Wednesday, September 10, 2014

Newsletter: September 9 2014

BDC Buzz Report: 9 September 2014

Most Recent Articles:

I have a new series of articles on Seeking Alpha focused on the ‘Risk Profiles’ for each BDC.  This series will include indicators for which BDCs would be the most likely to outperform the others during an economic downturn including NAV stability or declines from increased defaults on portfolio investments.  This series will also impact my pricing for each BDC as I believe that investors should expect higher risk adjusted returns from their investments.  If you would like email notifications when articles are published please select ‘Get email alerts’ on my profile or at the top of any of the articles.

Included in this newsletter:
  • Early Sign Up for Q4 Premium Reports
  • PSEC Update
  • BDC Market Update
  • YTD Portfolio Updates
  • BDC Total Returns (since Jan-13)
  • Recommendations & Pricing Update

Early Sign Up for Q4 Premium Reports:

I have decided to start Q4 premium reports early this quarter which gives subscribers access to all the reports from Q3 as well.  I usually have two new reports a week mostly related to recent announcements for individual BDCs as well as updated detailed rankings (dividend coverage, interest rate sensitivity, general/overall, etc.). I also have a report coming out that breaks down my current allocations/holdings and will keep subscribers up to date (real time or before) as changes are made. Usually BDCs make key announcements after the markets close and I try to have updated recommendations out prior to the open of market the next day.  My recommendations are categorized for both aggressive and conservative investors.

For a complete description of the reports available and pricing, please visit “Q4 Premium Subscribers”.

PSEC Update:

Part 5 of my “PSEC: What Comes Next?” series will be coming out later this week and I wanted to give newsletter subscribers advanced notice of what to expect.  It has become painfully obvious that PSEC is not able to support the current dividend and this problem will be getting worse over the next few quarters.  I have already put together base/best/worst case scenarios for dividend cuts to premium subscribers and will be walking through some of these projections on Seeking Alpha over the coming weeks.  Below is a ‘back of the envelope’ view of PSEC’s dividend coverage and there are many reasons why this might be optimistic and a few reasons why it might be conservative and I will include in the upcoming articles.

Possible downsides to this analysis: inability to originate new investments at the current stated portfolio yield of 12.1%, inability to borrow at 0.75 leverage due to declining portfolio quality, issuing share below NAV, other G&A expenses not included.

Possible upsides to this analysis: increased use of leverage, using short term borrowings at lower rates, investing in higher yielding investments, issuing shares at a premium to NAV.

BDC Market Update:

BDC are around breakeven for the year and seem to still be headed up. However there are some potential seasonality issues as well as more rate fear swings coming so investors should be prepared. In multiple articles this week there is the usual rhetoric related to the upcoming Fed meeting. This morning’s Bloomberg article ‘Treasuries Decline as BlackRock Warns on Fed’ mentions: “Treasury 10-year notes declined for a fourth day, the longest rout in three months, as BlackRock Inc. said the Federal Reserve may raise interest rates sooner than traders expect.”

Year to Date Total Returns:

Changes since last week: The risk averse and lower risk total return portfolios have performed much better than the others over the last few weeks.  Higher yield BDCs continue to underperform compared to the others even after taking into account the higher dividends paid.

The average BDC is around breakeven since the beginning of the year due to being dropped from the indices, small-caps in general being down and continued knee jerk reactions from the market regarding interest rates.  However this means that investors are still getting decent yields and I have included the average dividend yield for each suggested portfolio at the bottom of the table. Some BDCs that were significantly down in 2013 such as FSC (due to a dividend cut) are showing higher than average price appreciation for this year which is why looking at returns over a longer period makes sense and I have included in the next section with both 2013 and 2014 results.

Explanation of calculated returns: The ‘Stock Price’ return assumes you purchased the stock at the beginning of the year and sold as of the date shown below.  Dividends do not assume reinvestment and are calculated using the amounts paid divided by the purchase price at the beginning of the year and I have accrued the dividends owed for partial month/quarter amounts.  Hopefully BDCs will rally for the remainder of this year and it will be interesting to watch these returns over the next few months.


2013 & 2014 Total Returns:

This table uses the same methodology as the previous one but keep in mind the ‘Reg.’ dividend return amounts are cumulative over the last ~20 months which is why BDCs such as PSEC has 20% in regular dividend return but partially offset by a lower stock price.  The same goes for TICC, FSC, KCAP and MCC, all with higher dividends but lower than average total returns.  However BDCL continues to perform better than other high yielding BDC investments with a total return of over 24% after taking into account a price that is 1% lower than it was on January 1, 2013 but given the large payout it has returned more than the average BDC.

GLAD, FDUS and TCAP were recently (last 12 months) removed from the TR portfolios all of which have had higher than average returns. As many subscribers are well aware I have considered BKCC, KCAP, SLRC and MCGC to be overpriced and/or generally not recommended BDCs since early 2013 and have underperformed the average.  However I will continue to monitor these companies as potential investments because often the BDCs with poor historical performance outperform due to being discounted such as FSC, AINV and GLAD recently (seen higher in the first table) making them candidates for the ‘Underdog’ portfolio.

Recommendations & Pricing Update:

I have decided to delay the new pricing and recommendations until next week so I can cover more risk profiles.  As shown in the following table, I have already started to reposition each BDC according to potential risk. As most subscribers know, I use ‘relative risk rankings’ in many of my articles for valuation purposes, because I believe BDCs should be measured on projected risk vs. return.