Monday, June 15, 2015

New BDCs Added to Coverage: BDC Buzz Report June 2015

My upcoming articles on Seeking Alpha will reflect most of the information in this newsletter including upgrades/downgrades to certain BDCs as well as favorable/unfavorable reviews of newly covered BDCs. If you would like advance notice of when these articles are coming out please see the information at the end of the newsletter.

Included in this newsletter:
  • Actual Total Returns by BDC
  • Improved BDC Fee Structures & Shareholder Alignment
  • Fee Structures vs. Actual Total Returns
  • New BDCs Adding to Coverage

Actual Total Returns – Last 17 Months

Explanation of total returns: The ‘Change in Stock Price’ assumes you purchased the stock at the beginning of 2014 and sold as of June 12, 2015. Dividends do not assume reinvestment and are calculated using the amounts paid divided by the purchase price at the beginning of 2014.




Improved BDC Fee Structures & Shareholder Alignment

I am currently in the process of assessing new BDCs with fee structures that protect total returns to shareholders. Specifically, I am looking for realized/unrealized losses to be included when calculating incentive fees for management with a look-back feature to keep management on the hook for the performance of investments over the long-term.  I will be referring to this as a ‘high water mark’ in upcoming articles.

FSIC has included this feature and recently discussed on the last earnings call: “Alignment of management interests with those of FSIC shareholders is of critical importance to us. We have sought to achieve this through the adoption the three-year “high water mark” for our income incentive fee and through our strong level of sponsor commitment.”

Why do fee structures matter?

The following chart is similar to the one used in my BDC Total Returns & Continued Bifurcationarticle (updated with returns from previous table) and I have identified which BDCs have higher vs. lower fee structures as well as the ones with a high water mark or look-back feature.  Historically, BDCs with lower fee structures have provided higher returns to investors:


As you can see AINV and GLAD have higher returns, compared to other higher cost BDCs that could be partially due to waived management fees to ensure dividend coverage on an annual basis.

Potential BDCs Added to Coverage

All of the BDCs that I actively cover have been public for at least 3 years, with the exception of TSLX and FSIC that I have recently added. Over the last ~2 years, there have been at least 10 new publicly traded BDCs that have a high water mark or look-back features to their incentive programs, including Goldman Sachs BDC (GSBD) that I believe is currently overpriced with a much lower than average dividend yield. However, I believe that there are many other BDCs that are potentially under-priced and overlooked by investors.


Beyond a shareholder-friendly fee structure, investors need to consider the following:
  • Dividend coverage and growth potential
  • Risk profile/portfolio credit quality
  • Management quality
  • Valuation and pricing
  • Potential NAV growth and total returns
If you are interested in dividend sustainability, risk assessment and rankings, target prices, earnings projections and portfolio recommendations for these newly covered BDCs please visit premium reports.


Subscribers to premium reports will also receive advance notice of upcoming articles on Seeking Alpha indicating whether or not they will likely have positive coverage of these potentially overlooked BDCs, including one that will be coming out later this week.  Please visit "premium reports" if you are interested in more information on BDCs including:
  • Rankings (risk, return, pricing, dividend potential)
  • Individual BDC Projections
  • Pricing and Valuation
  • Dividend Coverage Potential
  • Suggest BDC Portfolios
  • My Current Positions
 

Wednesday, April 1, 2015

BDC Buzz Report: April 2014



[This report is no longer available.]


 Please visit ‘Premium Reports’ if you are interested in more information on BDCs including:
  • Rankings (risk, return, pricing, dividend potential)
  • Individual BDC Projections
  • Pricing and Valuation
  • Dividend Coverage Potential
  • Suggest BDC Portfolios
  • My Current Positions

Sample Views of Reports




Friday, January 9, 2015

BDC Buzz Report: January 2015

The following was sent out to my newsletter subscribers. If you have signed up but did not receive please check your spam/junk folder settings. 

FYI – I have decided to make this newsletter a monthly publication that will include more detail in the following months.

Included in this report:
  • BDC Market Update
  • Example: FSC Dividend & Fee Income Analysis
  • BDC Earnings Announcements & MCC: Items to Watch

BDC Market Update

As discussed in many recent articles, 2014 was a tough year for BDCs due to them being removed from the S&P and Russell indices, continued interest rate fears, general declines in small caps, selling institutional shareholders over the last two quarters and December tax-loss sellers. More recently, investors have been concerned with oil and energy exposure among portfolio investments. BDCs have started to rebound and are up an average of 5% since mid-December.



FSC Dividend & Fee Income Analysis

The following analysis is for dividend and fee income comparison only – these are not my projections.

After each company reports results I use a similar analysis to assess dividend coverage going forward. Key items to watch are stated and effective portfolio yields, fee and dividend income potential and operation cost efficiencies. Other important items are related to portfolio credit quality.  Many BDCs are reliant on non-interest income to cover dividends that can cause swing in quarterly EPS/NII and dividend coverage.  The following is an example using Fifth Street Finance (FSC) that recently increased its dividend and relies on dividend and fee income to support 20% of its dividend payment.




The following are the analyst estimates for the next two quarters.



Earnings Announcements: Items to Watch

So far only six BDCs that I follow have reported results including AINV, GLAD, GBDC, PFLT, PNNT and PSEC. This week FSC, MCC and FULL will be reporting and investors should pay close attention to dividend coverage potential and portfolio credit quality indicators, especially for MCC.  As discussed in “Medley Capital Update For FQ4 2014”, the company recently reported a large decline in its portfolio yield and was only able to cover dividends due to strong fee income. This could be a problem going forward depending on a few things including increased non-accruals and lower amounts of non-interest related income such as fees and dividends. Please see the FSC example below.




I have already weighed in on the Prospect Capital (PSEC) dividend coverage potential in my “PSEC: Dividend Coverage Stress Test” and if you would like to receive similar analyses for the remaining BDCs please visit “Premium Reports”. For most companies I try to turnaround the new information before markets open the next day with my personal recommendations. Currently there are around 40 reports including dividend coverage, oil and energy exposure, interest rate sensitivity, my current positions and allocations, overall rankings and pricing, suggested portfolios, etc.


  • $65 for all reports through 6/30/15
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http://bdcbuzz.blogspot.com/2013/12/premium-subscriber-sign-up.html






Wednesday, December 17, 2014

BDC Surveys

 

I will be using this page to host upcoming links to surveys as well as the results:


Each survey will provide a link after completion showing the results so far, but please bookmark to check back in after all results are recorded.

Current Surveys:









Monday, December 15, 2014

BDC Buzz Report: 14 December 2014




BDC Market Update

This year has been difficult for BDCs due to being removed from the S&P and Russell indices, continued interest rate fears, general declines in small caps, selling institutional shareholders over the last two quarters and December tax-loss sellers.  I believe that some investors have been selling baskets of investments, including higher quality BDCs, which has created an opportunity for investors. At some point, BDCs will rebound and I will have a series of articles coming out that discusses many of the positive signs that we are seeing including lower borrowing costs, stabilizing or even increasing portfolio yields and less competition from banks as they continue to exit level 3 assets.



Over the next two to three weeks, BDCs will either continue to fall, have a ‘dead cat bounce’ or potentially have a sustained rally into 2015. Investors should be ready for all three of these scenarios and to buy preferred BDCs over the coming weeks. As shown in the previous chart, I believe investors are currently reacting out of fear (in both the general and BDC markets).  The following chart shows the VIX hitting a high in mid-October at the same time BDCs hit a low for the year and there are signs that the VIX is headed to these levels yet again. Volatility – or “market whiplash” – is clearly back in the market.




The CNN Money Fear & Greed Index:

Investors are driven by two emotions: fear and greed. Too much fear can sink stocks well below where they should be. When investors get greedy, they can bid up stock prices way too far.

“We look at 7 indicators:  For each indicator, we look at how far they've veered from their average relative to how far they normally veer. We look at each on a scale from 0 - 100. The higher the reading, the greedier investors are being, and 50 is neutral.”




Source: CNN Money

What should investors do over the next few weeks?

Investors should be ready to buy BDCs that fit their investment profile.  Recently I have noticed that pricing multiples have changed to reflect investors’ perceptions of dividend coverage and risk or capital preservation.  BDCs that continue to trade at lower NAV per share multiples will be capital constrained and could risk losing various credit ratings that could contribute to a higher cost of capital.

There will likely be continued basket and tax-loss selling but at some point I believe BDCs will rebound sharply as they did after the October 15th lows. Also I believe investors will continue to pay higher multiples for higher quality BDCs giving them a clear advantage going into 2015.

Premium Reports:

There are currently over 35 reports available as discussed in “Premium Reports”.
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  •  $165 for all reports through 12/31/15.



Saturday, September 27, 2014

What is a Troll?

From Wikipedia:

In Internet slang, a troll is a person who sows discord on the Internet by starting arguments or upsetting people,[1] by posting inflammatory,[2] extraneous, or off-topic messages in an online community (such as a newsgroup, forum, chat room, or blog) with the deliberate intent of provoking readers into an emotional response[3] or of otherwise disrupting normal on-topic discussion.




Top trolls that I deal with on each PSEC article:

I will keep track of comments (even the ones that are deleted from Seeking Alpha due to being considered 'abusive') so that readers have context for our continued conversation and hope that others find humor in this blog.

Recent comments from 'koleffstephan':

"Heck, maybe you can sell some of the Hercules BDC stock that you are touting (all of the insiders of Hercules have been selling, why not you too and join the club!) and use the money to have a mental health care professional give you some humbling self-deprecating attitude reality check. Jusy sayin."

" Mr. Buzz: You too "write the same content and hidden biased verbiage on PSEC." Please "don't try next week," to write some more on PSEC - save your time and our eyesight."
 
" You really are writing and drinking koolaid. I am entitled to read any and all articles on my investments - including PSEC - and while many articles on PSEC are worthwhile, yours are not."

" It is "absurdly extreme" to think that Hercules insiders "have more skin in the game" than the PSEC insiders (including the CEO's of each respective company). Just saying."