invested in the equity class of the collateralized loan obligation (“CLO”), which are considered non-qualified investments due to the amount of off-balance sheet leverage (typically 10 times) used to achieve returns. Together these account for almost 26% of the portfolio and banks will not allow these assets to be used as collateral for credit lines, which is why PSEC needs to use subordinated notes and preferred stock for most of its borrowings.


What Can I Expect Each Week With a Paid Subscription?

Each week we provide a balance between easy-to-digest general information to make timely trading decisions supported by the detail in the Deep Dive Projection reports (for each BDC) for subscribers that are building larger BDC portfolios.

  • Monday Morning Update – Before the markets open each Monday morning, we provide quick updates for the sector, including significant events for each BDC along with upcoming earnings, reporting, and ex-dividend dates. Also, we provide a list of the best-priced opportunities along with oversold/overbought conditions, and what to look for in the coming week.
  • Deep Dive Projection Reports – Detailed reports on individual BDCs each week prioritized by focusing on buying opportunities and potential issues such as changes in portfolio credit quality and/or dividend coverage (usually related). This should help subscribers put together a shopping list ready for the next general market pullback.
  • Weekly General Updates or Comparison Reports – A series of updates discussing ‘Building a BDC Portfolio’, suggested pricing and limit orders, expense/return ratios, interest rates, leverage, BDC Investment Grade Notes/Baby Bonds, portfolio mix, and potential impacts on dividend coverage and risk.