BDC Market Update

January 23, 2025

PNNT Preliminary Reults: Downgraded

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

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

PNNT Preliminary Results & Dividend Coverage Downgrade

We previously downgraded TriplePoint Venture Growth BDC (TPVG) and Prospect Capital (PSEC) to ‘Level 3’ coverage (implying the potential for a dividend reduction) both of which cut their regular dividends in 2024 for the reasons discussed last year in the previous quick updates:

We have recently downgraded four additional BDCs to Level 3 dividend coverage including PennantPark Investment Corporation (PNNT) for the reasons discussed below. Please note that there are many positive impacts for BDC pricing if rates head lower (due to lower yield expectations from investors, improved portfolio credit quality, and higher NAV). The following is from the recent earnings call with OBDC management: “While lower rates will impact OBDC’s earnings, they will also reduce interest expense for our portfolio companies, enhancing their performance and potentially leading to increased M&A activity. New activity has been light in recent quarters with historically tight spreads driven by strong capital inflows into both public debt and private credit funds.”

Please note that the following information has NOT been announced in a “press release” by PNNT and is from an SEC filing which included preliminary estimates for calendar Q4 2024 and taken into account with the updated projections (shown later):

NAV per share between $7.55 and $7.60 per share at December 31, 2024. This compares to a net asset value per common share of $7.56 at September 30, 2024.
Net investment income between $0.19 and $0.21 per share for the quarter ended December 31, 2024. This compares to net investment income of $0.22 per common share for the quarter ended September 30, 2024.
The investment portfolio at fair value was $1.30 billion, compared to $1.33 billion as of September 30, 2024.
At December 31, 2024, two loans were on non-accrual representing 4.3% of the portfolio at cost and 1.5% at fair market value versus two loans on non-accrual at September 30, 2024, representing 4.1% of the portfolio at cost and 2.3% at fair market value.
As of December 31, 2024, the Company had approximately $779.5 million of total debt and $66.4 million in cash and unused capacity under the Credit Facility.
At December 31, 2024, PennantPark Senior Loan Fund, the company’s joint venture, had approximately $370.1 million in cash and unused capacity under its credit facility.

As shown below, analysts were previously expecting earnings between $0.20 and $0.22 per share with an average near $0.21 per share for Q4 2024 (implying a slight miss):

In June 2024, PNNT increased its monthly dividend from $0.07 to $0.08 per share which was higher than the previous best-case projection, and then quickly downgraded to ‘Level 2’. This was mostly related to the larger-than-expected dividend increase but also due to the recent increase in leverage and higher non-accruals. However, PNNT had around $1.00 per share of UTI/spillover income which is very high (especially as a percentage of NAV per share at around 13%) and needs to be partially paid out:

Previous call: “We do have about $1.00 a share of spillover. So we got to pay that out and we want to kind of pay out judiciously over time and in a careful fashion, knowing that we’re fairly fully levered at this point. So we’re balancing all these different competing interests or different interest, I should say, in terms of paying out the spillover in terms of looking at the earnings power of the company and all the different elements of that. So kind of that really led to our decision to boost the dividend last quarter to $0.08 per month, in large part due to all of these different elements, including the very large spillover.”

“First, it’s important for everyone to know we have a lot of spillover probably about $1.00 a share of spillover that we’re going to need to be to pay out a significant portion of that anyway. Now then you turn to what’s our recurring ongoing NII. And we believe that based on the performance of the portfolio based on continued growth of the joint venture that, that $0.24 is achievable on a recurring basis anyway. So that led us to – those two factors are the key factors that led us to the dividend increase.”

As mentioned in previous reports, UTI/spillover is for temporary dividend coverage issues and BDCs set dividends based on projected earnings. We have temporarily downgraded PNNT to ‘Level 3’ dividend coverage (implying the potential for a dividend reduction in 2025) mostly related to having higher leverage (net debt-to-equity near 1.47 compared to the upper target of 1.30) and a large amount of equity investments of which are mostly non-income producing.

“PNNT is kind of pretty fully levered here at about 1.50x [1.47x net of cash]. Our long-term target leverage is targeting about 1.25x to 1.30x. So, what PNNT does is, it basically buys deals and seasons them and then at some point, the JV will then purchase those deals. So, the growth of the portfolio in PNNT is really going to come through the JV at this point. So, it’s kind of been more of a steady state at PNNT and the new deals and new opportunities, given the leverage are going to be shifted over to the JV when appropriate. So, kind of ins and outs are monitored very closely, and we’ve been active, but we’re also getting repayments.”

As of September 30, 2024, PNNT had around $244 million of equity positions (shown below) in the portfolio that need to be partially rotated out of and into income-producing assets combined with deleveraging by selling assets to its PennantPark Senior Loan Fund (PSLF/JAV):

PNNT Call (November 26, 2024): “Once the JV is fully optimized to $1.5 billion and this incremental capital that we’re putting in, what do those economics look like? And we can work through that model…on the incremental capital, putting in the JV and how that works its way back to PNNT. And then, yes, we are looking forward to some equity rotation in this M&A world that seems to finally have revived after a couple of years of being sleepy. And, I think those are the two drivers for optimizing NII is the JV and the equity rotation.”

Please note that PNNT includes its ‘U.S. Government Securities’ when calculating the total portfolio which are excluded in the ‘Portfolio FV’ shown in the projections. Also, it is important to note that the company has an offsetting liability of $100 million (Payable for investment purchased). Excluding these items PNNT has a portfolio closer to $1.2 billion of which around 20% ($244 million) are equity positions.

On January 2, 2025, PNNT announced that PennantPark Senior Loan Fund (“PSLF”) closed a four-year reinvestment period, twelve-year final maturity, $400.5 million debt securitization in the form of a collateralized loan obligation (“CLO”):

Art Penn, Chief Executive Officer: “We are thrilled by the continued progress of our CLO business, with the milestones of issuing our tenth CLO and crossing over $3 billion in AUM within our CLOs. We believe that this financing positions us well to continue to capture the opportunity in the core middle market, where our capital is strategic to our borrowers. As a result, we believe that the risk adjusted return of our investments are attractive due to higher yields, lower leverage and covenants which are not available in the upper middle market.”

As discussed in previous updates, PNNT is considered a trading position mostly related to its equity positions that are highly sensitive to changes in economic expectations. However, these investments are primarily responsible for the previous NAV per share growth. When I purchased PNNT the company was paying only $0.12 per share per quarter but has continually increased to the current $0.24 per share per quarter ($0.08 per month). However, the amount of leverage has increased with a current debt-to-equity of 1.47 (net of cash) which is among the highest in the sector (as shown next). Also, the projected NII per share over the last three quarters is around $0.21 per share which is relatively low coverage of its previously increased dividend.

Interest rate sensitivity refers to the change in earnings that may result from changes in the level of interest rates. As of September 30, 2024, around 94% of portfolio debt investments bore interest at variable rates and 59% of borrowings were also at variable rates. Even if underlying rates eventually go lower, there is a good chance that most BDCs will continue to over-earn their regular dividends. Many BDCs have opted to take a conservative approach when setting their regular dividends and if portfolio yields decline, we will see lower amounts of supplemental/special dividends but the regular dividends will be maintained especially ‘Level 1’ dividend coverage BDCs.

As mentioned earlier, PNNT increased its monthly dividend higher than expected and if rates decline by 200 basis points, PNNT would only cover its regular dividends by 84%:

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.

January 23, 2025January 23, 2025

MAIN, CSWC, OBDC, TRIN, and PFLT Preliminary Results

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

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

As expected in the previous weekly update, Main Street Capita (MAIN) provided preliminary estimates for Q4 2024 including the following highlights which will be taken into account in the updated MAIN Deep Dive Projection report:

Non-accrual investments decreased from 1.4% to 0.9% of the total portfolio at fair value and from 3.9% to 3.5% at cost as of December 31, 2024.
Net investment income (“NII”) of $ 1.01 to $1.03 per share compared to analyst expectations of $1.03 per share.
Distributable net investment income (“DNII”), which is NII before non-cash compensation expenses, is $1.07 to $1.09 per share compared to dividends paid of $1.035 per share (for Q4 2024).
NAV per share as of December 31, 2024, is $31.62 to $31.68, representing an increase of $1.05 to $1.11 per share, or 3.4% to 3.6%, from the NAV per share of $30.57 as of September 30, 2024.

There was no specific discussion of “another meaningful supplemental dividend” for Q1 2025. However, on January 7, 2025, MAIN announced that it had fully exited its debt and equity investments in Pearl Meyer & Partners upon the completion of a majority recapitalization with a new financial sponsor. MAIN realized a gain of $53.7 million on the exit of its equity investment in Pearl Meyer with this realized value representing an increase of $6.2 million above MAIN’s fair market value for this investment as of September 30, 2024. The impact is a slight increase in NAV per share but around $0.60 per share of realized gains in Q1 2025 which could drive a larger supplemental dividend (in Q1) depending on the total net realized gains for the quarter.

As shown below, the average NII/EPS estimate is/was around $1.03 per share (compared to the likely ~$1.02 per share), implying a slight earnings miss.

Last week, Capital Southwest (CSWC) announced its preliminary results for calendar Q4 2024 including pre-tax net investment income in the range of $0.63 to $0.64 per share and NAV per share in the range of $16.57 to $16.62.

“The preliminary estimate of its net investment income for the same period is in the range of $0.62 to $0.63 per share. Capital Southwest’s preliminary estimate of its investment assets at fair value as of December 31, 2024 is approximately $1.7 billion.”

This implies that its NAV per share remained relatively stable (previously $16.59) with higher-than-expected portfolio growth (previously $1.5 billion) and earnings between my previous base case projection of $0.609 per share and best-case of $0.666 per share:

Also, Blue Owl Capital (OBDC) provided preliminary estimates for Q4 2024 including the following highlights which will be taken into account in the updated OBDC Deep Dive Projection report:

Non-accrual investments for OBDC decreased from 0.6% to 0.4% of the total portfolio at fair value as of December 31, 2024, and 0.3% after taking into account the merger.
Net investment income (“NII”) for OBDC of $0.47 per share compared to analyst expectations of $0.46 per share.
NAV per share for OBDC as of December 31, 2024, was $15.26 (the same after taking into account the merger with OBDE) which is a slight decline from the previous $15.28.
Net debt-to-equity (less cash) declined slightly from 1.23 to 1.19 as of December 31, 2024, and 1.20 after taking into account the merger with OBDE.
The amount of first-lien investments increased slightly from 76% to 78%.

Trinity Capital (TRIN) announced the following Q4 2024 investment highlights which indicate another quarter of meaningful portfolio activity and are taken into account with the updated projections included in the recently updated TRIN Deep Dive Projection report.

Proceeds received from repayments and exits totaled approximately $281 million, which included $130 million from early debt repayments, $15 million from warrant and equity exits, $59 million from scheduled/amortizing debt payments and $77 million from investments sold primarily to multi-sector holdings.
Investments funded totaled approximately $297 million, which was comprised of $190 million in secured loans, $96 million in equipment financings and $11 million in warrant and equity investments.
Originated approximately $411 million of new commitments, which was comprised of $231 million in secured loans, $173 million in equipment financings and $7 million in equity investments.
Funded approximately $233 million to 9 new portfolio companies, $59 million to 15 existing portfolio companies and $5 million of investments to multi-sector holdings.

This would imply lower portfolio growth than previous quarters (likely around $15 million) but it is important to note that Q4 2024 will include a full quarter of benefit from Q3 2024 net new investments of around $260 million. Also, the $130 million of early repayments could drive a meaningful amount of prepayment-related income including accelerated OID and EOT, prepayment penalty, and related fees driving the results closer to the best-case projections. I will hopefully be purchasing additional shares before the company reports Q4 2024 results.

Also, PennantPark Floating Rate Capital (PFLT) disclosed the following Q4 2024 preliminary results in an SEC filing that will be taken into account with the updated projections (see base case later). Again, this information has NOT been announced in a “press release” and was from a recent SEC filing:

NAV per share between $11.33 and $11.38 per share at December 31, 2024. This compares to a net asset value per share of $11.31 at September 30, 2024.
Net investment income between $0.36 and $0.38 per share for the quarter ended December 31, 2024 and includes approximately $0.04 per share of one-time non-recurring income [mostly due to the exit of Marketplace Events driving accelerated amortization income associated with the early repayment], net of the impact on incentive fees. This compares to net investment income of $0.24 per share for the quarter ended September 30, 2024.
Core net investment income (excluding one-time or non-recurring investment income and expenses) is estimated to be between $0.32 and $0.34 per share for the quarter ended December 31, 2024 and excludes approximately $0.04 per share of one-time non-recurring income related to accelerated amortization income associated with the early repayment of one of our loans, net of the impact on incentive fees.This compares to core net investment income of $0.32 per share for the quarter ended September 30, 2024.
The investment portfolio at fair value was $2.20 billion, compared to $1.98 billion as of September 30, 2024.
At December 31, 2024, there were two loans on non-accrual representing 0.4% of the portfolio at cost and 0.1% at fair market value versus two loans on non-accrual at September 30, 2024 representing 0.4% of the portfolio at cost and 0.2% at fair market value.

As shown later, PFLT is currently one of the best-priced BDCs with a stable dividend providing a current yield of 11.0%. Analysts were previously expecting earnings between $0.31 and $0.35 per share with an average near $0.32 per share for Q4 2024 implying an earnings beat (above the best case) as PFLT will report around $0.37 per share.

PFLT’s equity investment in New MPE Holdings (Marketplace Events) was exited during the quarter which represented 11.3% of the equity portfolio at September 30, 2024. In addition, in connection with the payoff of the Marketplace Events, the company recognized approximately $3.8 million of one-time non-recurring income related to accelerated amortization income associated with the early repayment of the loan. The equity position was valued at $20.1 million at September 30, 2024. In connection with the sale, we received $20.6 million in cash proceeds and anticipate receiving approximately $4.9 million of additional escrow proceeds in the future in connection with the terms of the sale. Please note that this will drive a meaningful amount of realized gains during Q4 2024 (depending on how many shares were issued during the quarter).

Please note that our financial projections err on the side of caution by using mostly conservative assumptions, and the preferred outcome is between the ‘Base’ and ‘Best’ case projections. As shown in the updated base case projections below, we are expecting PFLT to cover its dividends even as the portfolio yield declines while keeping modest leverage (debt-to-equity) making it a solid ‘Level 2’ dividend coverage BDC.

What Can I Expect Each Week With a Paid Subscription?

Weekly Updates – 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.

March 19, 2024

Morgan Stanley Direct Lending (MSDL)

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

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

On January 26, 2024, Morgan Stanley Direct Lending (MSDL) closed its IPO of 5 million shares at $20.67 per share raising net proceeds of around $97 million. MSDL is one of the larger ones with total assets over $3 billion and I will likely start coverage of this BDC next month. As mentioned earlier, the Morgan Stanley Investment Management platform has around $1.5 trillion of AUM.

It should be noted that there was an increase in trading activity just after we mentioned the potential for coverage on Friday (not sure if it’s related). Trading volumes will likely pick up after the expiration of share lock-ups (mentioned later).

The company entered into an amended and restated investment advisory agreement to reduce management and incentive fees through the first anniversary of the IPO as well as instituted an incentive fee lookback.

The Amended and Restated Investment Advisory Agreement incorporates (i) a cumulative three-year lookback provision and (ii) a cap on quarterly income incentive fee payments based on net realized capital loss, if any, during the applicable three-year lookback period. From January 24, 2024 to January 24, 2025 the Adviser has also agreed to waive any portion of the Base Management Fee in excess of 0.75% and each component of the incentive fee above 15%.

The Board declared a regular first-quarter dividend of $0.50 per share and two $0.10 per share special dividends, timed to follow the two IPO lock-up release dates that occur in 2024:

In conjunction with our IPO our Board of Directors declared two $0.10 per share special dividends to be paid 195 and 285 days post IPO. These will occur in the third and fourth quarters of this year.

MSDL has the lowest leverage (0.83 before IPO proceeds) which is conservative given it has the highest amount of first-lien (94%) with better than average NAV performance.

As of December 31, 2023, three investments were on non-accrual status, representing $19.3 million at cost and $12.5 million at fair value or around 0.4% of the portfolio.

The Board approved a share repurchase program of up to $100 million for the common stock at prices below NAV, adjusted for dividends.

Each of MS Credit Partners Holdings and our directors, officers and members of the Investment Committee agreed that they will not transfer their shares in accordance with the transfer restrictions provided for in a lock-up agreement with the underwriters in our IPO for a period of 365 days after the date of the prospectus relating to the IPO, which was January 23, 2024.

Certain other stockholders holding in the aggregate approximately 88.0% of the outstanding shares of Common Stock agreed that they will not transfer their shares that they own prior to the IPO in accordance with the transfer restrictions provided for in a lock-up agreement with the underwriters in our IPO for 365 days after January 23, 2024 (or January 22, 2025), provided, however that:

33% of the shares of our Common Stock held by such stockholder prior to this offering will be automatically released from the transfer restrictions at any time beginning 180 days after January 23, 2024 (or July 21, 2024)
An additional 33% of the shares of our Common Stock held by such stockholder prior to this offering will be automatically released from the transfer restrictions at any time beginning 270 days after January 23, 2024 (or October 19, 2024)
The remaining 33% of the shares of our Common Stock held by such stockholder prior to this offering will be released from such transfer restrictions 365 days after January 23, 2024 (or January 22, 2025)

What Can I Expect Each Week With a Paid Subscription?

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.

March 19, 2024

Nuveen Churchill Direct Lending (NCDL)

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

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

Nuveen Churchill Direct Lending (NCDL) is externally managed by its investment adviser, Churchill DLC Advisor, and by its sub-adviser, Churchill Asset Management, priced its offering of 5.5 million shares at $18.05 per share for proceeds of around $99 million.

Trading volumes are relatively low but will likely pick up after the expiration of share lock-ups (mentioned later):

The Board declared a first-quarter 2024 distribution of $0.45 per share payable on April 29, 2024, to shareholders of record as of March 30, 2024.

On January 10, 2024, the Board declared four special distributions of $0.10 per share, payable over the next year:

The average position size is 0.6% of the portfolio with the largest 10 positions comprising only 12.5% of the portfolio.

As of December 31, 2023, there were no investments on non-accrual with a weighted average internal risk rating of 4.1 (4.0 being the initial rating assigned to investments at origination).

NCDL has a higher dividend yield due to paying higher amounts relative to NAV with slightly higher than average leverage.

It has a very low fee structure similar to GBDC but with a 6.00% hurdle (higher is better). The Advisory Agreement became effective on January 29, 2024, and amended and restated the prior investment advisory agreement as follows:

Reduced the base management fee payable by us to the Adviser following the IPO from an annual rate of 1.25% of Average Total Assets (as defined in the Advisory Agreement) to an annual rate of 0.75% of Average Total Assets for the first five quarters beginning with the calendar quarter in which the IPO was consummated (i.e., beginning with the calendar quarter ending March 31, 2024 through the calendar quarter ending March 31, 2025), and thereafter, the base management fee will step up to 1.00% of Average Total Assets
Waived both the incentive fee on income and the incentive fee on capital gains for the first five quarters beginning with the calendar quarter in which the IPO was consummated
The calculation of the incentive fee on income will be subject to a “three-year look back”
The incentive fee on income will be subject to a cap equal to the difference between 15% of the Cumulative Pre-Incentive Fee Net Return (as defined in the Advisory Agreement) in respect of the current calendar quarter and the eleven preceding calendar quarters (or, if fewer, the number of calendar quarters beginning with the calendar quarter in which is the IPO was consummated) (such period, the “Trailing Twelve Quarters”) and the aggregate incentive fee on income that were paid to the Adviser by the Company in respect of the first eleven calendar quarters (or, if fewer, the number of calendar quarters beginning with the calendar quarter in which the IPO was consummated) included in the relevant Trailing Twelve Quarters
The calculation of the incentive fee on capital gain will include cumulative aggregate realized capital gains and cumulative aggregate realized capital losses from the beginning of the calendar quarter in which the IPO was consummated.

The Advisory Agreement will remain in effect for an initial two year period from January 29, 2024, its effective date, and thereafter from year-to-year, subject to approval by the Board or a vote of a majority of the Company’s outstanding voting securities, and by approval of a majority of the independent directors.

NCDL has a staggered lockup release of its pre-IPO shareholders coupled with special dividends with affiliated shareholders locked up for a full-year and non-affiliated pre-IPO shareholders being locked up for 90, 180, and 270 days with a $100 million share repurchase program that commences 60 days post IPO.

What Can I Expect Each Week With a Paid Subscription?

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.

March 19, 2024

Blue Owl Capital Corporation III (OBDE)

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

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

The largest newly public BDC is Blue Owl Capital Corporation III (OBDE) with investments in 153 portfolio companies valued at around $3.6 billion that are 76% first-lien secured debt positions:

Trading volumes are relatively low but will likely pick up after the expiration of share lock-ups (mentioned later):

OBDE has a relatively higher fee structure with an annual base management fee of 1.50% on average gross assets and an incentive fee of 17.5% over a 6% hurdle rate.

The Board previously declared a first-quarter 2024 regular dividend of $0.35 per share for stockholders of record as of March 29, 2024, payable on April 15, 2024. In conjunction with the listing, the Board declared five special dividends of $0.06 per share, payable quarterly:

The Board approved a share repurchase program of up to $100 million for the common stock at prices below NAV.

OBDE’s charter included trading restrictions on 100% of OBDE’s shares outstanding after a liquidity event such as the listing. In connection with the listing, our Board of Directors (the “Board”) waived this restriction for approximately 5% of each investor’s position, which became freely tradeable at time of listing. This represents approximately 5.9 million shares of initial float. Each investor’s remaining shares will become available via the expiration of a series of lock-ups, the first of which is July 23, 2024:

Two portfolio companies on non-accrual, representing 0.6% of the total debt portfolio at fair value and cost. Since its inception, OBDE’s annual net loss rate has been only 0.06%.

Based on the visibility we have today into the favorable positioning of our borrowers, we expect that the vast majority of our portfolio companies will maintain solid coverage metrics and adequate liquidity through this period. We believe any challenges ultimately will be manageable across our portfolio as a whole.

The debt funding mix comprised 46% unsecured debt (based on outstanding debt) with a weighted average debt maturity of approximately 4.7 years and no debt maturities until 2025. Similar to OBDC, management is targeting upper leverage (debt-to-equity) of 1.25:

We believe there is further earnings upside in 2024 as we are able to increase leverage towards the higher end of our target range of 0.90x – 1.25x. As noted in our listing presentation, when we are able to achieve target leverage, run-rate ROE should increase by approximately 50 bps, adding roughly $0.02 per share to quarterly NII, all else equal.

What Can I Expect Each Week With a Paid Subscription?

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.

March 19, 2024

Palmer Square Capital BDC (PSBD)

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

We will likely hold off from covering PSBD due to its higher use of leverage, NAV volatility, lower trading volume, and lack of response from management.
Target prices, buying points, and suggested limit orders (used during market volatility).
Risk profile, potential credit issues, changes in NAV, and overall rankings. Please see BDC Risk Profiles for additional details.
Dividend coverage projections (base, best, worst-case scenarios). Please see BDC Dividend Coverage Levels for additional details.

Palmer Square Capital (PSBD) went public at $16.45 per share and is the smallest of the recent IPOs focused on shorter duration and structured credits which are generally more liquid and in larger companies:

Palmer Square has established its reputation in the global corporate and structured credit market as the top-ranked CLO issuer by deal volume in 2023. This strong performance during a difficult environment for CLO issuance demonstrates our ability to find attractive opportunities and deliver for our investors across market conditions. Palmer Square’s platform is focused on corporate and structured credit across three significant strategies, opportunistic, income short duration; and finally, private and structured credit. PSBD was launched in 2019, and we started investing in early 2020. Unlike traditional direct lending models, we believe our model offers investors attractive risk-adjusted returns through a more liquid and transparent strategy, given our ability to invest across the syndicated and direct lending markets.

It should be noted that PSBD has a higher portion of its portfolio in broadly syndicated loans:

Specifically, our team has the ability to identify the best relative value in the larger, more liquid parts of the market in both the broadly syndicated market and private credit. We’ve already seen private credit issuers return to the broadly syndicated mode market to refinance the tighter spreads. We focus on investing in large, broadly syndicated loans and large private credit.”

“We’ve certainly seen a pretty significant pickup in activity in the syndicated loan market really starting in the fourth quarter of 2023 and certainly continuing this year for January and February. I’d say we’ve seen a few of the larger private credit transactions coming back to our market. There’s been a couple of larger syndicated transactions that were rumored to be going to the private credit markets that came to the syndicated market.”

As of December 31, 2023, there were no investments were on non-accrual status with a weighted average internal rating of the portfolio of 3.6:

The Board approved a share repurchase program of up to $20 million for the common stock at prices below NAV.

Subsequent to the IPO, we have 32,552,794 shares of common stock outstanding. Sales of substantial amounts of our common stock, or the availability of such shares for sale, could adversely affect the prevailing market prices for our common stock.

For Q4 2023, PSBD paid a dividend of $0.535 per share and will announce its Q1 2024 dividend over the coming weeks:

Q. “Just curious if you could give an update on your view on the distribution policy going forward? Do you expect that to be slowing related to your net investment income per share? Or do you expect to hold a relatively stable level of regular dividend and pay supplemental in addition to that?

A. “Our Board has continued to evaluate a go-forward dividend policy, and we’ll be updating shareholders on that front at quarter end.”

PSBD has a higher dividend yield due to paying higher amounts relative to NAV with the highest leverage (1.38 net of cash).

It should be noted that 100% of its borrowings are secured credit facilities (less flexible) at floating rates:

We reached out to management in January 2024 but they have not responded. Also, the trading volumes have fallen off quite a bit:

We will likely hold off from covering this BDC due to its higher use of leverage, NAV volatility, lower trading volume, and lack of response from management.

What Can I Expect Each Week With a Paid Subscription?

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.

March 8, 2024January 23, 2025

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, the dividend is NOT stable and has been downgraded to Level 3 as 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 Labs, Mystery 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 Labs, Mystery 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 Labs, Mystery 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%:

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?

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.

March 8, 2024

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 Thrasio, Whele (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), Khoros, Whele (Perch), CIBT, Astra 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?

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.

February 27, 2024February 27, 2024

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?

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.

February 23, 2024

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

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?

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.