TCG BDC Inc. (CGBD) Dividend Coverage & Risk Profile Update

The following is from the CGBD Deep Dive that was previously provided to subscribers of Premium BDC Reports along with revised target prices, dividend coverage and risk profile rankings, potential credit issues, earnings/dividend projections, quality of management, fee agreements, and my personal positions for all business development companies (“BDCs”).



For calendar Q2 2019, TCG BDC Inc. (CGBD) covered its dividend by 125% reporting just below its best-case projections. Over the last four quarters, its average earnings have been almost $0.45 per share compared to its quarterly dividend of $0.37 per share.

“We generated net investment income of $28 million or $0.46 per share, $0.01 higher than the $0.45 we produced in the first quarter. We declared a regular $0.37 dividend and as we previewed last quarter, we also declared a $0.08 special dividend for a total of $0.45 in dividends declared in the quarter. Our Company has consistently produced net investment income in excess of our quarterly dividend and we expect to continue this trend going forward.”

The company still has $0.21 per share of undistributed income available for a special dividend that will likely be announced in Q4 2019:

“We will consider additional future special dividends with some regularity as appropriate and as our core earnings allow. At the end of the second quarter, we had approximately $0.21 per share in spillover income to fund special dividends in future periods.”

The company has covered its dividend by an average of 118% over the last 8 quarters due to continued increases in recurring sources of income implying the potential for an increase to regular quarterly dividend and was discussed on a previous call:

“Given the consistency of our NII performance, we’ll be considering an increase to our stated quarterly dividend as well.”

The company repurchased another 1,089,559 shares during Q2 2019 at $14.91 per share (14% discount to previous NAV) resulting in accretion to net assets per share of $0.04. On November 5, 2018, the Board approved a $100 million stock repurchase program at prices below reported NAV per share through November 5, 2019, and in accordance with the guidelines specified in Rule 10b-18 of the Exchange Act. The stock is still trading at 15% discount to NAV and there will likely be additional accretive repurchases including another 427,141 so far in Q3 2019.

“As of today, we have $58 million remaining on our $100 million repurchase authorization implemented during the fourth quarter of 2018. We will continue to repurchase shares at or near our current valuation as we do not believe our current share price accurately reflects the strength of our investment platform.”

The company has been increasing its use of leverage that will likely continue. Previously, CGBD received shareholder approval to reduce its asset coverage requirement to 150% effective June 7, 2018, and the Board approved a 0.50% reduction in the 1.50% annual base management fee on assets financed using leverage in excess of 1.0x debt to equity. As of June 30, 2019, CGBD had cash and cash equivalents of $62 million and $207 million available for additional borrowings under its revolving credit facilities. Management guided for active portfolio growth in Q3 2019 due to “a steady originations pipeline combined with more modest repayments expected this quarter” and is taken into account with the updated projections:

“During the quarter, we increased commitments under our revolving credit facility by another $80 million. So we had about $340 million of total unused commitments under our credit facility. Statutory leverage was 1.07, generally in line with prior quarter giving you the growth in the portfolio. However, we do see this level increasing more meaningfully by the end of the third quarter due to a steady originations pipeline combined with more modest repayments expected this quarter. And given them more favorable rate environments for issuers, we anticipate exploring additional financing transactions in the near-term to increase our operational flexibility we’ll be looking at all areas of the market including the private and public capital markets.”

CGBD has a lower cost of borrowings including its previously reset 2015 CLO Notes and the credit facilities at around LIBOR + 200/225.

“Regarding our liabilities, we continue to benefit from the association with one of the premier CLO platforms in the world. This quarter, we priced our fourth middle market CLO further diversifying our sources of financing and reducing our overall cost of debt. We continue to be one of the few BDCs that has an investment portfolio anchored in first-lien senior secured loans with the scale and diversification necessary to support the issuance of CLOs. This not only provides our BDC and our shareholders with lower cost of debt relative to our peers but perhaps more importantly, it provides us with non mark-to-market term financing which we feel is highly valuable in markets with increased volatility.”

Middle Market Credit Fund, LLC (“Credit Fund”):

Investments in the Credit Fund increased from $1.26 billion to $1.33 billion during Q2 2019 producing a 12.7% annualized yield. The Credit Fund’s new investment fundings were $121 million for the quarter with sales and repayments of $43 million.

“Moving onto the JVs performance, the dividend yield on our equity in the JV was about 13% for the second quarter. As previewed on last quarter’s call in late May, we closed our second CLO at the JV, which resulted in an overall reduction in the JVs cost of capital by about 20 basis points.”

Similar to other BDCs, CGBD has added asset-based lending (“ABL”) to its portfolio which will likely provide higher risk-adjusted returns:

From previous call: “Our thesis was and remains that an ABL strategy is complementary to our core cash flow middle markets, sponsor finance business. Asset based loan performance and recovery rates have been strong and consistent across the market cycles. ABL’s have better structural protections in the form of borrowing bases and covenants and cash flow loans and adding an ABL underwriting capability creates more defensive and diversified company across more asset classes with potentially lower correlation. This quarter, we made two investments in the strategy at attractive yields. We expect to grow the strategy meaningfully which should drive higher ROE for the BDC.”

CGBD Risk Profile Update:

CGBD has a lower risk portfolio due to 89% of the portfolio in first-lien assets (including Credit Fund) highly diversified by borrower and sector, access to an experienced credit quality platform and historically low non-accruals.

“We consider our BDCs portfolio to be extremely well positioned fundamentally against this macroeconomic backdrop. We have 70% of our portfolio in true first lien instruments. A high degree of investment diversification and significant under weights to more cyclical industry exposures, all of which we believe will be long-term benefits to our shareholders. We’re acutely aware that we’re investing in what could be late cycle and therefore we remain ultra-selective. Carlyle’s credit investment platform has over 100 investment professionals that have the expertise to evaluate opportunities across the capital stack, company sizes, sectors and market cycles all with the lens and relative value and fundamental credit investing.”

During Q2 2019, net asset value (“NAV”) per share decreased by 1.4% or $0.28 per share due to net realized/unrealized losses of $0.29 per share partially from additional non-accruals (discussed later) and paying a special dividend of $0.08 per share, partially offset by accretive share repurchases adding $0.04 per share and over-earning the dividend. Management mentioned that the recent credit issues are “idiosyncratic credit issues, not indications of either thematic risk concentrations in our portfolio or broad economic weakness”:

“The one controllable area which fell short of expectations in Q2 was the progression of our NAV, which was impacted by higher realized and unrealized losses than we would expect to see in normal course. We have dug into each situation and ascertained they represent idiosyncratic credit issues, not indications of either thematic risk concentrations in our portfolio or broad economic weakness. As you would expect, these loans are a significant focus for our team and we have committed the necessary resources to maximize shareholder value. For the most part, for the names that are on our watch list or on non-accrual, they’re idiosyncratic situations. But one thing we can point to is that within the healthcare services space, where we’re seeing companies do more aggressive types of roll-up transactions that those come with more challenges.”

As mentioned in the previous report, “my primary concern is two investments that were added to ‘Internal Risk Rating 4’. However, management discussed these investments on the recent call as “these are temporary performance issues” and “our goal remains full recovery”:

“The weighted average internal risk rating remained 2.3. However, total watch list loans again increased this quarter with a net addition of three borrowers. With the overall theme is that in most cases we believe these are temporary performance issues. Sponsors have been supportive with additional capital. We’ve closed their negotiated credit enhancing amendments and our goal remains full recovery.”

“During the quarter, we repurchased 1.1 million shares of stock for over $16 million, which was $0.04 per share accretive to NAV. Stabilizing and growing our NAV via our integrated platform approach will be the major focus area for me and the team over the next few years.”

During Q2 2019, non-accruals increased due to adding Dimensional Dental Management and Indra Holdings Corp. (Totes Isotoner) during the quarter resulting in NAV decline of almost $0.16 per share. Totes hired Houlihan Lokey, which specializes in restructurings and CGBD exited this investment during Q3 2019 which will result in additional realized losses and a slight decline in NAV due to exiting at “a bit lower” value:

“The level of non-accruals increased this quarter from 0.8% to 2% based on fair value with the addition of two borrowers. We exited one of these positions [Totes] post quarter end at a level a bit lower than our 6/30 mark, driven by our developing view on the potential downside to our recovery in that investment. For the other non-accrual transactions these continue to be fluid and developing situations. Given the status of ongoing negotiations between the various parties we’re limited in providing additional color, but we hope to have updates over the next couple of quarters.”

SolAero Technologies Corp. has been discussed in previous reports and was restructured during Q2 2019 driving most of the realized losses of almost $9.1 million or $0.15 per share:

“The roughly $8 million realized loss this quarter has two primary components. First, a $9 million realized loss for our recapitalization of SolAero and that was primarily reversal of prior period unrealized losses. And second, a $2 million gain on an equity co-investment in imperial date.”

Product Quest Manufacturing, LLC remains on non-accrual and was written down due to “operational and liquidity challenges” and its smaller first-lien loan was added to non-accrual in Q1 2019. On a previous call, management mentioned that all lenders (including CGBD) have provided an additional credit facility to support the working capital needs and will provide updates on future calls. I am expecting Product Quest to be completely written off resulting in realized losses of $34 million or $0.57 per share but has already been mostly written off and will not materially impact NAV per share. Non-accruals accounted for around 2.0% of the portfolio fair value and $0.70 of NAV per share:

Some of the other investments that have been discussed in previous reports and/or that I am watching closely include Derm Growth Partners, PPT Management Holdings, Superior Health Linens, SPay, Inc., Legacy.com, Hydrofarm, Hummel Station, and GRO Sub Holdco. Most of these investments were marked down during Q2 2019 with the exception PPT:

It is important to note that CGBD has higher quality management that conservatively values its portfolio each quarter:

“When we held our initial earnings call as a public company back in August of 2017, I highlighted that based on our robust valuation policy, each quarter you may see changes in our valuations based on both underlying borrower performance as well as changes in market yields and that movement evaluations may not necessarily indicate any level of credit quality deterioration.”

Indra Holdings Corp. (Totes Isotoner) was its only investment with an ‘Internal Risk Rating 6’ and has been exited as discussed earlier.


This information was previously made available to subscribers of Premium BDC Reports, along with:

  • CGBD target prices and buying points
  • CGBD risk profile, potential credit issues, and overall rankings
  • CGBD dividend coverage projections and worst-case scenarios
  • Real-time changes to my personal portfolio

To be a successful BDC investor:

  • As companies report results, closely monitor dividend coverage potential and portfolio credit quality.
  • Identify BDCs that fit your risk profile.
  • Establish appropriate price targets based on relative risk and returns (mostly from regular and potential special dividends).
  • Diversify your BDC portfolio with at least five companies. There are around 50 publicly traded BDCs; please be selective.

TriplePoint Venture Growth (TPVG) Dividend Coverage & Risk Profile Update

The following is from the TPVG Deep Dive that was previously provided to subscribers of Premium BDC Reports along with revised target prices, dividend coverage and risk profile rankings, potential credit issues, earnings/dividend projections, quality of management, fee agreements, and my personal positions for all business development companies (“BDCs”).



For calendar Q2 2019, TriplePoint Venture Growth (TPVG) beat its best case projections covering 113% of its dividend due to continued prepayment-related income driving an effective yield of 16.5% (same to the previous quarter) as shown in the following chart.

Jim Labe, Chairman and Chief Executive Officer: “Our results for the second quarter demonstrate the earnings power of our investment platform. We delivered substantial quarterly investment income, generated meaningful unrealized gains, and grew our investment portfolio for the third quarter in a row.”

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During Q2 2019, FDUS funded 17 debt investments totaling $72.5 million to 13 companies, acquired warrant investments valued at $0.7 million in 10 companies and made equity investments of $1.7 million in 5 companies. FDUS had $43 million of early prepayments. The weighted average portfolio yield on debt investments for the second quarter was 16.5%, including the impact of prepayments and other activity, and 13.7% excluding the impact of prepayments and other activity.

“During the quarter, we had $42.5 million in portfolio company prepayments, which contributed to our 16.5% overall weighted average quarterly portfolio yield. Without prepayments, our portfolio yield was 13.7%. As a lender, we’re always happy to get our capital back. Prepayments are one way and we had a meaningful amount last quarter but we’re also pleased that our portfolio generates between $2 million and $3 million of natural principal amortization per month.”

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TPVG remains underleveraged but the company will likely cover its dividend. This is part of TPVG’s business model and dividend coverage will continue to be “lumpy but positive in the coming quarters”. On a previous call, management discussed “possible increases in our dividend policy on a go-forward basis” driven by higher use of leverage and/or additional prepayments:

“Looking back, we had at least one prepay every single quarter over the past two years and 10 in the past 12 quarters. In fact, we’ve already had two here in 2019. We expect to see that pattern of one on average per quarter in 2019, and along with our expected originations and increased leverage, is something our board is taking into consideration as we consider possible increases in our dividend policy on a go-forward basis.”

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During July 2019, TPVG had only funded another $11 million of new investments but entered into another $130 million of additional term sheets. Management seems confident in the ability to grow the portfolio given the current pipeline and unfunded commitments:

“Alongside our record level investment portfolio, we have a strong backlog that provides great visibility into potential near-term portfolio growth over the next few quarters. At the end of Q2, our unfunded commitments totaled roughly $350 million to 25 companies of which $91 million is dependent upon the company’s reaching milestones before the capital becomes available to them. $162.7 million of our unfunded commitments will expire during 2019, $157.3 million will expire during 2020 and $30 million will expire in 2021, if not drawn prior to expiration.”

As of June 30, 2019, TPVG had $24 million of cash and $179 million of available capacity under its revolving credit facility for upcoming portfolio growth. On August 27, 2019, TPVG amended its Credit Facility increasing the capacity from $265 million to $300 million with an accordion feature which allows up to $400 million.

“We anticipate tapping into the accordion in Q3 as we look to lock-in additional variable rate funding capacity to take advantage of movements by the Fed. As we utilize our warehouse and lever up, we will look to use long-term debt as the way to free up capacity, diversify our balance sheet and approach one times leverage.”

In June 2018, TPVG obtained shareholder approval to reduce its asset coverage ratio to potentially increase its leverage (debt-to-equity) to a maximum of 2.00x. However, the company continues to experience early repayments and will likely remain under 1.00x.

“In general we expect and have always given guidance of one to two prepayments per quarter and it’s going to be part of our activity and part of our yields, but we always can get down to you know specific crystal ball vision next 30, 60 days necessarily. But I would say in general, there’d be a decrease if there’s not a lot of prepays.

From previous call: “In the guidance that we gave when we got shareholder approval on our expectation for target leverage, right, we don’t need to lever the business out more than 1 to 1, given the return profile of our assets. But having said that, we did say that, during periods where portfolio growth in between capital raises to optimize when we raise equity, we would expect to go north of 1 to 1 to take advantage of that in building portfolio and then waiting for prepays and for the capital markets to cooperate.”

On March 28, 2018, TPVG received an exemptive order from the SEC to permit co-investment with TriplePoint Capital LLC (“TPC”) and/or investment funds, accounts and investment vehicles managed by TPC that continues to provide opportunities for portfolio growth and diversification.

“We continue to make progress in diversifying our portfolio, thanks in part to overall portfolio growth, as well as utilization of our co-investment capabilities. Since receiving our exemptive order, TPVG has made 10 co-investments with TPC’s proprietary vehicles, and this gives us meaningful financial flexibility as we scale the business”

From previous call: “Given our strong outlook for portfolio growth, we are grateful to our shareholders for approving a lower asset coverage requirement, which will enable us to take advantage of using leverage to serve as the primary source of funding portfolio growth for us here in 2019, plus, we intend to continue to take advantage of our exemptive relief order, which we received in 2018 as well to coinvest with other entities in the TriplePoint platform and further diversify as we scale.”

Previously, the company reduced its effective borrowing rates that most recently included reducing its unused facility fees from 0.75% to 0.50%. In July 2017, TPVG issued $65 million of 5.75% notes due 2022 trade on the NYSE under the symbol “TPVY” (included in the BDC Google Sheets) with the proceeds used to refinance the previous notes “TPVZ” at 6.75% resulting in lower borrowing rates. The company ultimately issued $74.8 million of notes (includes over-allotment).

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Part of management’s optimism is related to the large amounts of VC equity capital that have been raised and will likely be leveraged using debt capital from companies such as TPVG:

“As we look ahead, momentum in our market remains strong and the demand for venture lending at venture growth stage companies continues to be brisk as evidenced by our large and growing pipeline. There’s no lack of deal flow. We plan to capitalize on this pipeline and build upon the achievements of these first two quarters of 2019, for the remainder of this year and the years well beyond. Our performance speaks for itself. This is about results, not words.”

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TPVG Risk Profile Update:

TPVG provides financing primarily to venture capital (“VC”) backed technology companies at the venture growth stage (see the end of this report), similar to HTGC and HRZN. TPVG’s portfolio includes warrant positions in high growth sectors that continues to drive NAV per share growth and/or special dividends.

“We had a notable unrealized gain this quarter from an IPO at one of our portfolio companies and we actually had another IPO within our portfolio occur as well just after the close of last quarter. The recent IPOs at CrowdStrike and Medallia greatly contribute to our unrealized gains. As of yesterday’s close Medallia’s stock price was nearly double its IPO price. Aside from these IPOs, we continue to also have positive developments in many other portfolio companies with several raising new rounds of capital or getting acquired. During Q2, we also had six portfolio companies raised over $600 million of equity in private rounds.”

As discussed in previous reports, TPVG has historically had portfolio concentration risk and management is actively working to diversify the portfolio using the ability to co-invest across the broader platform and likely one of the reasons for the previous equity offering. The top five positions currently account for around 37% of the portfolio compared to 44% in December 2018 and 57% in early 2018.

“As of quarter-end, our top five positions represented 36.5% of the total debt investment portfolio on a fair value basis, down from 50.9% in Q2 2018. We continue to make progress in diversifying our portfolio, thanks in part to overall portfolio growth, as well as utilization of our co-investment capabilities.”

During Q2 2019, NAV per share increased by 4.4% or $0.60 per share (from $13.59 to $14.19) due to $15.1 million or $0.61 per share of unrealized gains from its equity investment in CrowdStrike, Inc. (CRWD).

“As discussed earlier on the call, the mark-to-market appreciation was primarily due to price appreciation in our publicly traded equity holdings and CrowdStrike, and was somewhat offset by fair value marks across the portfolio. During the second quarter, CrowdStrike completed its IPO on June 12. It opened trading at $63.50 after pricing its IPO at $34 this year, which was above the high-end of its expected range. The company raised more in $600 million, while we are under a six month lockup period as of the end of the quarter, the unrealized gain on our investment was $18 million.”

However, the stock has pulled back recently including a 15% decline during Q3 2019 which will have an impact of around $2.8 million of unrealized losses and a negative impact on its NAV per share by around $0.11 or 0.8%. TPVG’s shares of CRWD are currently in a six-month lockup and are not tradable until December 2019.

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As discussed in the previous report, the unrealized gains from CRWD during Q2 2019 were partially offset by unrealized losses in Farfetch Ltd. (FTCH) that has continued to decline:

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Its preferred shares in Medallia, Inc. (MDLA) were marked up by $0.5 million during Q2 2019 as the company recently completed its $326 million IPO and could drive additional gains in Q3 2019 depending on stock pricing that has also recently been pulling back as shown below.

“After the close of the quarter, as I mentioned, another portfolio company Medallia, they priced an IPO at $21 a share and raised over $325 million. As of yesterday’s close Medallia’s stock price was nearly double its IPO price. Aside from these IPOs, we continue to also have positive developments in many other portfolio companies with several raising new rounds of capital or getting acquired. Since the IPO occurred prior to the publishing of the financial statements, we were able to give some factor in a little bit, the outcome of the IPO and coming up in striking as fair value mark at quarter end.”

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Credit quality declined slightly during Q2 2019, including Roli, Ltd’s ($21.4 million cost; $19.8 million FV) and Mind Candy Limited’s ($12.0 million cost; $9.7 million FV) obligations that became past due and TPVG is in the process of renegotiating the terms. Also, Roli, Ltd. and MapR Technologies, Inc. ($3.5 million cost; $2.0 million FV) were added to non-accrual status during Q2 2019. Management discussed Roli and Mind Candy on the recent call:

Q. “Question on a couple of the portfolio names downgraded Roli and Mind Candy. You footnote that part of those loan structures have become past due. On the ground level, what sort of game plan you’d have for a company, that still holds some value according to your mark but is obviously past due on the loan per se.”

A. “Generally, when there are delays in fundraising activity, we collaborate with the sponsors and be helpful where we can. And in certain situations that may be delaying payment or deferring payment and then our expectations are for either full catch up of the payment post – strategic event occurring or those may get added to principal balance. So generally that’s our rule of thumb is we may delay or defer payments during those extended periods for the rounds or the strategic processes to happen. And then once they do caught up and then occur.”

Q. “On MapR do you know – I understand that it’s in some sort of a sale process, but do you know what the residual value of the equipment that is under the equipment lease is compared to what the valuation is that you’re carrying it at the end of the quarter?”

A. “We’re financing mission critical equipment, servers, furniture, hardware, data center equipment. And so the fair value mark that we put for the quarter is our expected recovery factoring in, residual value, payments from potential M&A and things of that nature. But generally speaking, hardware residuals are anywhere from 10% to 30% of original costs if you look at the historic hardware lease financing data.”

As discussed in previous reports, Cambridge Broadband Network ($7.5 million cost; $3.9 million FV) was added to non-accrual status during Q4 2018 and was marked down again in Q2 2019. Also, Munchery, Inc. ($3.0 million cost; $2.3 million FV) remains on non-accrual status and previously downgraded to Category 5 indicating “serious concern/trouble due to pending or actual default”. Mind Candy is a video game developer for kids and was still on accrual status according to the 10-Q.

“Moving onto credit quality, the weighted average investment ranking of our debt investment portfolio was 2.03, as compared to 1.95 at the end of the prior quarter. As a reminder, under our rating system, loans are rated from one to five with one being the strongest credit rating and new loans are initially generally rated two. Mind Candy was upgraded from Orange 4 to Yellow 3 due to continued improvement in capital raising activities. Cambridge Broadband and Roli were downgraded from Yellow 3 to Orange 4 due to delays in fundraising or strategic activities as well as general performance below plan. MapR Technologies, a company where we have only equipment financing outstanding was downgraded from White 2 to Red 5 during the quarter. As reported in the press, MapR is in active M&A discussions.”

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I consider TPVG to have a safer-than-average risk profile due to mostly 1st lien positions with VC equity support. Its portfolio is 90% debt investments structured as ‘growth capital loans’ or ‘equipment financing’ and mostly backed by a senior position on all assets (see below), typically with warrants that provide upside potential. Also, almost 26% of growth capital loans are with borrowers that have other facilities in a senior position to TPVG:

From 10-Q:“Growth capital loans in which the borrower held a term loan facility, with or without an accompanying revolving loan, in priority to our senior lien represent approximately 25.5% and 14.0% of the debt investments at fair value as of June 30, 2019 and December 31, 2018, respectively.”

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A large part of the BDC Risk Profiles report takes into account the need to “reach for yield” as well as the need to grow the portfolio. As mentioned in previous reports, the company is frequently impacted by “higher-than-anticipated prepayments driving higher onetime prepayment-related income” but lower portfolio growth and dividend coverage from recurring interest income. One of my concerns is the accrual of the end of term (“EOT”) payment that ranges from 2% to 12% and provides higher effective yields as discussed earlier. EOT payments provide upside potential when loans are repaid earlier including the previous repayments from Simplivity, Inc., FuzeJet.comHayneedle, Inc., Thrillst Media Group and EndoChoice. However, this contractual payment is accrued and added to income but not paid in cash until the loan is repaid. It should be noted that there are non-cash expenses related to amortization of credit facility fees to ease concerns of non-cash portions of income.


This information was previously made available to subscribers of Premium BDC Reports, along with:

  • TPVG target prices and buying points
  • TPVG risk profile, potential credit issues, and overall rankings
  • TPVG dividend coverage projections and worst-case scenarios
  • Real-time changes to my personal portfolio

To be a successful BDC investor:

  • As companies report results, closely monitor dividend coverage potential and portfolio credit quality.
  • Identify BDCs that fit your risk profile.
  • Establish appropriate price targets based on relative risk and returns (mostly from regular and potential special dividends).
  • Diversify your BDC portfolio with at least five companies. There are around 50 publicly traded BDCs; please be selective.

Gladstone Capital (GLAD) Dividend Coverage & Risk Profile Update

The following is from the GLAD Quick Update that was previously provided to subscribers of Premium BDC Reports along with revised target prices, dividend coverage and risk profile rankings, potential credit issues, earnings/dividend projections, quality of management, fee agreements, and my personal positions for all business development companies (“BDCs”).



For calendar Q2 2019, Gladstone Capital (GLAD) hit its base case projections covering its dividend due to continued management fee waivers. There was another decline in its portfolio yield from 12.0% to 11.8% offset by higher-than-expected fee and other income. Its debt-to-equity remained near historical levels due to previous repayments and issuing 939,015 shares at a weighted-average price of $9.34 (13% premium to previous NAV) through its at-the-market (“ATM”) program.

Bob Marcotte: “We entered the quarter well prepared for the elevated level of prepayment activity we experienced which allowed us to increase our assets and net interest income for the period while higher prepayment and other fee income drove much of the investment income increase for the quarter. Notwithstanding the competitive market conditions for senior debt, we are continuing to outpace prepayments and prudently grow our investment portfolio. In the near term we will continue to focus our efforts on deploying our approximate $75 million of incremental investment capacity to grow our core net interest earnings and enhance the returns to our shareholders.”


Management previously indicated that it would slowly increase its targeted debt-to-equity ratio from 0.80 to 1.00. In July 2019, its debt investment in PIC 360, LLC was repaid at par for net proceeds of $2.6 million. In August 2019, GLAD invested an additional $5.0 million in Sea Link International IRB, Inc, an existing portfolio company, through secured second lien debt.

Its net asset value (“NAV”) per share increased by $0.12 or 1.5% mostly due Alloy Die Casting marked up another $3.8 million adding almost $0.13 per share. Lignetics, Inc. and LWO Acquisitions Company (same as previous quarter) were the largest markdowns during the quarter and need to be watched.


During the previous quarter, New Trident (cost of $4.4 million, fair value of $0.0 million) was added to non-accrual status but was already marked down to zero and did not impact NAV per share. Meridian Rack & Pinion, Inc. (cost of $4.1 million, fair value of $2.1 million) was also previously added to non-accrual status and marked down by another $0.4 million during the quarter. New Trident and Meridian are the only investments on non-accrual and account for $2.1 million in fair value or 0.5% of the portfolio. If these investments were completely written off, it would impact NAV per share by around $0.07 or 0.8% and management is already waiving fees to ensure dividend coverage.

Secured first-lien debt accounts for around 46% of the portfolio fair value:


Oil & gas investments now account for around 9.5% (previously 10.0%) of the portfolio fair value and will likely be lower going as indicated by management. In March 2019, two of its energy-related portfolio companies, Impact! Chemical Technologies, Inc. (“Impact”) and WadeCo Specialties, Inc. (“WadeCo”), merged to form Imperative Holdings Corporation (“Imperative”). In connection with the merger, GLAD received a principal repayment of $10.9 million and its first-lien loans to Impact and WadeCo were restructured into one $30.0 million second lien debt investment in Imperative.


As mentioned in previous reports, in December 2018, Francis Drilling Fluids (“FDF”) was restructured upon emergence from Chapter 11 bankruptcy protection. As part of the restructure, its $27.0 million debt investment in FDF was converted to $1.35 million of preferred equity and common equity units in a new entity, FES Resources Holdings, LLC (“FES Resources”). GLAD also invested an additional $5.0 million in FES Resources through a combination of preferred equity and common equity.

Distributions and Dividends Declared

In July 2019, the Board of Directors declared the following monthly distributions to common stockholders and monthly dividends to preferred shareholders:


This information was previously made available to subscribers of Premium BDC Reports, along with:

  • GLAD target prices and buying points
  • GLAD risk profile, potential credit issues, and overall rankings
  • GLAD dividend coverage projections and worst-case scenarios
  • Real-time changes to my personal portfolio

To be a successful BDC investor:

  • As companies report results, closely monitor dividend coverage potential and portfolio credit quality.
  • Identify BDCs that fit your risk profile.
  • Establish appropriate price targets based on relative risk and returns (mostly from regular and potential special dividends).
  • Diversify your BDC portfolio with at least five companies. There are around 50 publicly traded BDCs; please be selective.

Oaktree Specialty Lending (OCSL) Dividend Coverage & Risk Profile Update

The following is from the OCSL Quick Update that was previously provided to subscribers of Premium BDC Reports along with revised target prices, dividend coverage and risk profile rankings, potential credit issues, earnings/dividend projections, quality of management, fee agreements, and my personal positions for all business development companies (“BDCs”).


For calendar Q2 2019, Oaktree Specialty Lending (OCSL) reported slightly below base case projections with lower portfolio yield and lower-than-expected portfolio growth partially offset by higher fee income. NAV per share increased by $0.05 or 0.8% (from $6.55 to $6.60) due to overearning the dividend and net unrealized gains. During calendar Q2 2019, OCSL exited $27 million of non-core investments, including one on non-accrual, reducing non-core investments by almost 70% since September 30, 2017.

OCSL has covered its dividend by an average of 128% with average earnings of around $0.12 per share over the last four quarters mostly due to improved portfolio earnings and reduced borrowing rates. Also, OCSL’s dividend is still 47% lower than two years ago and needs to be increased as it is well below the portfolio earnings each quarter likely due to management wanting to retain earnings to improve NAV per share. The company has plenty of growth capital available given its historically low leverage with a current debt-to-equity ratio of 0.58.


As shown below, management has made meaningful progress shifting the portfolio from ‘non-core’ legacy assets that still account for around 21% of the portfolio fair value.

Edgar Lee, Chief Executive Officer and Chief Investment Officer, said, “The third quarter was highlighted by continued strong financial results and portfolio performance. NAV increased for the sixth consecutive quarter to $6.60 per share, an 11% increase over the same period one year ago, and net investment income remained solid at $0.12 per share. We made further progress in reducing risk in the portfolio, successfully exiting $27 million of non-core investments, while adding $67 million of new investments that are consistent with our late-cycle investment approach. Importantly, with leverage of only 0.58x and $330 million of dry powder, we are well capitalized and have ample capacity to invest in new opportunities.”


OCSL intends to rotate out of another $273 million of investments it has identified as non-core investments and redeploy “into proprietary investments with higher yields”.


On June 28, 2019, shareholders approved the reduced asset coverage requirements allowing the company to double the maximum amount of leverage effective as of June 29, 2019. The investment adviser reduced the base management fee to 1.0% on all assets financed using leverage above 1.0x debt-equity. Management mentioned “we have no near-term plans to increase our leverage above our target range of 0.70 to 0.85 times”:

“As you will recall last quarter, we received Board approval to increase our leverage, effective in February 2020, unless we were to receive shareholder approval before then. While we have no near-term plans to increase our leverage above our target range of 0.70 to 0.85 times, this is an opportunity cost efficiently seeks shareholder approval in the events, but in the future, we deem the appropriate to deploy higher leverage. In connection with this, our base management fee will be reduced to 1% on all assets, finance using leverage above 1.0 times debt to equity once the new leverage limits are in effect.”


Management previously amended its revolving credit facility terms including extending the reinvestment period and modifying the asset coverage ratio covenant.


As discussed in previous reports, management is working to increase NII including:

  • Redeploy non-income generating investments comprised of equity, limited partnership interests and loans on non-accrual
  • Operating cost savings from leveraging Oaktree’s platform
  • Rotation out of broadly syndicated loans priced at LIBOR + 400 or below
  • Realization of lower operating costs from credit facility optimization

OCSL Risk Profile Update:

As of June 30, 2019, 54% of the portfolio was first-lien and there were five investments that stopped accruing cash and/or PIK interest or OID income. Non-accruals increased from 6.1% to 6.4% of the portfolio fair value due to modest markups.


Also discussed earlier, NAV per share increased by $0.05 or 0.8% due to overearning the dividend by $0.02 per share and net realized/unrealized gains of $0.03 per share:


This information was previously made available to subscribers of Premium BDC Reports, along with:

  • OCSL target prices and buying points
  • OCSL risk profile, potential credit issues, and overall rankings
  • OCSL dividend coverage projections and worst-case scenarios
  • Real-time changes to my personal portfolio

To be a successful BDC investor:

  • As companies report results, closely monitor dividend coverage potential and portfolio credit quality.
  • Identify BDCs that fit your risk profile.
  • Establish appropriate price targets based on relative risk and returns (mostly from regular and potential special dividends).
  • Diversify your BDC portfolio with at least five companies. There are around 50 publicly traded BDCs; please be selective.

PennantPark Investment (PNNT) Dividend Coverage & Risk Profile Update

The following is from the PNNT Quick Update that was previously provided to subscribers of Premium BDC Reports along with revised target prices, dividend coverage and risk profile rankings, potential credit issues, earnings/dividend projections, quality of management, fee agreements, and my personal positions for all business development companies (“BDCs”).


For calendar Q2 2019, PNNT reported just below its base case projections mostly due to lower-than-expected portfolio yield partially offset by higher ‘other income’. ‘Provision for taxes’ of $0.3 million is not included when calculating ‘Core NII’ resulting in net investment income (“NII”) per share of $0.178 and 99% coverage of the dividend.

There was a meaningful decline in the overall portfolio yield from 10.6% to 10.1% as expected partly due to the previously discussed exit of its largest investment Parq Holdings in May 2019 that was yielding 14.6%. On February 5, 2019, shareholders approved the adoption of the modified asset coverage requirements allowing higher leverage and the advisor agreed to reduce the base management fee from 1.50% to 1.00% on gross assets that exceed 200%.

Art Penn, Chairman and CEO: “We are pleased that we are making substantial progress toward enhancing our portfolio by moving into more senior secured positions, which we believe will result in even more steady and stable coverage of our dividend over time. Additionally, our earnings stream will continue to improve based on a gradual increase in our debt to equity ratio, while maintaining a prudent debt profile.”


Net asset value (“NAV”) per share declined by $0.09 or 1.0% (from $8.83 to $8.74) due to multiple markups and markdowns during the quarter. Some of the largest markdowns were previously discussed companies including Hollander Sleep Products, ETX Energy and AKW Holdings Limited. Similar to PennantPark Floating Rate Capital (PFLT), its investment in Hollander Sleep Products, was previously added to non-accrual status and marked down by another $7.9 million during the recent quarter impacting NAV per share by almost $0.12.

PT Networks was also marked down and needs to be watched. Some of the largest markups included its investments MidOcean JF Holdings and RAM Energy (similar to the previous quarter). On June 14, 2019, Superior Digital Displays, LLC filed for Chapter 7 bankruptcy protection and is no longer reflected on the Schedule of Investments.

The following table only shows affiliate’ companies and includes changes over the last nine months:


Energy, oil & gas exposure increased to 12.8% of the portfolio fair value (previously 12.3%) due to the previously discussed unrealized appreciation and an additional $10 million debt investment in RAM Energy.


As expected, there were no additional share repurchases due to only around $0.5 million of availability. Previously, PNNT purchased 1 million shares during the three months ended March 31, 2019, at a weighted average price of around $7.10 per share or a 22% discount to its previously reported NAV per share. 

Previous call: “We purchased $7 million of a common stock this quarter as part of our stock repurchase program, which was authorized by our board. We’ve completed our program and have purchased $29.5 million of stock. The stock buyback program is accretive to both NAV and income per share. The accretive effect of our share buyback was $0.03 per share.”


As shown below, equity investments are now around 14% of the portfolio and the company will likely continue to use higher leverage as it increases the amount of first-lien positions that now account for 59% of the portfolio (up from 40% five quarters ago).


On January 31, 2019, PNNT announced the redemption of $250 million of its 4.50% 2019 Notes due October 1, 2019. The 2019 Notes were prepaid at 100% of the principal amount, plus accrued and unpaid interest through the payment date of March 4, 2019.


This information was previously made available to subscribers of Premium BDC Reports, along with:

  • PNNT target prices and buying points
  • PNNT risk profile, potential credit issues, and overall rankings
  • PNNT dividend coverage projections and worst-case scenarios
  • Real-time changes to my personal portfolio

To be a successful BDC investor:

  • As companies report results, closely monitor dividend coverage potential and portfolio credit quality.
  • Identify BDCs that fit your risk profile.
  • Establish appropriate price targets based on relative risk and returns (mostly from regular and potential special dividends).
  • Diversify your BDC portfolio with at least five companies. There are around 50 publicly traded BDCs; please be selective.

Apollo Investment (AINV) Dividend Coverage & Risk Profile Update


The following is from the AINV Quick Update that was previously provided to subscribers of Premium BDC Reports along with revised target prices, dividend coverage and risk profile rankings, potential credit issues, earnings/dividend projections, quality of management, fee agreements, and my personal positions for all business development companies (“BDCs”).


For calendar Q2 2019, Apollo Investment (AINV) reported between its base and best-case projections, covering its dividend but only due to no incentive fees paid during the quarter due to the ‘total return hurdle’. As shown in the following table, the company would have only covered 89% of its dividend if the incentive fees had been paid. This would imply that the company could have dividend coverage issues over the coming quarters depending on the progress of portfolio rotation out of non-income producing assets but also maintaining its portfolio yield and increased leverage to support portfolio growth. The Board maintained its distribution of $0.45 per share payable on October 5, 2019, to shareholders of record as of June 20, 2019.

Mr. Howard Widra, AINV’s CEO commented, “During the quarter, we had substantial portfolio growth resulting from robust origination activity. This origination activity, in a competitive market, is another indication of the strength of our origination platform. Consistent with our plan, the growth was in lower risk corporate loans which further diversified the portfolio. Also, consistent with our plan, we reduced the size of our investment in Merx Aviation to less than 15% of the total portfolio and reduced non-core assets to 17% of the portfolio. Net investment income was strong for the quarter benefiting from the net growth in the portfolio, the impact from the total return provision in our fee structure, and the catch-up income from an investment being restored to accrual status.


I was expecting at least another $4.5 million credit to the incentive fees for calendar Q2 2019 as discussed on the previous call:

“So if you kind of take that versus a $55 million number that’s kind of carrying forward, we will kind of in our next quarter have some benefit from that carryover via the incentive fee credit. So, we have $55 million and 20% of that is $11 million, $6 million or $7 million of that was credited in the first quarter. So there’s still a performance – if nothing else changes this quarter there is another $4 million to $4.5 million of benefit in the second quarter.”

However, there were additional credit issues (Spotted Hawk and KLO Holdings as discussed later) resulting in no incentive fees paid during the quarter. As mentioned in the previous report, my primary concern is the ability of the company to cover the dividends during the last half of the year.

Portfolio growth was higher-than-expected and the company repurchased 0.9 million shares at a 16% discount to the previously reported net asset value (“NAV”) resulting in an increased debt-to-equity ratio of 1.05 as the company utilizes its access to higher leverage effective April 4, 2019. The company recently amended its Senior Secured Facility increasing commitments by $70 million which increased the size of the facility to $1.71 billion. In July 2019, the company announced the redemption of its 6.875% senior unsecured Baby Bond due July 2043 and is referenced in the BDC Google Sheets.

“We continue to manage our liabilities and optimize our capital structure. We increased the size of our revolving credit facility by $70 million during the quarter and subsequent to quarter end, we announced that we would be redeeming our 2043 unsecured notes.”


NAV per share declined by $0.06 or 0.3% (from $19.06 to $19.00) due to some markdowns mostly related to non-accruals including Spotted Hawk discussed in previous reports and KLO Holdings that was added to non-accrual status during the quarter. These unrealized losses were partially offset by accretive share repurchases (adding $0.04 per share) and overearning the dividend by $0.05 per share.

Spotted Hawk was marked down by an additional $7.7 million and impacted NAV per share by around $0.11. Total non-accruals currently account for 1.7% of total investments at fair value (previously 2.4%) and 2.5% of total investments at cost (previously 2.9%). If these investments were completely written off, it would impact NAV by around $0.67 or 3.5%.


On February 6, 2019, the Board approved a new stock repurchase plan to acquire up to $50 million of the common stock. The new plan was in addition to the existing share repurchase authorization, of which $13.9 million of repurchase capacity remains. Since the inception of the share repurchase program, AINV has repurchased over 11 million shares at a weighted average price per share of $16.92 for a total cost of almost $188 million.

“We consider stock buybacks below NAV to be component of our plan to deliver value to our shareholders. We typically repurchase shares during both open window periods and we generally allocate a portion of our authorization to a 10b5-1 plan, which allows us to repurchase stock during blackout periods. Since the end of the quarter, we had continued to repurchase stock. We intend to continue to repurchase our stocks should it continue to trade at a meaningful discount to NAV.”

Since the end of the quarter, AINV has continued to repurchase stock (another 136,010 shares) with approximately $64 million available for stock repurchases (as of June 30, 2019) under its repurchase programs inclusive of the newly authorized $50 million plan:


As mentioned in previous reports, the company is in the process of repositioning the portfolio into safer assets including reducing its exposure to oil & gas, unsecured debt, and CLOs. The “core strategies” portion of the portfolio now accounts for 83% of all investments:


Its aircraft leasing through Merx Aviation remains the largest investment but is now below 15% of the portfolio and continues to pay dividend income. As mentioned in previous reports, AINV has been reducing its concentration risk including reducing its exposure to Merx. Energy, oil and gas investments account for around 5.6% of the portfolio:


This information was previously made available to subscribers of Premium BDC Reports, along with:

  • AINV target prices and buying points
  • AINV risk profile, potential credit issues, and overall rankings
  • AINV dividend coverage projections and worst-case scenarios
  • Real-time changes to my personal portfolio

To be a successful BDC investor:

  • As companies report results, closely monitor dividend coverage potential and portfolio credit quality.
  • Identify BDCs that fit your risk profile.
  • Establish appropriate price targets based on relative risk and returns (mostly from regular and potential special dividends).
  • Diversify your BDC portfolio with at least five companies. There are around 50 publicly traded BDCs; please be selective.

THL Credit (TCRD) Dividend Coverage & Risk Profile Update


The following is from the TCRD Quick Update that was previously provided to subscribers of Premium BDC Reports along with revised target prices, dividend coverage and risk profile rankings, potential credit issues, earnings/dividend projections, quality of management, fee agreements, and my personal positions for all business development companies (“BDCs”).


For Q2 2019, THL Credit (TCRD) easily beat its best-case projections due to higher-than-expected ‘other income’ related to the repayment of LAI International, Inc. (“LAI”) combined with no incentive fees paid. As expected, there was another decline in its portfolio yield and interest income as well as a decline in overall investments but leverage remained higher. Net asset value (“NAV”) per share declined by another $0.47 or 5.2% (from $8.96 to $8.49) due to net realized/unrealized depreciation of $18.7 million or $0.58 per share. However, non-accruals have decreased from 5.9% to 1.8% of portfolio fair value due to exiting LAI but Charming Charlie and Loadmaster Derrick & Equipment remain on non-accrual status.


It should be noted that if the company had lower ‘other income’ without the benefit of the additional payment from LAI and paid an incentive fee at 17.5% the dividend would not have been fully covered. But management is waiving incentive fees through 2019 as it rotates the portfolio to full cover without waivers.


During Q1 2019, the largest markdown was its investment in LAI which was placed on non-accrual status with an investment score of “5” during the quarter. TCRD made a $10.0 million follow-on first lien senior secured term loan to LAI during Q1 2019. During Q2 2019, TCRD exited its non-accrual investment in LAI resulting in realized losses of almost $23 million or $0.72 per share but also impacted NAV per share due to exiting at a lower value.

“Repayment of certain first lien senior secured term loans in LAI International, Inc., which resulted in proceeds received of $16.8 million and an additional $4.4 million in expected proceeds which are reflected as a receivable. The realized loss of $22.7 million was largely offset by a corresponding change in unrealized appreciation and a $1.5 million exit fee was recorded as income relating to the repayment of priority loans.”


TRCD previously implemented a $15 million 10b5-1 stock repurchase plan and has been repurchasing shares “at levels that are accretive to shareholders with proceeds from exits of additional control equity positions this year”. During Q2 2019, the company repurchased 701,000 shares at an average price of $6.70 (25% discount to previous NAV). The company continues to repurchase shares:

“From July 1, 2019 through August 7, 2019, TCRD repurchased 353,986 shares of common stock for a total cost of $2.4 million as part of a 10b5-1 Stock Repurchase Plan. This brings the total number of shares repurchased since adoption of the 2019 stock repurchase program on March 11, 2019 to 1,252,987 shares at a cost of $8.4 million.”

On June 14, 2019, shareholders approved increased leverage “up to an amount that reduces our asset coverage ratio of 200% to an asset coverage ratio of 150%.”

“Once we have achieved our diversification objectives, we believe it will be accretive to our shareholders to operate with additional leverage and the 1.05 to 1.15 range. Our Board has approved putting the reduced assets coverage requirements to a shareholder vote at our annual meeting in June. If approved by our shareholders, and subject to further progress in diversifying our portfolio, and successfully – our credit facility, we intend enter these modest additional leverage commencing sometime in 2020.”

4 – The portfolio investment is performing materially below our underwriting expectations and returns on our investment are likely to be impaired. Principal or interest payments may be past due, however, full recovery of principal and interest payments are expected.

5 – The portfolio investment is performing substantially below expectations and the risk of the investment has increased substantially. The company is in payment default and the principal and interest payments are not expected to be repaid in full.

As mentioned in the previous report, the Advisor decided to waive additional incentive fees through the end of 2019, as well as to lower the base management fee to “more closely align with what it believes is appropriate for a first lien floating rate portfolio”. I believe that the new fee structure is very shareholder-friendly for the following reasons:

  • Annual hurdle remains 8% (this is important as discussed in other reports)
  • Total return hurdle remains (also important and best-of-breed)
  • Base management fee reduced from 1.5% to 1.0% (this is among the lowest)
  • Incentive fee reduced from 20.0% to 17.5%
  • Deferral of PIK and non-cash items until realized

The company has been working to re-positioning its portfolio, including reducing the amount of non-income producing equity investments to 2% of the portfolio and 82% invested into Core Assets (first-lien debt and Logan JV) with a stated goal of 90%.

Christopher Flynn, CEO: “Over the past year, we have made significant progress on our strategic objectives across four dimensions— shifting the composition of our portfolio into primarily first lien floating rate assets, reducing our concentrated positions, increasing our investment in the Logan JV, and exiting our non-income producing securities. We remain confident that the steps we are taking to reduce risk in our portfolio will result in a more diversified senior secured floating rate portfolio that is positioned to deliver more stable and predictable returns for our shareholders over the long term.”

However, this has resulted in lower overall portfolio yield as shown below:

The company continues to ramp its THL Credit Logan JV from $257 million as of December 31, 2017, to $336 million as of June 30, 2019. However, the yield recently declined from 14.1% to 11.1% as shown in the following chart:

Undistributed taxable income increased from $0.21 per share to $0.29 per share due to the previously discussed earnings results and no incentive fees paid.



This information was previously made available to subscribers of Premium BDC Reports, along with:

  • TCRD target prices and buying points
  • TCRD risk profile, potential credit issues, and overall rankings
  • TCRD dividend coverage projections and worst-case scenarios
  • Real-time changes to my personal portfolio

To be a successful BDC investor:

  • As companies report results, closely monitor dividend coverage potential and portfolio credit quality.
  • Identify BDCs that fit your risk profile.
  • Establish appropriate price targets based on relative risk and returns (mostly from regular and potential special dividends).
  • Diversify your BDC portfolio with at least five companies. There are around 50 publicly traded BDCs; please be selective.

Gladstone Investment (GAIN) Dividend Coverage & Risk Profile Update


The following is from the GAIN Quick Update that was previously provided to subscribers of Premium BDC Reports along with revised target prices, dividend coverage and risk profile rankings, potential credit issues, earnings/dividend projections, quality of management, fee agreements, and my personal positions for all business development companies (“BDCs”).


For Q2 2019, Gladstone Investment (GAIN) beat its best-case projections due to higher-than-expected dividend income covering its dividends by 125% and NAV per share declined by 0.9% (discussed later). As shown below, ‘Other G&A’ (net of credits) is inconsistent and has a meaningful impact on dividend coverage.


Its secured first-lien debt of B-Dry, LLC that was previously on non-accrual with a cost basis of $11.9 million and a fair value of $0, which was converted into equity during the three months ended June 30, 2019 (still with a cost basis of $11.9 million and a fair value of $0).

During calendar Q1 2019, Meridian Rack & Pinion was added to non-accrual status and marked down an additional $1.0 million during calendar Q2 2019 and SOG Specialty Knives & Tools (“SOG”), PSI Molded Plastics (“PSI”), and The Mountain Corporation remain on non-accrual status. Total non-accruals now have a cost basis of $56.4 million, or 9.4% of the portfolio at cost, and fair value of $36.1 million, or 5.7% of the fair value of the portfolio. It should be noted that the equity positions in most of these companies have been marked down to zero fair value. If these non-accruals were completely written off, it would impact NAV per share by around $1.10 or around 8.9%.


For calendar Q2 2019, NAV per share declined by 0.9% (from $12.40 to $12.29) due to various markdowns including its equity positions in J.R. Hobbs Co. (by $8.3 million) and Galaxy Tool Holding (by $2.8 million) partially offset by overearning the dividend and various markups including Alloy Die Casting and Nth Degree, Inc.


Due to the previous repayments, GAIN has higher portfolio concentration risk with the top five investments accounting for over 38% of the portfolio fair value and 31% of investment income:

“Our investments in Nth Degree, Inc., J.R. Hobbs, Counsel Press, Inc., Brunswick Bowling Products, Inc., and Horizon represented our five largest portfolio investments at fair value as of June 30, 2019, and collectively comprised $240.4 million, or 38.1%, of our total investment portfolio at fair value.”

There is the potential for improved coverage through portfolio growth and rotating out of equity investments. As shown in the following table, the company will likely earn at least $0.215 per share each quarter covering 105% of the current dividend which is basically ‘math’ driven by an annual hurdle rate of 7% on equity before paying management incentive fees.

“The income-based incentive fee rewards the Adviser if our quarterly net investment income (before giving effect to any incentive fee) exceeds 1.75% [quarterly] of our net assets, adjusted appropriately for any share issuances or repurchases during the period (the “Hurdle Rate”). No incentive fee in any calendar quarter in which our pre-incentive fee net investment income does not exceed the Hurdle Rate (7.0% annualized)”

This calculation is based on “net assets” per share which have continued to grow driving a higher amount of “pre-incentive fee net investment income” per share before management earns its income incentive fees. As shown in the analysis below, the company continues to increase the dividend as NAV grows and increases the “Minimum Dividend Coverage”:


As mentioned in previous reports, the Board approved the modified asset coverage ratio from 200% to 150%, effective April 10, 2019. However, the company is subject to a minimum asset coverage requirement of 200% with respect to its Series D Term Preferred Stock. Historically, the company has maintained its leverage with a debt-to-equity ratio between 0.60 and 0.70 but is currently 0.52 giving the company plenty of growth capacity. The amount of preferred/common equity still accounts for 34% of the portfolio fair value (marked well above cost) which needs to be partially monetized and reinvested into income-producing secured debt.


This information was previously made available to subscribers of Premium BDC Reports, along with:

  • GAIN target prices and buying points
  • GAIN risk profile, potential credit issues, and overall rankings
  • GAIN dividend coverage projections and worst-case scenarios
  • Real-time changes to my personal portfolio

To be a successful BDC investor:

  • As companies report results, closely monitor dividend coverage potential and portfolio credit quality.
  • Identify BDCs that fit your risk profile.
  • Establish appropriate price targets based on relative risk and returns (mostly from regular and potential special dividends).
  • Diversify your BDC portfolio with at least five companies. There are around 50 publicly traded BDCs; please be selective.

New Mountain Finance (NMFC) Dividend Coverage & Risk Profile Update


The following is from the NMFC Quick Update that was previously provided to subscribers of Premium BDC Reports along with revised target prices, dividend coverage and risk profile rankings, potential credit issues, earnings/dividend projections, quality of management, fee agreements, and my personal positions for all business development companies (“BDCs”).


For Q2 2019, NMFC reported just above base case projections with another quarter of lower-than-expected portfolio yield and dividend income but strong portfolio growth fully covering its dividend since its IPO. The company continues to increase its use of leverage due to shareholder approval to reduce its asset coverage ratio (effective June 9, 2018) driving higher interest and total income. The Board declared a Q3 2019 distribution of $0.34 per share payable on September 27, 2019, to holders of record as of September 13, 2019.


On July 11, 2019, NMFC completed its offering of 6.9 million shares at a price of $13.68 per share. The Investment Adviser paid a $0.39 per share portion of the $0.42 per share underwriters’ sales load for net proceeds of $13.65 per share or $94.2 million. NMFC had over $240 million of originations and commitments since the end of Q2 2019through August 1, 2019, and management is expecting to fully invest in the proceeds from recent equity offering:

Robert Hamwee, CEO, commented: “The second quarter represented another solid quarter of performance for NMFC. We originated $183 million of investments and once again had no new investments placed on non-accrual. Additionally, we anticipate an active third quarter of originations, allowing us to remain fully invested after our recent equity raise.”

As predicted in previous reports and shown below, income from recurring sources (including its SLPs) continues to increase and accounted for 97% of total income in Q2 2019. However, there was a decline in the amount of income from its fully ramped its NMFC Senior Loan Program III LLC (“SLP III”):

First-lien debt increased slightly to 52.3% (previously 50.2%) of the portfolio as the company “shifted originations towards senior investments as we have accessed incremental leverage”.

On April 30, 2019, NMFC issued $116.5 million of 5.494% unsecured notes due April 30, 2024. As of June 30, 2019, the company had cash equivalents of almost $87 million and over $280 million of available borrowing capacity under its credit facility and SBA debentures.

For the fourth quarter in a row, and for 9 out of the last 10 quarters, there were no new non-accruals in the portfolio. Previously, its first-lien positions in Education Management (“EDMC”) were placed on non-accrual status as the company announced its intention to wind down and liquidate the business. As of June 30, 2019, the company’s investments in EDMC had a cost basis of $1.0 million and fair value of $0.0 million. Portfolio credit quality remained stable with only EDMC (0% of the portfolio) with an investment rating of “4”. An investment rating of a “4” includes non-accruals or investments that could be moved to non-accrual status, and the final development could be an actual realization of a loss through a restructuring or impaired sale.

Steven B. Klinsky, Chairman: “As managers and as significant stockholders personally, we are pleased with the completion of another successful quarter. We believe New Mountain’s focus on acyclical “defensive growth” industries and on companies that we know well continues to be a successful strategy to preserve asset value”

NAV per share decreased by $0.04 or 0.3% from ($13.45 to $13.41) mostly due to markdowns during the quarter that will be discussed in the updated NMFC Deep Dive report.


This information was previously made available to subscribers of Premium BDC Reports, along with:

  • NMFC target prices and buying points
  • NMFC risk profile, potential credit issues, and overall rankings
  • NMFC dividend coverage projections and worst-case scenarios
  • Real-time changes to my personal portfolio

To be a successful BDC investor:

  • As companies report results, closely monitor dividend coverage potential and portfolio credit quality.
  • Identify BDCs that fit your risk profile.
  • Establish appropriate price targets based on relative risk and returns (mostly from regular and potential special dividends).
  • Diversify your BDC portfolio with at least five companies. There are around 50 publicly traded BDCs; please be selective.

Institutional Investors, AFFE & Increased BDC Multiples

The following is from an update that was previously provided to subscribers of Premium BDC Reports.


The following information was discussed in the following Seeking Alpha interview last week:

Please feel free to read/comment on the public article linked above.

BDCs, like REITs almost 20 years ago, want institutional investors and the scale that comes with them. Recently, the largest asset managers including Blackstone, KKR, Carlyle, Ares, TPGFranklin Templeton, and Owl Rock have been actively entering into the sector and there will likely be positive changes to regulations over the coming quarters driving up multiples for current investors. For example, the acquired fund fees and expenses (AFFE) rules require investment companies and mutual funds investing in BDCs to include an additional line of expenses outlining the fees and operating costs charged by the BDC distorting expense ratios making them prohibitively expensive for a number of institutional investors that could have otherwise been attracted by the vehicles’ high dividend yields.

In December 2018 the SEC kicked off a consultation on a broader fund of funds reform proposal that included views on the impact of AFFE on BDCs. In September 2019, the Coalition for Business Development (“CBD”), a BDC lobby group, put forward a proposal to the existing AFFE:

“The current classification of BDCs harm institutional ownership and ‘Main Street’ BDC investments along with it,” said Joseph Glatt, chairman of the CBD. Under the CBD’s alternative proposal, a SAI disclosure would detail the BDC’s operating expenses. Any costs would be factored into the BDC’s trading price. The argument is that any expenses would be reflected in the fund’s total return. After the adoption of the AFFE rule, BDCs were delisted from multiple fund indices, including the S&P and Russell in 2014. Following the delistings, BDCs on average have traded below their net asset value and have since never fully recovered.”

Source: Reuters “BDCs increase pressure on SEC for reporting exemption

The following was from a previous call with Main Street Capital’s (MAIN) CEO:

“Currently, our focus has been directed primarily on the Acquired fund fees and expenses or AFFE rule as it affects BDCs and the special deduction for individuals that receive dividend income from REITS and MLPs. The first item we are working with the SEC to either eliminate or at least modify the rule that effectively resulted in the elimination of BDCs eligibility for index fund inclusion. The second item we are working with congressional staff to include BDC dividends as being eligible for the deduction so as to level the playing field with REITS and MLPs”

SourceMAIN CEO Vince Foster on Q2 2018 Results – Earnings Call Transcript


To be a successful BDC investor:

  • As companies report results, closely monitor dividend coverage potential and portfolio credit quality.
  • Identify BDCs that fit your risk profile.
  • Establish appropriate price targets based on relative risk and returns (mostly from regular and potential special dividends).
  • Diversify your BDC portfolio with at least five companies. There are around 50 publicly traded BDCs; please be selective.